Confidential Information: Basic Clauses in a Non-Disclosure Agreement

This post was first published on August 15th, 2011.
One of the most widely adopted measures to protect secrecy is the execution of a Non-Disclosure Agreement (NDA). It is a common practice to sign an NDA before disclosing any confidential information. A well-drafted NDA is easy to understand, not too long and lucid. Important clauses in an NDA include:
  1. Definitions;
  2. Confidentiality; and
  3. Term and Termination.
a. Definitions Clause
The definitions clause in an agreement defines important terms used in the agreement. The objective is to avoid any confusion with respect to the meaning of critical terms used in the agreement. Every NDA must have definitions for the terms “Confidential Information” and “Permitted Purpose”.
The phrase Confidential Information must clearly define the kind of information that would be disclosed and that must be maintained confidentially. Specific Definition relevant to the disclosure being made under the agreement is preferred over a general definition using standard language. Courts sometimes refuse to grant relief based on the fact that trade secrets or confidential information were not clearly identified. Therefore, it is advisable to avoid stating that every information being disclosed is confidential unless it is really confidential information.
For Example, in an NDA between parties collaborating for research, Confidential Information may be defined as
“Confidentiality Information” shall mean any oral or written information, including and not limited to proposals, abstracts, observations, flow chart, presentation, process, sample, drawing, design, pattern, compilation, model, algorithm, formula and so on, which is disclosed by the Disclosing Party to the Recipient.
Confidential Information shall not include:
i. information which is in the public domain or comes into the public domain otherwise than by disclosure or default by the Recipient; or
ii. information which was or is lawfully obtained or available from a third party who was lawfully in possession of the same and free to disclose it; or
iii. information, which was already known to the Recipient and has been received from a source other than Disclosing Party.
The purpose of disclosure is an important element of any NDA. Therefore, the purpose for which disclosure is being made must be clearly defined. The use of the information being disclosed will be limited to the said purpose and a narrow definition is always preferred.
For Example, in an NDA between parties collaborating for research, ‘Permitted Purpose’ may be defined as
“Permitted” Purpose shall mean collaborated research on ‘(research topic/subject)’ under the (details of the project) Project.
b. Confidentiality Clause
The confidentiality clause is the core clause of an NDA. It lays down the obligation of confidentiality or secrecy and provides obligations with respect to use of the Confidential Information. The confidentiality clause must have explicit and unambiguous language with respect to the secrecy of confidential information being disclosed. It must also lay down obligations with respect to further disclosure of such information, transfer of information, return of information and so on. The extent to which the information may be used must also be clearly defined.
For Example, in an NDA between parties collaborating for research, the confidentiality clause may be worded as
“In consideration of Disclosing Party disclosing proprietary Information, the Recipient hereby undertakes:
i. To keep confidential all Information that it may acquire in any manner from the Disclosing Party;
ii. To use such Information exclusively for the Permitted Purpose and not to use the Proprietary Information for its own purposes or benefit;
iii. Not to disclose such Information to anybody, except to authorized employees of the Recipient who need to have access to the Information for the purpose of carrying out their duties in connection with the Permitted Purpose;
iv. To inform everybody to whom the recipient discloses Information that it is confidential and obtain their agreement to keep it confidential on the same terms as this Agreement;
v. To notify immediately upon becoming aware of any breach of confidence by anybody to whom the Recipient has disclosed the Information.”
c. Term and Termination Clause
This clause defines the term of the NDA and also the term of confidentiality. It is advisable to incorporate a perpetual or long term for confidentiality than the term of the agreement. The provision must also include circumstances under which the agreement would terminate and consequences of such termination. This clause would be very important when things go wrong between the parties. The validity of NDAs has in many cases been decided by courts based on provisions in this clause.
At the cost of repetition, it is worth emphasizing here that care must be taken to avoid termination of confidentiality on termination of the agreement.
For example, a termination clause may be worded as below:
“The term of this agreement shall be for a period of one (1) year from the Effective date of this agreement.
Provisions relating to confidentiality of Information shall remain in effect for as long as the information is deemed confidential by the Disclosing Party.
Recipient agrees to return promptly all tangible items relating to the Information, including all written material, drawings, presentations, plans, models, etc, made available or supplied by Disclosing Party, and all copies thereof, upon the request of Disclosing Party.”
Other clauses such as indemnity, relief in case of breach and so on may be included to strengthen the agreement. While the absence of said clauses would not make much difference, non-existence of the afore-mentioned clauses would make the NDA inadequate.
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