Non-disclosure agreement

Every business has confidential information they don't want to share. Whether it’s trade secrets, customer lists or client details, it's important companies protect valuable information.  Especially from potential buyers or former employees.

Non-disclosure agreements protect your business's confidential and proprietary information. As well as legally obligating your workers to not share valuable data.

Without a confidentiality agreement, you're at risk of losing customers and financial loss. As well as having to take legal action if an employee decides to share your confidential information.

In this guide, we'll discuss what non-disclosure agreements are, the risks of not using one, and what to include in them.

What is a non-disclosure agreement?

A non-disclosure agreement (NDA) is a mutual agreement between two or more parties. It prohibits both parties involved from disclosing confidential information about the other.

This includes information they may have previously shared while doing business together. Or anything private mentioned earlier in their business relationship. This means that information can’t be disclosed without prior written consent from the other party.

How do non-disclosure agreements work?

An NDA creates a confidential relationship between two parties: the disclosing party and the receiving party.  Only one party predicts that they will share confidential information with the other.

To protect information disclosed, the disclosing party provides the receiving party with an NDA. Once they sign it, the receiving party agrees not to disclose information covered by the agreement.

They must then keep any confidential information private to the extent required by law, or another regulatory body. And only use it for its permitted purpose – if this is set out in the agreement.

Are non-disclosure agreements legally binding?

An NDA is a legally binding contract under UK governing law. If the receiving party does disclose confidential information, they will have breached the agreement.

If one party resides outside of the UK, the agreement should state which jurisdiction the agreement falls under.

You can also request that employees sign a confidentiality agreement. And you can refer to this as part of the confidentiality clause in your employment contract with them.

This will also establish a confidential relationship between both you and your workers. Meaning employees cannot share your company's confidential information.

What happens if an employee breaches a non-disclosure agreement?

If an employee chooses to disclose information about your business - and has signed a confidentiality agreement - you could take legal action.

You may choose to:

• Get an injunction: You can request an injunction to prevent further disclosures from an employee. An injunction is legally enforceable and will stop the receiving party - in this case the employee - from sharing more confidential information.
• Claim for damages: You may also legally claim that an employee pay compensation for any damages that may occur as a result.
• Fee: You could also request a fee. It must be equal to the amount a user would pay to license the information.
• Take profits: You can request an accounting for any profits made by your employee from using your confidential information. For example, if the employee uses your proposed invention to make their own product, they may sell this and make a profit. But you could request they pay you equal to the profit they made.

Employers must also ensure they use specific language when defining confidential information in an employment contract. Otherwise, their staff may interpret the information this refers to differently.

What type of information is protected by a non-disclosure agreement?

Confidential information protected by an NDA may include:

• Client information.
• Customer information. For example, financial information disclosed that relates to a buyer.
• Sensitive business information. For example, details of a new invention or trade secret.
• Accounting information. For instance, bank account details.
• Marketing strategies.
• Trade secrets. For example, customer lists.
• Intellectual property. For example, a new idea or invention an employee at your business has come up with.

Such information does not include data that is already public knowledge. Or confidential information that becomes available - but not through the wrongful act of the receiving party.

The risks of not having a non-disclosure agreement

A confidentiality agreement legally protects your confidential information. So without one, you're at risk of several issues occurring.

These include:

Lose rights to intellectual property

You and your staff share thoughts and ideas every working day. And if you don't use an NDA, it's harder to protect your intellectual property. This is because an NDA outlines what information an employee can and cannot share.

Lose out on business opportunities

Without an NDA to protect your intellectual property or confidential information, you may lose out on business opportunities.

For example, a former employee may take an idea they came across and pitch it to a potential investor. Or, they could use your client information to poach your customers.

Failure to lead your market

Not using confidentiality agreements may lead your business to fall behind in terms of innovation.

As your confidential information is not legally protected, former employees may share your ideas when they move companies. Which could be a great benefit to their new employer, but not to your business.

For example, an employee of yours starts a second job at a competitor's business. And shares confidential information about a new service or product of yours with them.

The new business then launches the new service or product. Even though you thought of this idea first, you don't have an NDA to legally cover you. As a result, your business could end up falling behind its competitors. 

When do businesses use non-disclosure agreements?

Whilst they mostly protect confidential information, there are several reasons why a business might use an NDA.

These include:

Hiring new employees

A business may require new staff members to sign an NDA. This is to protect sensitive information new employees have access to. This may include trade secrets or a mock-up of a new product.

The NDA legally prevents new employees from sharing this type of confidential information. But it also helps you set a standard for your workplace as soon as a new staff member starts.

Beginning a new business relationship

Employers may also use an NDA when beginning a new relationship with another business. This is so both companies can evaluate an understand each other's processes. Which may mean sharing financial information or trade secrets.

With an NDA, both businesses agree to not disclosing confidential information about the other party. And if one party does disclose information, they will have breached the agreement.

Proposing a new invention or idea

A business may also choose to use an NDA with employees, when proposing a new invention, idea or service.

An invention could be a:

• Product.
• Plan.
• Design.
• Recipe.

As public disclosure of a new invention can sometimes void patent rights, an NDA can protect the business owner as they further develop the product.

Seeking funding or potential investors

You could also use an NDA when seeking funding from potential buyers or investors. This is to allow the investors to review and assess confidential information about your company. But, legally prevents them from sharing it.

This protects your business's confidential information should investors drop funding. Or decide to provide funding to a competitor company.

Selling the business to a prospective buyer

When selling their business to a potential buyer, a company may request they sign an NDA. This protects any confidential information the business may share during sale negotiations. And legally covers the business should the buyer disclose this data.

How long does a non-disclosure agreement last?

An NDA lasts for as long as both parties agree to. The disclosing party should state this time period clearly within the agreement. And the receiving party agrees to keep the disclosed information private - from the start date until the end date.

Whilst some NDAs do not have a termination clause, some do. For example, the clause may state that either party can terminate the NDA by providing a 30-day written notice.

The benefits of using non-disclosure agreements

Whilst creating an NDA may seem time-consuming, employers can gain several benefits from using one. These include:

Protect trade secrets and sensitive information

Most notably, NDAs protect your business's confidential information. For example, you could decide to sell your business and share this idea with your employees.

This might include disclosing information about potential buyers. If an employee has signed an NDA and moves to a competitive business, they cannot disclose this information to them. And if they do, you could take legal action.

Gives your business a competitive advantage

If you have a discussion with a potential buyer, an NDA prevents the buyer from using any confidential information you have disclosed. This could include using it in their own business ventures. Or sharing it with competitor companies in the future.

This offers your business a competitive advantage, as the NDA could protect private information about your company's ideas, inventions, products or services.

As a result, there is less risk of an individual taking these ideas for their own, and your business can stay ahead of the curve.

Sets professional standards for your business

Using an NDA in your business helps employees know what level of confidentiality you expect from them. And if you include this in their contract, it could prevent issues from occurring down the road.

If you decide to use NDAs with employees or potential buyers, it's best to ensure you are using them with all employees.

For example, if you ask one employee to sign an NDA, but not another, this may damage your relationship with them. And could also put you at risk of a discrimination claim.

What is the difference between a settlement agreement and a non-disclosure agreement?

A settlement agreement is a legally binding contract that brings employment contracts to an end. It can also be used to settle a dispute during employment.

Employers typically use them to settle workplace disputes. Whilst they differ from NDAs, they can contain a confidentiality clause which has the same effect as one.

Different types of confidentiality agreements

When drafting an NDA, you must ensure you create one that suits your needs. And there are several different types of NDAs available.

These are:

One-way non-disclosure agreement

A one-way NDA has only one disclosing party and one receiving party. It's the simplest form of NDA - and prohibits the receiving party from using or disclosing confidential information. Except for its permitted purpose.

This type of NDA is also useful if you regularly use freelancers or contractors within your business. As these are self-employed, an NDA can ensure confidentiality is met during the time they work at your company - and possibly beyond.

Mutual non-disclosure agreement

A mutual NDA is where the two parties involved both wish to protect confidential information. The two parties both disclose sensitive information to the other, and both must protect this data and keep it confidential.

Businesses typically use a mutual NDA to prevent proprietary information ending up in the hands of their competitors. If one business decides to disclose information about the other party, this will breach the agreement.

How to write a confidentiality agreement

It's important you don't rush drafting an NDA. As you must consider a number of factors before you write one.

These include:

Decide the confidential information covered

Before you write your NDA, you must decide on what sensitive information the agreement will cover. Moreover, you must be specific and give examples where possible. Otherwise, you and your employees might have different ideas of what information you want to protect.

You should also ensure you specify the time frame in which you want this information to stay confidential. This could be an indefinite time period, or until you plan to make the information public.

For example, if you're nearly ready to launch a product - but want to keep it a secret in the meantime - you could suggest a short time period.

Consult a lawyer

You could also consult a lawyer when writing a confidentiality agreement. This will ensure your NDA is thorough and legally sound. You should also consider speaking with a lawyer if you’re writing an NDA in unusual circumstances.

For example, you should consult a lawyer if your NDA:

• Includes more than two parties.
• Is set outside the UK.
• Includes the exchange of information with a public body. For example, a government body or university.

Use a non-disclosure agreement template

You could also use a template when drafting an NDA. These can be found online and are usually free. They can help if you're struggling with what to include.

When using a NDA template, you must ensure that the agreement is legally enforceable. So it's best to have a lawyer or HR professional review it.

What should you include in a non-disclosure agreement?

If you don't include all the necessary items in an NDA, you won't be able to legally enforce it.

For an NDA to be lawful, it should include:

• Clarification of parties: An NDA should include an identification of the two parties it relates to. This part of the NDA should explain who the disclosing party is, and who the receiving party is. This includes using personal information such as names and contact details.
• Specify the jurisdiction: You should also specify which competent jurisdiction applies to the NDA. For example, you may want a non-exclusive jurisdiction - where a party can bring a claim to a separate court in the event of a dispute. Or an exclusive jurisdiction - where the only court that you can involve is one you have stated in the agreement. For example, a court of a certain country.
• Definitions: This section of the NDA lays out what information the receiving party must protect and keep private.
• Obligations: This outlines what behaviour the disclosing party expects from the receiving party. But also details the penalties that the disclosing party could enforce if the receiving party shares their confidential information.
• Scope: This specifies terms so neither party can misinterpret what they consider sensitive information.
• Time frame: The disclosing party will specify how long they want this information to remain private. This can be a short period or an indefinite amount of time.
• Return of information: Once parties agree on the agreement terms, an NDA may require the recipient to provide confirmation. This confirmation affirms that they have returned or destroyed the sensitive information they had access to.
• Exclusions: This is information that the NDA does not protect. For example, information that the disclosing party has previously mentioned, or that employees were aware of before they joined the business.
• Remedies: This section details what happens if an employee breaches a confidentiality agreement. For example, payment of damages.

Get help writing a non-disclosure agreement from Peninsula UK

You should ensure employees sign an NDA when they join your company. The written agreement should be thorough, as well as including sound confidentiality obligations.

An NDA will establish what you expect from new hires straightaway, and legally protect you if a former employee shares private information. Without one, it's likely your business will lose customers and fall behind when it comes to innovation.

Peninsula offers you expert 24/7 HR advice and support, to help you write confidentiality agreements, and manage confidentiality in your company, as well as helping you know how to protect valuable information. Contact us on 0800 028 2420.