1. Purpose of a Confidentiality Agreement
2. Types of Confidentiality Agreements
3. Key Provisions of an NDA Agreement
4. Issues Associated With Confidentiality Agreements

Updated November 18, 2020:

A confidentiality agreement for business partners is used when you need to share critical confidential information with contractors, vendors, funders, and other professionals as part of the course of business. This is also called a nondisclosure agreement (NDA). Having partners sign this agreement gives you legal recourse if proprietary information is stolen and used.

Purpose of a Confidentiality Agreement

The text of this type of agreement states that the other party agrees not to disclose any information learned during the course of business to any third-party. An NDA is legally binding. Common items included in an NDA are processes, trade secrets, recipes, technical specs, chemical formulas, customer lists, and business plans.

Any aspect of your business that you want to keep confidential can be protected. For example, if you have designed a new product and want to get a manufacturing estimate, you can ask the manufacturing company to sign a confidentiality agreement so they won't share your design with others or use it for profit themselves.

Confidentiality agreements are also useful when you hire new employees or are negotiating with potential investors or new business partners.

Types of Confidentiality Agreements

Most confidentiality agreements can be customized to the needs of your business. However, you can also choose from a few specific types of NDAs.

  • Two businesses involved in a merger or acquisition often use a precedent confidentiality agreement (PCA). This allows the business making the purchase to review complete information about the assets and debts of the business being purchased. This information must then be kept confidential if the acquisition does not come to pass.
  • With a one-way NDA, one business is providing information to another individual or business. A two-way NDA is used when two businesses are sharing information with one another. These are also called unilateral and bilateral NDAs.
  • A multilateral NDA is used when three or more parties are sharing information.

Key Provisions of an NDA Agreement

Your confidentiality agreement should include the following sections and clauses:

  • Indicate the disclosing party, which is the person or business sharing the confidential information. This is not necessarily the party who owns the information in question; it could be someone who is legally permitted to disclose the information for a specific purpose with permission.
  • Indicate the receiving party, which is the person or business receiving the confidential information. Often, this is an individual or small department in a large company, which allows you to avoid binding an entire corporation with information that hasn't even been shared with everyone. Many institutions nominate one individual as the signor for confidentiality agreements. Those within an organization named as a receiving party may share the information only with other members of the organization unless the NDA states otherwise.
  • State the purpose of the agreement. Use language that indicates how the information covered by the NDA can be used within the context of the agreement.
  • Note limitations on disclosure, even when the receiving party believes you have a confidentiality agreement with a third party that covers the same information. This type of disclosure is forbidden unless specifically covered in the agreement.
  • Indicate exceptions to information covered by the confidentiality agreement. This typically includes information that was already in the public domain, that the receiving party had prior to the agreement, that has since entered the public domain, that was independently discovered by the receiving party, or that is legally required to be disclosed.
  • You may want to include a non-grant of rights close that indicates that the signing of a confidentiality agreement does not necessarily constitute agreement to enter any further contract or agreement with the receiving party, including rights or license to the disclosed information.

Issues Associated With Confidentiality Agreements

Suing another party for breach of contract is costly and difficult, even when he or she has signed a legally binding confidentiality agreement. You must have evidence that the business or individual in question has disclosed the information and ask a court to legally prevent them from doing so.

Make sure the agreement details the exact information that should be kept confidential. Agreements that are too broad are difficult to uphold in court.

If you need help with a confidentiality agreement for business partners, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.