Business dealings usually involve sharing of information from one end to
another. However, this sharing may cause harm to business entities if it is
shared with competitors, so to avoid these types of situations, NDAs are signed.
A nondisclosure agreement protects the revealed information. This article deals
with the various details that one needs to know about the non-disclosure
NDA is a first agreement which is signed by the parties which are yet to enter
into any type of commercial relationship in which they need to disclose any kind
of sensitive information related to the business of one party to another one.
This sensitive information includes market strategy of any business, trade
formulas, customer lists, business dealings, transaction data, details of
customer, information related to its intellectual property etc. This agreement
puts a legal obligation upon the party who is receiving the sensitive
information that information disclosed must not be shared with anyone.
It is signed to prevent any kind of loss to the business which may be caused due
to release of its sensitive information by the receiving party in the public or
to the competitors. Any kind of breach of the provisions mentioned in the NDA
attracts legal consequences. It is governed by Indian Contract Act, 1872. Thus,
it is legally binding in nature.
It is usually signed in case of business transactions. In case of an investment
transaction, the Investee needs to provide sensitive information to the
investor. So here the investor is under legal obligation to not to disclose the
revealed information related to the investee's business. But in case of a joint
venture, both the parties must maintain confidentiality. The confidentiality
clause in the employment agreements also plays the same role as NDA.
NDA is needed to protect the individual interest of the parties while they are
entering into any deal.
Essentials of a non disclosure agreement:
- Name of the Parties
A NDA shall contain names of the parties between whom the sensitive
information is being shared or being transferred. The party who is sharing
the confidential information is called 'disclosing party' whereas the party
with whom the information is being shared by disclosing party is called
'receiving party'. The agreement usually contains information about the
nature of business in which the disclosing party is involved.
- Definition of confidential information
It means that all the information which the disclosing party wants to
protect from being disclosed to anyone else. All the confidential
information should be defined; i.e. What Information is included in the
definition of confidential information and what is exempted from its scope.
Usually, the disclosing party tries to increase the scope of the definition
of the confidential information so that it can protect its interest to a
larger extent and the receiving party tries to decrease the same.
There is no time restriction on how long the NDA will be in effect.
Depending on the nature of the business and nature of information, the NDA's
legal validity may last for a different amount of time. It typically lasts
between two and ten years. The agreement could, however, be extended by the
parties indefinitely. When the "confidential information" as described in
the agreement is made public, it is unenforceable.
There should be some standardized exceptions in the agreement where the
receiving party is not held liable even though it shares confidential
information. For example, Receiving party discloses information to a third
party in case it is in accordance with court order, or while conducting due
diligence the party shares information to its representatives or partners
etc, for enquiring about the nature of business in which the disclosing
party is involved, or when receiving party is under the legal obligation to
disclose the information to any government body, or it is disclosed for the
legal proceedings occurring in any competent court. These exceptions are
essential in these types of agreements.
- Return of confidential information
The receiving party must not possess the confidential information after the
NDA expires since it could be harmful to the interests of the disclosing
party and could also be used as a weapon by the receiving party against the
disclosing party. As a result, the NDA always contains a clause indicating
the return of confidential information. In order to ensure that no
information ends up in the hands of a third party, information provided
through hard copies is typically requested for return, while information
supplied through electronic media is requested to be destroyed.
A remedy is provided to the victim (often the disclosing party) in the event
that any NDA clauses are breached. Either compensation for the aggrieved
party's loss is provided in the form of damages to him, or the aggrieved
party is granted injunctive relief to stop more information from being
In this clause the parties jointly agree and designate the specific court in
which they will resolve their issue.
Types of non disclosure agreementThere are three types of NDA
Nature of Information Protected
- Unilateral non disclosure agreement:
In this type of agreement, only one party discloses confidential information
to another such as Employer-employee agreement, Seller-buyer agreement,
Inventor-evaluator agreement, and Company-contractor agreement.
- Bilateral non disclosure agreement or Mutual non disclosure
In this type of agreement, information is disclosed by both parties and both
the parties sign an NDA to protect each other's confidential information.
For example in the case of Mergers, Acquisitions, Takeovers and Joint
Ventures etc, bilateral NDA is signed.
- Multilateral non disclosure agreement:
In this more than two parties are involved where disclosed information is
protected by all the parties (other than the disclosing party) signing the
agreement. This happens only in case of heavy deals.
All the information related to the business of the disclosing party, i.e.
Development plans (upcoming products, ventures, deals), Business operations
(strategies and procedures, relationship with other entities, information about
contracts with inventor, vendor, trade secrets, manufacturing capacity,
techniques, services, technical information, merchandise operations),
Information related to Intellectual property(any copyright, patent, any
invention, formulas, prints, research and development, results of research).
Accounting information balance sheets, cost information, information about
company's profit and loss, total expenses, any penalties), Customer information(
prospective customers, customer's contact information,) is protected in the NDA
to reduce the risk of leakage. Any information which is already present in the
public domain is not protected. To save the company's reputation, it is
essential to protect sensitive information.
A Non Disclosure agreement is signed in various situations. For example when a
startup is pitching to an investor, it needs to share information about their
business for getting investment and NDA plays an important role here. Other
examples such as while entering into a business deal, while entering into asset
purchase agreement, taking advice in the company matters from experts, or taking
a legal opinion of a lawyer, in case of recruiting, while discussing any matter
with contractors, researchers, suppliers on any confidential matter, information
about the product or any new project is yet to be launched.
Breach of non disclosure agreement
When any provision of a non disclosure agreement is violated, the party who
violated it is subject to the penalties mentioned in the agreement. Penalties
vary according to the nature of information disclosed. Usually monetary damages
are given to the aggrieved party, but in case sensitive information is shared
with a third party (which is not specified in the agreement), the party
breaching the agreement is sued in accordance with the jurisdiction clause
mentioned in the agreement itself.
Employees that violate the Employer-Employee NDA risk having their employment
terminated and facing financial fines. In such NDAs, an employee is under
obligation to protect the information for a specific period even after he leaves
Importance of witness
Presence of a witness is not a pre-requisite condition for a non disclosure
agreement to be legally binding. However, the presence of witnesses changes the
scenario. In the presence of a witness, the Limitation Period extends to 12
years. Whereas, when NDA is signed without witness, the aggrieved party had to
take action against the other party for violating the provisions mentioned in
the agreement in 6 years. Beyond this, the aggrieved party cannot take any legal
Benefits of signing a Non disclosure agreement
Stamping, Notarization, Registration
- Building business relationships:
A Non Disclosure Agreement gives confidence to the party to share sensitive
information about their business. As the NDA requires the other party to
preserve the trade secrets of the party disclosing the information, the
latter party can be reasonably certain that its information is protected. As
a result, NDA facilitates the quick and efficient development of business
connections while maintaining the protection of individual interests.
Without an NDA, parties run the risk of losing their reputations, their
distinctive way of doing business, and there won't be any rivalry if
everyone in the industry is aware of each other's tactics.
- Limits the use of disclosed information:
The disclosing party can limit the use of information by the other party and
specify circumstances where the receiving party can use the disclosed
information, so as to maintain its confidentiality. It gives surety to the
disclosing party that the information is not misappropriated.
- Repercussions in case of disclosure:
When the receiving party discloses the information, it is subject to the
legal consequences as mentioned in the agreement. Penalties serve as a
dissuasive factor that prevents the receiving party from breaking the terms
of the NDA.
- Preserving essential affairs:
In case of Bilateral NDAs, both parties are assured that their information
is secure and they can build further commercial relationships with each
other. NDA stimulates growth of both parties simultaneously.
Documents are made more authentic and easily admissible in court by the
stamping, notarization, and registration processes. This makes it simpler for
the disclosing party to seek compensation and more challenging for the other
party to retract their statements and conduct. Receiving party could claim they
did not sign the contract to defend themselves in the absence of stamping,
notarization, or registration.
It makes the legal document admissible. In the case of a company, it is printed
on the company's letterhead and signed by both the parties. The stamp duty may
vary state to state.
Parties can register the signed NDA under the Registration Act of 1908. The
rules and fees for registration may vary from place to place.
Notarizing means when the notary himself acts as witness of the contract.
Notarization builds authenticity of the document. It creates a legal obligation
on the parties signing the contract to fulfill their responsibilities.
So, it is advisable to print a NDA on stamp paper, register it and get it
A Non-Disclosure Agreement plays an important role in business transactions.
Gradually, it is also gaining popularity in various fields such as fashion,
medicine etc. It is a kind of mutual promise of both the parties not to
misappropriate the disclosed information. Thus, it should be drafted carefully
so as to avoid the risk of leakage.
Award Winning Article Is Written By: Ms.Shobita
Authentication No: AP311728016298-27-0423
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