Four Clauses Decide Whether an NDA Works
Most NDAs are signed without being read, on the assumption that one is much like another. They are not. Four things determine whether an NDA is worth anything: how confidential information is defined, what is carved out, how long the obligation lasts, and what remedy is available on breach. Everything else is machinery.
1. The definition of confidential information
Two approaches.
Broad and catch-all: anything disclosed, in any form, whether or not marked. Easier to enforce in the sense that nothing falls outside, harder in the sense that a court may read it down as unreasonable.
Specific and marked: only information identified as confidential at the time of disclosure, or reduced to writing and marked within a stated period. Cleaner, but it fails when someone forgets to mark something.
A middle route is usually best: broad definition, with an obligation to mark written material and to confirm oral disclosures in writing within a short period.
2. The carve-outs
Standard exclusions, and an NDA without them is unbalanced:
• Information already in the public domain, other than through breach
• Information already known to the recipient before disclosure
• Information independently developed without reference to the disclosed material
• Information lawfully received from a third party without restriction
• Disclosure required by law, regulation or a court, usually with an obligation to notify the discloser first
That last one matters commercially. A recipient who is compelled to disclose should not be in breach for complying with the law.
3. Term and survival
Two different periods, often confused.
The term of the agreement: how long the parties can exchange information under it.
The survival period: how long the confidentiality obligation continues after that.
A common structure is a short term with a longer survival. For genuine trade secrets, a perpetual obligation is sometimes sought, though its enforceability is a question worth taking advice on.
4. Remedy
Damages are hard to quantify for a confidentiality breach, which is why NDAs commonly provide for injunctive relief and state that damages alone are an inadequate remedy.
Also check: governing law, jurisdiction or arbitration, and whether the clause is workable for you. An NDA with a foreign seat of arbitration is theoretically enforceable and practically unusable for a small Indian business.
Mutual or one-way
One-way protects only the disclosing party. Signing one as the recipient means you carry obligations and get none.
Mutual binds both.
If information will flow both ways, insist on mutual. This is the single most common imbalance in NDAs presented to smaller parties, and it is usually conceded when raised.
The clauses people miss
No licence or assignment. The NDA should say that disclosure grants no rights in the information.
Return or destruction of material on termination, with an exception for routine backups and legal retention.
Residuals. A clause permitting the recipient to use general knowledge retained in memory. It is common in technology NDAs and it substantially weakens protection. Read it carefully if it appears.
No obligation to proceed. The NDA does not commit either party to a transaction.
Permitted recipients. Employees, advisers and affiliates, with an obligation to bind them.
What an NDA cannot do
It cannot stop someone independently developing the same idea. It cannot make a non-confidential fact confidential. And it is of limited practical use against a counterparty with no assets, because the remedy is only as good as the ability to enforce it.
An NDA is a useful discipline and a deterrent. It is not a substitute for not disclosing what you cannot afford to lose.
How Northrop LLP helps
Northrop LLP reviews NDAs presented to businesses, identifies the imbalances and the clauses that weaken protection, and advises on the commercial consequences before signature.