A company treats its trade secrets like a national treasure, always guarded and kept away from the public eye. When a company decides to let another corporate entity take a peek of it for partnership or associative reasons, they always try to make sure that no word about it gets out. To achieve this confidentiality, companies draft up non-disclosure agreements or also known as NDA. You may also see Agreement Templates.
An NDA is a legally binding document that works like an acknowledgement letter, it recognizes receipt of a confidential information, inhibits the receiving company from breaching confidentiality, and enumerates the receiving company’s responsibilities with regards to that information.
Elements of a Good Non-Disclosure Agreement
The approach in framing an effective non-disclosure agreement is to carefully phrase all of the clauses in a way that no legal loophole can be devised by the receiving party. To ensure that your NDA is airtight in protecting your company’s trade secrets, never miss out on including the following essential elements:
1. Parties Involved: This section that begins the NDA straight-up determines the business agencies involved in the agreement. There are usually two parties involved: the disclosing party, or the corporate entity that provides the confidential information, and the receiving party, or the recipient of the information. However, when the recipient is affiliated with other entities that require them to divulge the provided information, these parties are made to be identified under the list of third parties.
2. Confidential Information: A non-disclosure agreement must, above all, be clear on what information needs to be kept confidential. As part of the disclosing party, you have to be broad in identifying the information that must be kept a secret and be specific on what the recipient can and cannot do about it.
3. Receiving Party’s Obligations: Every non-disclosure agreement entitles the receiving party to two obligations: non-disclosure and non-use. The non-disclosure obligation sets up the receiving party to not only keep the information confidential but also take extra steps to keep it from leaking to any other entity. Meanwhile, the non-use obligation restricts the receiving party to make use of the confidential information in any way, especially for profiteering schemes.
4. Exclusions from the Agreement: With the variety of business agenda that the NDA recipient conducts each day, they can sometimes be cornered in situations where the disclosure of the information is but inevitable. As the framer of NDA, you will have to cite these instances as exclusions from your agreement so as not to put your recipient in unjust situations.
5. Time Period: This refers to the span of time that your non-disclosure agreement becomes effective or, in other words, how long the secret can be kept secret. In the official document, the clause that states the time period is known as the term of agreement.
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Steps to Make a Great Non-Disclosure Agreement
- Collect the necessary information: Before you start writing your NDA, gather all the facts and information necessary to frame the agreement. Make sure that you know about the information that you will keep under the rug and consider the effect on your company if ever it gets leaked. You can also do a background check on the receiving company with regards to how they handle non-disclosure agreements.
- Start with the introduction: The introduction of your non-disclosure agreement contains the full names of the entities involved along with the generic term they will be referred to in the document. Usually, the non-disclosure agreement itself is set to be called as The Agreement, the name of the disclosing company as The Disclosing Party, and the name of the recipient as The Receiving Party. You can use the boilerplate introduction from the templates in the preceding section to easily be done with in this part.
- Define your confidential information: Spare no details in writing about the information that must be kept confidential. This actually benefits both parties in a way that your company, as the disclosing party, will be confident that all details have been covered and your recipient, as the receiving party, will have clarity on the subject matter. Since the conveyance of information happens through writing, some companies tend to count out spoken information and this makes up for a great loophole in your agreement. To prevent this, make sure to explicitly state that all information conveyed through any form of communication must not be disclosed, as well as all the other aspects your receiver needs to know.
- Specify scope of the receiving party’s obligations: The scope of confidentiality clause is considered as the main core of your non-disclosure agreement through the non-disclosure and non-use obligation. Provide, in detail, the duties and responsibility of the receiving party as well as the limitations of the sales actions they can take regarding the information.
- Enumerate exclusions of confidentiality treatment: Some information that are commonly declared as exclusions are those that are already known by your recipient, those that are already publicly known, and those that a vital contractor for a business transaction needs to know. You might also want to add in the instance where your recipient is required by a legal court to disclose the confidential information.
- Indicate the term of agreement: When deciding on the term of agreement, or the whole length of the business timeline that the agreement will hold, determine the specific number of years (or months) that the confidential information will remain relevant. Always be considerate to the receiving party as some legal courts may not allow terms that are unrealistically imposed.
- Wrap up with a concluding clause: The concluding clause in a non-disclosure agreement, like any other legal papers, certifies that all of the involved parties were able to read and take in all the details in the document. This part usually starts with “In witness whereof the said parties have hereunto set their hands…” and ends with the signature lines of the party representatives and a notarized form from a lawyer.
Tips for a Great Non-Disclosure Agreement
- Include additional provisions: Although you can already make a decent non-disclosure agreement with the parts mentioned above, dropping in additional provisions can help fortify your business case. The provisions you can add solely depend on the type of business you are conducting, and they must share the same goal of preserving the assets of your company as well as enabling quick legal remedies. Examples of these provisions you can add to your NDA are injunction clause, return of information clause, and no binding clause.
- Supply an indemnification clause: To save your company from any fiscal responsibility when the receiving company commits a breach, add in an indemnification clause to hold them responsible for compensation. However, indemnification clauses always go two ways. So when you state that you require them to provide compensation if ever they violate the provisions in the agreement, you must also state that you are equally held subject to such sanction should you happen to be the breaching party.
Types of Non-Disclosure Agreements
- One-way Non-Disclosure Agreements: These are the agreements where only one company is sharing the information and the other company is made to keep the information confidential.
- Two-Way or Mutual Non-Disclosure Agreements: These agreements are drafted when the two parties share information with each other and they both want that none of the shared trade secrets get leaked outside their respective companies.
- Precedent Confidentiality Agreements: Corporate buyers and mergers, in the process of evaluating the worth of a company, might uncover some confidential information from their prospects. Precedent confidentiality agreements make sure that none of that spills out especially in cases where the buyer or merger suddenly pulls out from the asset handover process.
- Employee Non-Disclosure Agreements: While there is already an employment contract that disallows an employee to divulge any trade secret he or she finds out during his stay in the company, the employee may not know what these trade secrets are. To specify the information that needs to be kept confidential, employers make use of employee non-disclosure agreements. The term of this type of agreement usually extends beyond the period that the employee works under the company.
Non-Disclosure Agreement Template Sizes
Non-disclosure are printed on documents with the following sizes:
- US Letter Size: 8.5 inches by 11 inches
- US Legal Size: 8.5 inches by 14 inches
- A4: 8.27 inches by 11.69 inches
NDAs can go as short as two pages and can go over ten pages. Ultimately, the length of your NDA depends on the information being discussed.
Non-Disclosure Agreement FAQs
What is the typical duration of a non-disclosure agreement?
Although it is possible to state in your non-disclosure agreement that the contract binds the information indefinitely, it is advisable to set a time frame for contract termination. Usually, NDAs only last for 5 years, but your term can go lower than that, especially when you are in an industry that changes so fast it pretty much renders your protected information useless within just a couple of years.
What is a non-solicitation clause in an NDA?
This clause is another type of important provision you can add to your non-disclosure agreement to prevent the receiving party from poaching your employees, especially if they know a lot about the confidential information being shared. The period of non-solicitation clause are usually lower than that of the term of agreement, typically only spanning from 12 to 24 months.
Trying to come up with the final copy of your non-disclosure agreement is an arduous process of reading and re-reading to ensure that no legal loophole can break the confidentiality of the information. But in the end, keep in mind that the NDA seals into writing the proof of what was agreed to that can prevent misunderstandings later on. And in the long run, it will maintain the uniqueness of your product for you to keep your special niche in the market.