Non-Disclosure Agreements

A non-disclosure agreements (an "NDA") is a common agreement which is typically entered into between parties as a preliminary agreement while there are reviewing or discussing a more substantive agreement. For example, an NDA is often entered into when entering into discussions with potential investors or purchasers of a business or with service providers when examining the possible provision of services. If the transaction does not proceed, the confidential information disclosed is protected. If the parties decide to proceed with the transaction, a more substantive agreement is often entered into which may replace the NDA.

NDAs can be mutual or one-way. In a mutual NDA, both parties disclose information as a "disclosing party" and are prohibited from using or disclosing information as a "receiving party". In a one-way NDA, a "disclosing party" discloses information to a "receiving party" and only the receiving party is prohibited from using or disclosing information.

The following are the key elements of an NDA:

• Definition of "confidential information" - it is important that the NDA accurately describe the type of confidential information that will be disclosed.
• Confidentiality obligation - the confidentiality obligation will often prohibit the receiving party from (1) using the confidential information except for the purposes for which it was disclosed (such as to evaluate a possible transaction) and (2) disclosing the confidential information.
• Receiving party employees and agents - the NDA may also contain provisions dealing with the receiving party's employees and agents, such as permitting the receiving party to disclosed confidential information to certain employees and agents under specified conditions.
• Term - the NDA should clarify that its provisions survive the termination of the parties' relationship, often for a minimum of five years, but frequently for an indefinite term.
• Return of information - the NDA may impose requirements on the receiving party to return or destroy confidential information on request.
• Non-Solicitation - to further protect the disclosing party's business and relationships, an NDA may include a non-solicitation provision with prevents the receiving party from contacting or soliciting the disclosing party's employees, customers or other relationships. This provision should be considered carefully by a receiving party as it could restrict future business opportunities simply because it entered into discussions with the disclosing party.
• Indemnification - the NDA may also provide that the receiving party is financially responsible for any costs and damages incurred by the disclosing party as a result of the breach by the receiving party of its obligations under the NDA.

Although NDAs are fairly described as a standard legal document, the devil is in the details, and they can vary widely in the scope of the protections they provide to a disclosing party and obligations they impose on a receiving party. As a result, businesses should even have what appear to be simple NDAs reviewed by a lawyer. For parties who must frequently sign NDAs, including receiving parties, it is a good practice to have their own form of NDA which they can offer to sign.