How to Draft Non-Disclosure Agreement [Download Sample]

A Non-Disclosure Agreement (NDA) is a legal contract that helps protect sensitive or confidential information shared between parties, ensuring that the recipient does not disclose this information to others. NDAs are crucial for maintaining trust in business relationships, particularly in commercial transactions, mergers, collaborations, or any scenario where confidential information is exchanged.

This article will explore the process of drafting a Non-Disclosure Agreement, covering essential elements such as the purpose of NDAs, key clauses, important considerations, and sample templates. Whether you are an employer, employee, business owner, or legal practitioner, understanding how to draft an effective NDA is vital to safeguarding valuable information.

What are Non-Disclosure Agreements?

A Non-Disclosure Agreement, commonly known as an NDA, is a legally binding contract that establishes a confidential relationship between the parties involved. The purpose of an NDA is to protect sensitive information, such as trade secrets, intellectual property, client data, or any proprietary information shared during business dealings.

For example, if two companies are negotiating a merger or discussing a potential partnership, an NDA ensures that any sensitive information exchanged remains confidential and is not disclosed to third parties. NDAs are frequently used in a variety of contexts, such as:

• Business mergers and acquisitions
• Intellectual property licensing
• Employment agreements
• Partnerships and joint ventures
• Consulting services
• Technology and software development

An NDA can be unilateral (one-way), where only one party shares confidential information, or mutual (two-way), where both parties disclose sensitive information. The agreement sets the rules and obligations for handling the confidential information and outlines remedies in case of a breach.

Types of Non-Disclosure Agreements

There are three main types of NDAs:

Unilateral NDA

In a unilateral NDA, only one party (the Disclosing Party) shares confidential information with the other party (the Receiving Party). This is commonly used when a business or individual shares sensitive data with a third party, such as during product development or contract negotiations.

Mutual NDA

A mutual NDA, also known as a two-way NDA, involves both parties exchanging confidential information. This type of NDA is often used in collaborations, joint ventures, or mergers, where both parties need to share proprietary information.

Multilateral NDA

A multilateral NDA is a three-way or multi-party agreement where more than two parties are involved. This type of NDA is used when multiple companies or individuals are participating in a project that involves the sharing of confidential information.

3. Benefits of Non-Disclosure Agreements

NDAs provide numerous advantages for businesses, employers, and individuals. These include:

• Protection of Sensitive Information: NDAs ensure that proprietary information, trade secrets, business strategies, and intellectual property are protected from being disclosed to competitors or third parties.
• Prevention of Financial Loss: By keeping valuable information confidential, companies can prevent financial loss caused by competitors accessing client lists, product formulas, or other trade secrets.
• Legal Recourse in Case of Breach: An NDA provides legal remedies if the confidential information is disclosed without authorisation. This may include financial compensation or injunctive relief.
• Clear Boundaries for Employees: NDAs can be part of employment contracts, preventing employees from disclosing company secrets during or after their employment.

Key Elements of an NDA

An NDA must include certain key elements to ensure that the agreement is legally valid and enforceable. These elements form the foundation of the NDA and outline the responsibilities and obligations of each party.

Parties to the Agreement

The NDA should clearly identify the parties involved in the agreement. The Disclosing Party is the entity or individual sharing the confidential information, while the Receiving Party is the entity or individual receiving the information. Both parties must be clearly defined to avoid ambiguity.

Definitions of Confidential Information

The NDA must include a definition of what constitutes “confidential information.” This definition should be as specific as possible to avoid any misunderstanding. For example, confidential information may include business plans, customer lists, technical data, pricing information, or proprietary software.

A broad definition of confidential information benefits the Disclosing Party, while a narrower definition may be more favorable for the Receiving Party. The parties must agree on a mutually acceptable definition.

Obligations of the Parties

The NDA should outline the obligations of the Receiving Party, which typically include:

• Not disclosing the confidential information to third parties
• Taking reasonable measures to protect the information
• Using the information only for the purpose specified in the agreement

The Receiving Party should also be required to inform the Disclosing Party of any unauthorised disclosure.

Duration of the Agreement

The NDA must specify the duration of confidentiality. This is typically longer than the duration of the business relationship. For example, if a company is sharing proprietary technology, the confidentiality obligations may last several years after the termination of the agreement.

The duration will depend on the nature of the confidential information and the business context. In fast-paced industries, a shorter duration may be appropriate, while in industries with long-term intellectual property, a longer duration is advisable.

Return of Confidential Information

The NDA should include a clause requiring the Receiving Party to return or destroy all copies of the confidential information upon termination of the agreement or when the information is no longer needed. This ensures that the Receiving Party does not retain sensitive data after the business relationship ends.

What are the Important Clauses to Include in an NDA?

A well-drafted NDA includes several important clauses to protect the interests of both parties. These clauses provide clarity on the obligations, remedies, and exceptions related to the confidential information.

Scope of Confidentiality

The scope of confidentiality must be clearly defined. This clause outlines the types of information that are considered confidential and the purpose for which the Receiving Party can use the information. It also specifies any restrictions on sharing the information with third parties.

For example, if the confidential information is related to a business merger, the scope of confidentiality may include financial records, legal documents, and client contracts. The Receiving Party is typically restricted from using the information for any purpose other than the transaction.

Remedies for Breach

In the event of a breach, the Disclosing Party should be entitled to certain remedies. These remedies can include:

• Financial Compensation: The Receiving Party may be required to pay monetary damages if the breach results in financial losses.
• Injunctive Relief: The Disclosing Party may seek a court order to stop the Receiving Party from further disclosing or using the confidential information.

The NDA should specify the remedies available for a breach and outline the process for seeking legal recourse.

Exceptions to Confidentiality

There are certain exceptions to the confidentiality obligations in an NDA. These exceptions typically include situations where:

• The information was already publicly known before the disclosure.
• The information was already known to the Receiving Party before the disclosure.
• The information is required to be disclosed by law, such as in response to a court order or government investigation.

These exceptions provide flexibility for the Receiving Party and prevent undue penalties for disclosures that are legally required or unavoidable.

Non-Compete and Non-Solicit Clauses

In some cases, NDAs may include additional clauses, such as non-compete or non-solicit clauses. These clauses prevent the Receiving Party from competing with the Disclosing Party or soliciting the Disclosing Party’s clients or employees for a specified period.

For example, in an employment context, a non-compete clause may prohibit an employee from working for a competitor for a certain number of years after leaving the company. A non-solicit clause may prevent the employee from poaching clients or colleagues.

Termination Clauses

The NDA should include termination clauses that outline when and how the agreement can be terminated. This clause also specifies what happens to the confidential information upon termination.

Termination may occur for various reasons, such as the completion of a business transaction or the mutual agreement of the parties. The NDA should specify the actions to be taken by the Receiving Party, such as returning or destroying confidential information.

Governing Law and Jurisdiction

The NDA should specify the governing law and jurisdiction for any disputes arising from the agreement. This is particularly important in international business transactions, where the parties may be located in different countries.

For example, the NDA may state that any disputes will be governed by the laws of a particular state or country and that the parties agree to resolve disputes in a specified court.

Injunctive Relief

An injunctive relief clause allows the Disclosing Party to seek immediate legal intervention to prevent the further disclosure of confidential information. This remedy is particularly useful when financial compensation alone may not be sufficient to remedy the breach.

For example, if confidential information is leaked to a competitor, the Disclosing Party may seek a court order to stop the Receiving Party from using or sharing the information.

Steps to Draft an NDA

Drafting a Non-Disclosure Agreement requires careful attention to detail, ensuring that all relevant clauses are included to protect confidential information while maintaining legal validity. Below are the key steps to follow when drafting an NDA:

a. Identifying the Purpose and Parties

The first step in drafting an NDA is to clearly identify the purpose of the agreement and the parties involved. The purpose can range from sharing trade secrets during a business negotiation to disclosing client information in an employment setting.

You must specify:

• Disclosing Party: The entity or individual sharing confidential information.
• Receiving Party: The entity or individual receiving the confidential information.

Ensure that all parties involved in the transaction or agreement are properly defined and included in the NDA.

b. Defining Confidential Information

The NDA must include a comprehensive definition of what constitutes confidential information. Depending on the business or transaction, confidential information may include:

• Business strategies
• Client lists
• Product designs
• Intellectual property
• Financial information
• Trade secrets
• Technical specifications

It is advisable to draft this section carefully, ensuring that it is broad enough to cover all potential confidential information but specific enough to avoid ambiguity. Defining what does not constitute confidential information is equally important. For example, publicly available information or data known to the Receiving Party before the agreement should be excluded.

c. Drafting Key Clauses

Next, you will draft the key clauses of the NDA, ensuring that each critical area is covered. Essential clauses include:

• Obligations of the Receiving Party: These obligations specify how the Receiving Party should handle the confidential information. This may include refraining from disclosing the information to third parties, taking reasonable security measures, and limiting the use of the information to the agreed-upon purpose.
• Term or Duration: The duration of the NDA should be clearly stated, specifying how long the confidentiality obligations will last. This may exceed the actual business transaction period, depending on the nature of the information.
• Return or Destruction of Confidential Information: Upon termination or completion of the agreement, the NDA should outline how confidential information should be returned, deleted, or destroyed by the Receiving Party.
• Remedies for Breach: In the event of a breach, the NDA should specify the available legal remedies, such as financial compensation or injunctive relief.

d. Review and Finalisation

After drafting the NDA, it is essential to thoroughly review the document to ensure all aspects are clear and enforceable. Both parties should review the agreement, preferably with legal counsel, to ensure that their interests are protected.

Once reviewed and agreed upon, both parties should sign the NDA, and each should retain a copy of the signed document for their records.

Sample Non-Disclosure Agreement Clauses

To give a better understanding of how to draft specific clauses in an NDA, here are examples of some commonly used NDA clauses:

a. Definition of Confidential Information:

“Confidential Information” shall mean all information disclosed by the Disclosing Party to the Receiving Party, whether orally or in writing, that is designated as confidential, proprietary, or that a reasonable person would understand to be confidential under the circumstances of disclosure. Confidential Information includes, but is not limited to, business strategies, trade secrets, financial data, technical specifications, and customer lists.

b. Obligations of the Receiving Party:

The Receiving Party agrees:

• Not to disclose any Confidential Information to any third party without the prior written consent of the Disclosing Party.
• To take all reasonable measures to protect the confidentiality of the information and to prevent unauthorised access, use, or disclosure.
• To use the Confidential Information solely for the purposes specified in this Agreement.

c. Exceptions to Confidentiality:

The obligations of confidentiality shall not apply to information that:

• Is already in the public domain at the time of disclosure.
• Was lawfully known to the Receiving Party prior to the disclosure by the Disclosing Party.
• Is required to be disclosed by law or court order, provided that the Receiving Party gives prompt written notice to the Disclosing Party of such legal obligation.

d. Return or Destruction of Confidential Information:

Upon termination of this Agreement or upon the Disclosing Party’s request, the Receiving Party shall return all tangible materials containing Confidential Information and delete any electronic copies of such information from its systems. The Receiving Party may retain one copy for legal or archival purposes, subject to the continuing confidentiality obligations of this Agreement.

e. Remedies for Breach:

In the event of a breach of this Agreement, the Disclosing Party shall be entitled to seek monetary damages and injunctive relief to prevent further unauthorised disclosure of Confidential Information. The Receiving Party acknowledges that monetary damages may not be sufficient to remedy the breach and that injunctive relief may be necessary to enforce the terms of this Agreement.

Legal Considerations and Best Practices

When drafting an NDA, it is essential to consider the following legal and practical factors:

a. Tailoring the NDA to the Specific Transaction

Each NDA should be tailored to the specific context of the transaction or business relationship. A one-size-fits-all approach may lead to gaps in protection, particularly if the confidential information varies significantly from one agreement to another.

For instance, an NDA for a software development project will have different requirements than an NDA for a business merger. Understanding the specific risks and concerns related to the confidential information is key to drafting a robust agreement.

b. Enforceability and Governing Law

Ensure that the NDA complies with the governing law of the jurisdiction in which it will be enforced. Jurisdictional considerations are particularly important for international agreements, as different countries may have different rules regarding the enforceability of confidentiality agreements.

For example, the enforceability of non-compete clauses may vary significantly between jurisdictions, and certain provisions in the NDA might need to be adjusted to comply with local laws.

c. Consideration of Trade Secrets and Intellectual Property

If the confidential information includes trade secrets or intellectual property, additional protections may be necessary. In some jurisdictions, trade secret laws provide extra layers of protection, but these laws may require certain steps to be taken by the parties, such as marking documents as confidential and implementing reasonable security measures.

d. Periodic Review and Updates

NDAs should be reviewed periodically to ensure they remain relevant and up to date. Changes in the law, business practices, or the nature of the confidential information may require amendments to the agreement. Including a clause that allows for amendments to be made in writing by mutual consent can ensure that the NDA remains effective over time.

e. Clear Definitions and Avoiding Ambiguity

One of the most important legal considerations in drafting an NDA is the need for clarity. Ambiguous language can lead to disputes over the scope of the confidentiality obligations. Ensure that definitions are clear and that the rights and obligations of each party are well-defined. Avoid using overly complex legal jargon that could be misinterpreted.

Download Non-Disclosure Agreement Sample

A well-drafted NDA not only safeguards confidential information but also fosters trust between the parties involved, ensuring that they can collaborate without fear of unauthorised disclosure. As legal professionals or business owners, understanding how to effectively draft and negotiate an NDA is essential for managing risk and preserving the confidentiality of proprietary data.