What is a Non-Disclosure Agreement (NDA)?

In the hyper-competitive world of business, sensitive information is a valuable commodity.  Companies invest significant resources in developing unique ideas, trade secrets, and customer lists. A non-disclosure agreement (NDA) is a legal contract that protects this confidential information from unauthorized disclosure.

What Does an NDA Do?

A non-disclosure agreement, sometimes referred to as a confidentiality agreement, is a legal contract between two or more parties that outlines information to be shared for specific purposes but restricts its disclosure to any third party. Essentially, it creates a confidential relationship between the parties to protect any confidential and proprietary information or trade secrets. NDAs can be mutual, where both parties are restricted from sharing information, or unilateral, where only one party is bound by the confidentiality clause.

At its core, an NDA establishes a relationship of trust between two or more parties.  One party (the discloser) shares confidential information with the other party (the recipient). The NDA outlines the recipient's obligations regarding this information, typically including:

  • Maintaining the confidentiality of the information.
  • Limiting the use of the information to authorized purposes outlined in the agreement.
  • Not disclosing the information to any third party without written permission.

Key Components of an NDA

A well-crafted non-disclosure agreement will typically include several key clauses to clearly define the obligations and expectations of both parties. Here's a breakdown of some standard provisions found in NDAs:

Definition of Confidential Information

This clause explicitly defines what information is confidential under the agreement. This can be broad or specific, depending on the needs of the business.

Purpose of Disclosure

This clause outlines the reason the confidential information is being shared. This helps ensure the recipient only uses the information for the intended purpose.

Non-Disclosure Obligations

This core clause details the recipient's responsibilities regarding the confidential information. It typically prohibits them from disclosing the information to any third party without written permission from the disclosing party.

Exceptions to Non-Disclosure

This clause may specify situations where disclosure is permitted, such as when required by law or to defend a legal claim.

Term and Termination

This clause outlines the duration of the NDA and the circumstances under which it can be terminated.

Return or Destruction of Confidential Information

This clause specifies how the recipient must handle confidential information after the NDA expires or terminates. It may require them to return all physical copies and delete any electronic copies.

Remedies for Breach

This clause outlines the legal consequences if the NDA is breached. This may include financial penalties or injunctive relief to prevent further disclosure of confidential information.

Governing Law and Dispute Resolution

This clause specifies the legal jurisdiction that governs the interpretation and enforcement of the NDA and how any disputes arising from the agreement will be resolved.

By incorporating these essential clauses, a business can create a comprehensive NDA that effectively protects its confidential information. It's important to remember that NDAs are legal documents, and consulting with a lawyer is advisable to ensure the agreement is tailored to your organization’s specific needs and complies with relevant laws.

Because NDAs are legal documents, they are often managed by an organization’s legal department, and are a common touchpoint between legal and other departments.

Who Uses an NDA?

The list of those who use NDAs is quite broad! Overall, NDAs are used by any entity that needs to share confidential information with another party and wants to ensure its secrecy. Here are some of the common scenarios where NDAs come into play:

Businesses:

Companies of all sizes use NDAs to protect confidential information, from trade secrets and inventions to customer lists and marketing strategies.

Employees:

Most employee contracts include a form of NDA, restricting them from sharing sensitive company information after their employment ends.

Independent Contractors and Consultants:

When a business hires a freelancer or consultant who will have access to confidential data, an NDA is often used.

Investors and Potential Investors:

Companies seeking investment may require potential backers to sign NDAs before disclosing financial information or business plans.

Mergers and Acquisitions:

During M&A discussions, a mutual NDA protects the sensitive information of both companies involved.

Strategic Partnerships:

When businesses collaborate on a project, an NDA ensures that each party's confidential information is protected.

Types of NDAs

Three main types of NDAs differentiate based on how many parties are disclosing and receiving confidential information: 

Bilateral NDA

It involves two parties who are both disclosing confidential information to each other. It is also known as a mutual NDA. This type of NDA is used when both parties have sensitive information to share during collaborations or negotiations. 
Here are some common examples:

  • Two companies entering into a joint venture or partnership agreement, where each might share proprietary technologies or market data.
  • Businesses negotiating a merger or acquisition, where confidential financial information and strategic plans are exchanged.
  • Two research institutions collaborating on a scientific project, where each might share unpublished data or research methods.

Unilateral NDA

This type is the most common type of NDA. In a unilateral NDA, only one party (the discloser) shares confidential information with another party (the recipient). 
This scenario is common for situations like:

  • An employer requiring an employee to sign an NDA to protect trade secrets or customer information.
  • A company providing a prototype or new product concept to a potential investor under an NDA.
  • An inventor disclosing their idea to a potential manufacturer for evaluation, with an NDA in place to safeguard the invention details.

Multilateral NDA

This is less common than unilateral or bilateral NDAs and involves three or more parties sharing confidential information with each other. Multilateral NDAs are used in complex situations where multiple parties need access to sensitive information for a common purpose. Some examples include:

  • A consortium of companies collaborating on a large-scale development project, where each company has its own confidential technologies or processes involved.
  • Multiple investors participating in a funding round for a startup, requiring all investors to keep the startup's financial details and business plans confidential.
  • A group of vendors or suppliers working together on a project for a primary client, where all parties need to protect the client's confidential information.

Common Scenarios for an NDA

Businesses rely on NDAs in a variety of situations to protect sensitive information and maintain their competitive edge. Here are some common business uses for NDAs:

Employee Onboarding

New hires are often exposed to confidential information like customer lists, trade secrets, or marketing plans. An NDA ensures they understand their obligations to keep this information confidential even after leaving the company.

Contractor and Vendor Agreements

Businesses may use NDAs with independent contractors, consultants, or vendors who will have access to confidential data during their work.

Business Negotiations and Partnerships

When exploring potential partnerships, joint ventures, or discussing mergers and acquisitions, companies often share confidential information. NDAs ensure this information is used only for the specific purpose of the negotiations and not disclosed to competitors.

Investor Relations

Companies seeking investment capital may require potential investors to sign an NDA before disclosing financial information, business plans, or proprietary technologies. This protects the company's sensitive information.

Licensing Agreements

If a company licenses its technology or intellectual property to another company, an NDA ensures the recipient keeps the details of the technology confidential.

Product Development and Collaboration

Companies collaborating on research projects or developing new products may use NDAs to protect each other's confidential information and ideas.

Customer Information Protection

Businesses often collect valuable customer data, including purchasing habits, contact details, and preferences. NDAs can be used with third-party service providers who may access this data to ensure its confidentiality.

Using NDAs strategically, businesses build trust with partners, employees, and investors while safeguarding their competitive edge.

What happens when an NDA is breached?

If a non-disclosure agreement (NDA) is breached, the consequences can be significant, depending on the situation's specifics. Here's a breakdown of what might happen:

Legal Action

  • The party harmed by the NDA breach can sue the breaching party in court. This lawsuit would aim to enforce the agreement and potentially recover damages for any losses incurred due to the information disclosure.
  • Types of Damages:  Depending on the NDA and the situation, courts might award financial compensation for lost profits, harm to reputation, or other damages demonstrably caused by the breach.
  • Injunctions:  In some cases, a court might issue an injunction to prevent further disclosure of confidential information. This could be particularly relevant if the information is ongoing or poses a continued threat.

Financial Penalties

Many NDAs include provisions for liquidated damages, which are predetermined financial penalties that the breaching party must pay if they violate the agreement. This amount can serve as a deterrent and compensate for potential harm.

Reputational Damage

A breach of NDA can severely damage the reputation of both the breaching party and the discloser (the party who shared the confidential information). This can lead to lost business opportunities, strained relationships, and difficulty attracting future partnerships.

Employment Termination

If an employee breaches an NDA included in their employment contract, they could face termination of employment. This is because the breach would be considered a serious violation of trust and potentially a security risk.

Additional points to consider

The enforceability of an NDA and the consequences of a breach can vary depending on the jurisdiction (where the lawsuit is filed) and the specific wording of the agreement. A well-drafted NDA with clear definitions and limitations will likely hold more weight in court than a vague or poorly written agreement. Consulting with a lawyer is crucial if you suspect an NDA breach.

Why Businesses Might Need a Contract Management Tool to Manage Their NDAs

Businesses can benefit greatly from using a contract management tool to manage their NDAs. 

Unlike other contract types in the business, NDAs are seldom subject to negotiations or redlines. However, there are still critically important from risk management standpoint, and still must be reviewed by legal to ensure they comply with internal rules. Given the large volume of NDAs coming in from across the business, NDAs reviews can sap legal resources away from more valuable work.

With the right contract management tool, organizations can automate this review work without compromising on risk and compliance.

Contract management tools can save time and resources, help organizations ensure compliance with legal requirements, and mitigate risks associated with confidentiality breaches.

Increased Efficiency and Organization:

NDA template library 

A contract management tool makes it easy for anyone in a business to access the latest approved NDAs contract template so they can start out in compliance. This eliminates the risk of employees using outdated language or requiring legal assistance every time they need a new NDA.

Centralized repository

Once an NDA is signed, a centralized repository offers a secure, central location to store all your NDAs electronically across departments and locations. This makes them easily accessible for retrieval and reference whenever needed.

Streamlined workflows 

The tool can standardize and automate contract lifecycle workflows for requesting, approving, and signing NDAs. This saves time and reduces the risk of errors or delays.

Surface crucial details instantly 

The best contract management tool comes equipped with generative AI. With AI, you can ask your NDA contract specific questions and get an answer instantly! Questions may include the following and more:

  • What information is considered confidential under the NDA?
  • How long does the NDA last?
  • What happens if I accidentally breach the NDA?
  • Does signing the NDA restrict my ability to work with competitors?
  • Are there any other associated agreements related to this NDA?

Enhanced Risk Management and Compliance:

AI clause recognition

some tools can scan NDAs for specific clauses, such as confidentiality obligations or exceptions. Powered by AI, this clause-matching capability happens within seconds. This helps ensure all essential elements are present and reduces the risk of overlooking crucial details.

Version control

Best-in-class tools can track contract redlines and other changes made to NDAs and provides a clear record of who accessed and modified the document. This is crucial for ensuring all parties are on the same page and working with the most up-to-date version of the contract.

Security features

Contract management tools offer robust security features to protect sensitive information within NDAs. This includes access controls, encryption, and data backup functionalities.

Improved Collaboration and Visibility:

Real-time collaboration

Multiple users can access and collaborate on NDAs within the platform, facilitating smoother communication and streamlining the approval process.

Visibility and reporting

The tool provides insightful reports on NDA activity, allowing businesses to track trends, identify potential bottlenecks, and optimize their NDA management practices.

Where Can I Get a Tool Like That? 

A contract management system like Icertis Contract Intelligence does all of the above and more. It enables automating and streamlining all aspects of an NDA’s contract lifecycle. 

Icertis customers have stood up enterprise-wide systems to improve NDA management in as little as 100 days. This includes one hypergrowth software company that issues between 50 to 100 NDAs every day. Icertis quickly delivered massive time savings so the company’s legal team can focus on more pressing tasks. 

​“With Icertis, we know the right attorneys are doing the right work,” comments the company’s senior director of legal operations. “We're keeping those seasoned commercial attorneys working on deals. That's something we didn't have before Icertis-the workflows or the metrics.”

This platform unifies previously scattered and siloed NDAs into a single, central repository. This allows companies to standardize clauses and create clause libraries and templates across the organization. It also provides companies a platform to communicate their contract redlines securely and in real-time with all stakeholders, internal or external. 

It uses AI to automatically detect clause deviations and provide contract professionals with a dashboard to monitor contract risks such as potential breaches of confidentiality obligations, contract compliance with governing laws, and other aspects of NDA management. Through its generative AI chat interface, professionals can surface critical details about the contract in seconds by asking it questions in natural language. These capabilities save companies precious time and resources and help contractual risk management become much less complicated.

The best contract management software also comes ready to integrate with your existing tools. Icertis Contract Intelligence natively integrates with Microsoft Word so that you can leverage its advanced capabilities even without leaving the Word document.

Request a demo today to learn more about how Icertis Contract Intelligence can help you manage your NDAs.

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