If you’re entering into a new business relationship or disclosing confidential information, you might be asked to sign a non-disclosure agreement (NDA). An NDA is a legal contract that requires parties to keep certain information confidential and not to disclose it to others without permission. NDAs are a way to protect confidential information and trade secrets from falling into the wrong hands or ears. In this article, we’ll cover everything you need to know about NDAs.

What Is a Non-Disclosure Agreement?

An NDA is a way for two people to make a promise to keep a secret. If one person has something private they want to share with the other, they can ask the other person to promise not to tell anyone else. Once the other person makes the promise, it becomes a legal agreement. Both people have to keep the information confidential, or they can legally find themselves in trouble for breaking the agreement. Sometimes, only one person has to keep the secret, but other times both people do. 

NDAs are used in business to protect confidential information and trade secrets from being shared with others without permission. This confidential information can be anything from a new product design, financial information, or customer lists, to any sensitive information that could give a business a competitive edge.

What’s Included in a Non-Disclosure Agreement?

If you’re asked to sign an NDA or you think you may need one yourself, it’s important to understand what the agreement entails

Participants to the Agreement

An NDA identifies the party participating in the agreement, which includes the person or the entity that’s disclosing the confidential information (the disclosing party) and the person that receives that info (the receiving party). For example, say you’re a freelance writer and you’re creating blog content for a new start-up company. They may ask you to sign an NDA. In this example, the company is the disclosing party and you’re the receiving party. 

Explanation of Confidential Information

An NDA will define the information you or the other party wants to protect. This could include trade secrets, technical data, financial information, etc. The NDA outlines the information that shouldn’t be disclosed. The private information won’t be written on the NDA form.

Exclusions of Confidentiality

In some rare cases, the receiving party is allowed to disclose the information without breaking the NDA. The exclusions of confidentiality list those circumstances. For example, this might include situations where the information is already known to the public or is required to be disclosed by law. If the situation applies and the NDA is broken, there is no penalty.

Obligations

The obligations of the parties are also outlined in NDAs. This typically entails duties like upholding confidentiality, restricting the use of confidential information, and putting in place suitable security measures to safeguard the data exchanged.

Time Period

The duration of the agreement’s validity will also be outlined. This could apply for a limited time or the duration of the business relationship. If information is disclosed outside of this specified duration, the disclosing party can’t take legal action.

Other/Miscellaneous Provisions

An NDA may include other miscellaneous provisions, such as the governing law of the agreement, how disputes will be resolved, and any limitations in place on liability.

3 Types of Non-Disclosure Agreements

Non-disclosure agreements (NDAs) come in different types, each with its unique features and applicability. 

1. The Mutual Agreement

As the name implies, this kind of NDA is used when both parties have confidential information they want to keep private. Both parties to an NDA mutually agree to keep each other’s confidential information to themselves. 

This kind of NDA is used when two businesses are debating a potential merger, joint venture, or business partnership and they need to share sensitive information to assess the opportunity. 

2. The Non-Mutual Agreement

One-way NDAs, another name for this kind of NDA, are used when only one party has sensitive information that needs to be protected. For instance, a business may use a non-mutual NDA when hiring a worker to ensure that the employee won’t divulge proprietary information to rival businesses.

3. The Disclosure Agreement

In business transactions like mergers and acquisitions where one party may need to disclose confidential information to the other party, this kind of NDA is frequently used. The disclosure agreement specifies the conditions and purposes for which confidential information may be disclosed.

When Do You Need an NDA?

It’s important to know when an NDA is needed to protect confidential and proprietary information. Here are some scenarios where an NDA may be necessary:

When Employees and Independent Contractors Have Access to Confidential and Proprietary Information

While working on a project, employees and independent contractors might have access to private and proprietary information. An NDA can be used in this situation to guarantee that the information is kept private.

When Doing Business with Potential Partners, Investors, Buyers, and Service Providers

An NDA can be used to safeguard private information exchanged during discussions about potential business partnerships or investments. It can also be used to keep information private when outsourcing services to a service provider or sharing it with a potential customer.

When Litigation or Arbitration Happens

In the unfortunate event of a legal dispute, having an NDA can protect a business’s confidential information. If a former employee or contractor violates their NDA by sharing sensitive information during a lawsuit, it could have devastating consequences for the business. By including specific language in the NDA that applies during litigation or arbitration, businesses can ensure confidential information is kept private and not shared with anyone outside of the court.

Advantages of Having an NDA

In various circumstances, having an NDA in place can benefit businesses in several ways. A few advantages of having an NDA are listed below:

  • Information Protection: Preventing the disclosure of sensitive and confidential information to unauthorized parties is one of the NDA’s most significant advantages. This includes financial data, intellectual property, and marketing plans in addition to customer information.
  • Competitive Advantage: By keeping certain information confidential, businesses can gain a competitive advantage over their competitors. This can be especially important in industries where innovation and new ideas are key to success.
  • Increased Trust: Having an NDA in place can also foster trust between parties, especially in situations where sensitive information is being shared. It shows that both parties are committed to protecting each other’s interests and can help establish a positive working relationship.
  • Customization: An NDA can be tailored to meet the specific needs of a company based on the type of information that needs to be protected. This isn’t a one-size-fits-all document, which helps to provide an extra layer of security to businesses disclosing private information. Businesses can add specific provisions and clauses to the agreement to make sure their requirements are addressed.

Limitations of NDAs

While NDAs can be beneficial, they do have limitations. 

  • An NDA is only as strong as its enforceability. If someone breaches the agreement, it can be challenging and costly to take legal action. You’ll have to follow through with the process and file a lawsuit if they violate the NDA.
  • An NDA can’t stop someone from using information they already knew before signing the agreement.
  • An NDA can’t protect information that is already public knowledge or becomes public knowledge through legal means.
  • An NDA is often not effective against a government agency or court order that requires disclosure of confidential information.
  • The other party may refuse to sign the NDA. If that happens, you’ll want to limit the extent to which confidential information is shared or risk not having any protection.

Protection and Privacy for Your Business 

Non-disclosure agreements are a useful tool when businesses or entities are exchanging confidential information. There are many reasons why you may need to use one and they can offer protection, so long as you are prepared to enforce them if breached.

doola understands the importance of protecting your business’s confidential information. Our team of experts can assist you with all of your NDA and bookkeeping, and business banking needs.

FAQs

Are NDAs legally binding?

Yes, NDAs are legally binding if they meet certain criteria such as having clear terms and conditions, adequate consideration, and lawful objectives.

What happens if you break an NDA?

If you break an NDA, the consequences can include lawsuits, damages, and other legal remedies. Depending on the nature of the breach, the offending party could also face negative publicity and reputational harm.

Do NDAs require two signatures?

Most NDAs require two signatures: one from the disclosing party and one from the receiving party. This ensures that both parties acknowledge and agree to the terms of the agreement.

How long do NDAs normally last?

The length of an NDA can vary depending on the specific needs and circumstances of the parties involved. NDAs can be short-term, covering a specific project or period, or long-term, covering the duration of a business relationship.

Does an NDA need to be witnessed?

An NDA does not necessarily need to be witnessed, but it is recommended to have a witness present during the signing of the agreement to further strengthen the validity and enforceability of the contract.

Jeannine Mancini
Jeannine Mancini
Content Specialist
Doola's website is for general information purposes only and doesn't provide official law or tax advice. For tax or legal advice we are happy to connect you to a professional in our network! Please see our terms and privacy policy. Thank you and please don't hesitate to reach out with any questions.
LLC 101
Popular Posts

Get started with doola and launch your US business

Turn your dream idea into your dream US business, today.