Confidentiality Agreement Overview

Confidentiality agreement consideration is generally recommended, especially if you have sensitive information you wish to protect while entering into a contractual agreement, as a confidentiality agreement can give you legal recourse should the other party divulge information deemed confidential to a third party.

In a confidentiality agreement, the party offering the sensitive information is generally called the “Disclosing Party,” while the party receiving the sensitive information is known as the “Receiving Party.” Confidentiality agreements prohibit the receiving party from disclosing sensitive information while they are under contract, and typically for a time period after the end of the contract, as well.

Also known as nondisclosure agreements, or NDAs, confidentiality agreements are especially common between employees and employers. In this relationship, confidentiality agreements are beneficial and often necessary because they allow for the free flow of information without fear from the employer that sensitive information will be disclosed. Such sensitive information could include:

  • Client lists
  • Marketing strategies.
  • Business strategies.
  • Trade secrets, like recipes and formulas.
  • Proprietary technology.

Other parties that might be required to sign a confidentiality agreement include:

  • Independent contractors.
  • Suppliers.
  • Parties considering a business or financial arrangement together, such as those considering a joint venture or investing in a company.

Unilateral or Mutual Confidentiality Agreements

Confidentiality agreements can either be unilateral or mutual, depending on the circumstances. Unilateral confidentiality agreements are those that involve only one party disclosing confidential information, while mutual confidentiality agreements involve both sides exchanging confidential information. This might occur, for example, if a business hires a vendor to create proprietary software and a mutual exchange of sensitive information is necessary for the job to be completed.

Defining Confidential Information

Defining what constitutes confidential information is of paramount importance for the effective creation of a confidentiality agreement. To do so, there are three basic approaches generally taken, and these are:

  • Offering a general description.
  • Offering a specific description.
  • Specifically marking certain information as confidential.

Each has its own advantages and disadvantages, and these are as follows:

  • General description. Describing confidential information in general terms can be good if there is the chance that the scope of what may be considered confidential will expand throughout the course of the contract. However, the lack of specificity could give rise to legal issues should a question of what precisely is or is not confidential arise, and it may also lead to misunderstandings on the part of the receiving party.
  • Specific description. This is almost the reverse of using a general description, with the opposite advantages and disadvantages. There will be little risk for confusion, but there is greater risk for information that should be marked as confidential not being properly designated. Thus, this type of confidentiality designation is better suited for shorter-term contracts than longer ones.
  • Marking information as confidential. This is the most specific way to mark information, and as such it is ideal if one wants to leave not doubt that certain data is confidential. The downside of this approach is if the information is intangible or there is a great amount of it, it may be difficult or tedious to mark such information as confidential.

Additional Confidentiality Agreement Clauses.

Confidentiality agreements may include other clauses besides those that relate directly to confidentiality. Some of these, however, could raise issues if included. Clauses to keep in mind include:

  • Assignment of Intellectual Property Rights (IPR) Clause. If this is included, specifically defining the assignment or non-assignment of the IP is strongly advised. Crafting too generic or broad of a clause in its intent and scope should be avoided.
  • No Warranties Clause. In confidentiality clauses, stating that confidential data should be offered “as is” without warranty is advisable.
  • Non-Solicitation Clause. This clause may be included within a confidentiality agreement so long as the correct definition of intent, scope, and duration is made.
  • Term Clause. Sometimes it may be desirable for the term of confidentiality to exceed the term of the contract itself. If so, this should be specified.
  • Residual Clauses. These should generally be excluded from confidentiality agreements, since they can unduly favor the receiving party through specifying exceptions to what information is to be considered confidential.

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