We have reviewed many hundreds of NDAs (aka Non-Disclosure Agreements or sometimes called Confidentiality Agreements). What are the points that we are reviewing to check for?
These are often used when one party wants to share secrets it has with another – this could be as they are seeking investment, or perhaps they want to explore entering into a long term contract together.
We have a lot of information for companies at our information hub over here, but in this article we want to set out some of the provisions that you should know about, to stay safe. If you’d like us to look over one you have been sent before you sign it, then just let us know as we can often spot things that are unusual quickly.
In order to upskill you on some key points to watch out for, consider these:
Mutual or one way?
If it is a mutual one then typically it will be more “fair” – as you both need to comply with the provisions. Even if it is mutual look out for any special carve outs that only apply to one party and not the other eg rights of termination or liability provisions that are more favourable (usually for the person who prepared the draft).
Who holds the power
Like most commercial agreements these are all about negotiating power. Some companies will only deal with you to explore whether they will talk more if you sign their NDA. If you are happy with the security you have then it is probably the “key” to enter into those discussions and you just have to weigh up the commercial risks as not having the ability to talk to them will certainly not lead to a contract.
Clear definitions
Spend some time checking how confidential information is defined – most agreements will include things which are labelled as confidential, but does it go as far as to say anything you should know was confidential or anything that was said by phone? It becomes harder to prove later on if the definitions go that far. For certainty it can be a strategy to ask that confidential information is written and labelled that way. Unless it suits you to have a wider definition as you are providing most of the information.
The Purpose
It is common for a purpose of the disclosure to be identified and then reference made to that purpose – that is, the confidential information disclosed needs to be used for the purpose (eg evaluating if the parties will enter into a contract of some kind). Any time there is a purpose or definition of permitted use check if it is going too far and covering things that are too wide. Typically there is also a statement about how entering into the NDA is not obligating a party to sign additional agreements related to the purpose – one or both sides might decide to walk away.
Standard of protection
Most agreements will say something about how each party will keep the information safe. A common standard is that the level of protection is the same level you would use with your own confidential information.
Carve outs for permitted disclosures
An NDA should have some specific carve outs in relation to disclosure that is permitted – typically this will cover sharing with advisors, if required to disclose by a Court or Government body (usually need to notify the other party if this happens), was already in the public domain, later was released by the disclosing party publicly, was already known by the receiving party or was independently developed by the receiver (though that might be hard to prove). Another common carve out covers affiliates of the signing party, provided that the signing party ensures that the affiliate abides by the same obligations under the NDA.
Return or destruction of information
There will usually be a clause saying that at the end of the agreement confidential information will be returned, or destroyed. While understandable, this is probably hard to comply with given most information is transmitted via email so back ups likely exist on a server, somewhere. A reference to taking the steps that they can but not requiring a search of all back up files is a practical solution (with a commitment that they will maintain the confidentiality and not use it).
IP Ownership
We would want to see that the original owner of the IP retains ownership of it even if shared with the other party. There may be a provision about what happens to new IP created based on disclosed information – those usually indicate how a party will want additional agreements to work so can be a good test of the new relationship eg will they own new IP developed based on what you disclose? NDAs also often make it clear that there is no license granted by the NDA for the information to be used.
Warranties, Indemnities, Remedies
It is common to have provisions that say there is no warranty regarding the information provided (ie that it is accurate, full, fitness for purpose etc). There is often an indemnity for the discloser if the recipient were to breach the agreement and they suffered loss, and it will often set out what the remedies are if there is a breach (applying to a court to enforce it).
Term
Typically there will be a period of the agreement, so how long is appropriate – 6 months, 1 year, 3 years? It is common for the obligations to continue on indefinitely, and it is also common for an NDA to be superseded by a later agreement that will set out more about how the parties treat each other.
Who is the counterparty?
It is worth asking this before you sign any contract – is it with the “main entity” or is it with a subsidiary. If so, does that entity have any assets? Also consider whether the likely harm of breach of the NDA would be financial and/or reputational as this may influence which entity you prefer to be the counterparty.
Governing law
This is actually important just because if you are based in New Zealand but the governing law is California, or Germany, or Japan, then you cannot really know what the law is going to decide over there unless you engage a local lawyer. Your ability to quickly enforce the NDA may also be compromised if a foreign law and/or court is chosen.
What is the real value?
We seldom see NDAs actually enforced because the cost of doing so in a Court is often prohibitive – but what they are good for is signalling intent and a “moral obligation”, showing how the parties will respect intellectual property. They also start a pattern of relationship and indicate that each party sees it as being important to deal with each other fairly. Relationships are the real key in business, and they get built through interactions and you get a “sense” of their approach. For these reasons they are an important part of growing a relationship with the other side.
We hope this has been a helpful overview to upskill you on key things to look for in an NDA. If you get one that has some “unusual” looking provisions, then feel free to drop us a line to have a look over.
We also have many resources for companies over at our “Start-ups and Capital Raising Information Hub” including downloads like the “Start-ups Legal Toolkit” and the “Capital Raising Guide”. We hope these are helpful to build up the ecosystem.
This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.
