Key Takeaways

  • A confidentiality agreement (non-disclosure agreement or NDA) protects sensitive information such as trade secrets, business strategies, and financial data.
  • The key elements of a non-disclosure agreement include identifying the parties, defining confidential information, specifying exclusions, setting obligations, and establishing duration.
  • NDAs can be unilateral, bilateral, or multilateral, depending on how many parties share information.
  • Strong NDAs also cover permitted disclosures, remedies for breach, and whether a court can issue injunctive relief.
  • Overly broad or vague NDAs may be unenforceable, so precise drafting is essential.
  • Confidentiality agreements are vital in contexts such as mergers, acquisitions, hiring, joint ventures, and investor discussions.

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.

When to Use a Non-Disclosure Agreement

Businesses rely on NDAs in a wide range of scenarios to safeguard competitive advantages. These agreements are common when:

  • Presenting business ideas to potential investors or partners.
  • Sharing proprietary technology or trade secrets with contractors or vendors.
  • Discussing merger or acquisition details where financials and internal data are exposed.
  • Protecting client lists, pricing strategies, or marketing plans during collaborations.
  • Onboarding employees who will have access to sensitive company records.

In each of these cases, the agreement ensures that confidential information is shared only for the intended business purpose and not exploited for personal or competitive gain.

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 Elements of a Non-Disclosure Agreement

While the structure of NDAs may vary, most contain certain essential elements to ensure enforceability and clarity:

  1. Identification of Parties – Clearly state who is disclosing and who is receiving the information.
  2. Definition of Confidential Information – Spell out what counts as protected information, often including written, oral, digital, or tangible materials.
  3. Exclusions from Confidentiality – Specify exceptions, such as information already known publicly, independently developed, or disclosed by third parties lawfully.
  4. Obligations of Receiving Party – Detail how the recipient must protect, store, and limit the use of confidential data.
  5. Term of Agreement – State how long the information must remain confidential. Some terms extend indefinitely, especially for trade secrets.
  6. Permitted Disclosures – Clarify circumstances when disclosure is allowed, such as to employees on a “need-to-know” basis or when legally required.
  7. Consequences of Breach – Outline remedies, such as monetary damages, injunctive relief, or attorney’s fees.

These components collectively form the foundation of an effective NDA, ensuring both parties understand their rights and obligations.

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.

Additional Provisions That Strengthen an NDA

Beyond the basic framework, businesses often include additional provisions to reinforce protection:

  • Return or Destruction of Information – Requiring recipients to return or destroy confidential materials at the end of the business relationship.
  • No License Granted – Clarifying that disclosure does not grant ownership or intellectual property rights.
  • Governing Law and Jurisdiction – Specifying which state’s laws will apply and where disputes must be resolved.
  • Non-Solicitation or Non-Compete Clauses – Restricting the receiving party from soliciting employees or competing using disclosed information.
  • Equitable Remedies – Acknowledging that financial damages may be insufficient and that a court can issue an injunction to prevent further harm.

These provisions add enforceability and provide clear guidance if disputes arise.

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.

Frequently Asked Questions

  1. What are the key elements of a non-disclosure agreement?
    The key elements include identifying parties, defining confidential information, listing exclusions, setting obligations, duration, permitted disclosures, and remedies for breach.
  2. How long does an NDA last?
    The duration can vary but often extends until the confidential information is no longer sensitive. Trade secrets may require indefinite protection.
  3. Can an NDA prevent all disclosures?
    No. NDAs cannot prevent disclosures required by law, nor do they cover information that is public knowledge or independently developed.
  4. What happens if someone breaks an NDA?
    A breach can result in financial damages, court injunctions, and other remedies depending on the terms of the agreement.
  5. Do both parties always need to share information in an NDA?
    Not necessarily. NDAs can be unilateral (one-way), bilateral (two-way), or multilateral (three or more parties), depending on the situation.

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