Everything you need to know about NDAs
Have you ever been asked to sign a non-disclosure agreement (NDA)? Do you know what an NDA is, in case you are asked to sign one in future?
NDAs are often found between self-employed contractors and their clients, and between businesses who come together in partnership for a specific objective. Employees may be asked to sign an NDA by their employer. In a corporate merger or acquisition, all parties working on the deal are usually bound by NDAs. They are less common in private life, but you might find an NDA protecting the interests of family members when finance or estate planning is underway. The family may wish to ensure complete confidentiality within its ranks. Artists may insist on an NDA when collaborating creatively with another artist. But what exactly is an NDA and what do you need to know before you sign one?
What is an NDA?
Also referred to as a confidentiality agreement, an NDA is a legally binding contract in which one party agrees to give another party confidential information and the second party agrees not to share this information with anyone else or disclose it to third parties for a specified period of time.
Purpose of the NDA
The purpose of the agreement is to protect sensitive information and prevent its unauthorised disclosure, which may cause harm to the company or individuals who own the information.
The NDA sets out the terms and conditions, the purpose and the context of the disclosure of sensitive or confidential information. The contract should provide a definition of what the confidential information is and the length of time the other party will be authorised to disclose and receive information. The agreement may include the class or type of information, the method by which it will be distributed, or the product or service at the core of the relationship between the parties. Each parties’ respective confidential information should be defined prior to the signing of the agreement, to prevent any unlawful use or future disputes regarding ownership of or rights to the confidential information.
Uses of NDAs
NDAs can cover a wide range of information, including trade secrets, customer lists, financial information, business plans, and other proprietary information. An NDA may be used when a South African company is sharing technology it has developed with a potential international partner, or when a local start-up is pitching to potential investors. One of the most common contexts for an NDA is the workplace. In the employment context, confidentiality agreements are beneficial to an employer because they allow the free flow of confidential information within an organisation to maximise business efforts while prohibiting employees from using or disclosing confidential information, such as client lists, marketing strategies, and proprietary relationships outside the scope of their job responsibilities. A senior manager’s NDA may include a period of time after termination of employment when they are prohibited from disclosing confidential information, to prevent them taking sensitive information to a competitor or starting their own business using their employer’s intellectual property. Or their employment contract may include an NDA clause to this effect.
Protecting personal information
In South Africa, the Protection of Personal Information Act (POPIA) has significant implications for NDAs, particularly where these agreements involve the sharing of personal information. POPIA aims to protect personal information, upholding the broader constitutional right to privacy. POPIA regulates the processing of personal information step by step, from data collection to destruction. To comply with POPIA, parties to an NDA must ensure that any personal information shared under the agreement is processed in accordance with the conditions set out in POPIA.
Types of NDAs
A NDA may be unilateral – one-sided – or bilateral – two-sided. In a unilateral NDA one party discloses confidential information to another party for a specific purpose. Unilateral NDAs are often used in the employer–employee relationship, between an investor and a start-up, and between a company and a consultant. In a bilateral or reciprocal agreement, both parties disclose and receive confidential information for a specific purpose and both parties have a mutual duty towards each other for the use, safe keeping and return of the confidential information. Bilateral agreements are used in joint ventures, mergers and franchise agreements.
In the South African context, the choice between a unilateral and bilateral NDA often depends on the nature of the relationship between the parties and the balance of power. For instance, venture capitalists in South Africa, as in many other parts of the world, are often reluctant to sign NDAs.
Limitations and enforceability of NDAs
There are limitations to the use of an NDA. The agreement can only be enforced against the parties who are bound by it. The effectiveness of the agreement is limited to the court’s interpretation of it, as the legitimate “confidential” status of the information may be at issue.
An NDA must be “reasonable” to be enforceable. To determine reasonableness, courts look at factors such as the interests of the Disclosing Party in keeping the information secret; the period of time the information must be kept secret; the burden on the Receiving Party; and the interests of the public. The consequences of disclosure or use of the confidential information outside the scope of the agreement must be clearly set out in the agreement. A breach of contract may occur if one party fails to comply with its obligations in terms of the NDA, in other words, where one party provides the confidential information to a third party.
Although NDAs are legally binding contracts, enforcing them can be problematic. In South Africa, the enforcement of NDAs often requires going to court, which can be costly and time-consuming. Furthermore, the damages suffered from a breach of an NDA can be difficult to prove in practice.
Practical tips for drafting NDAs
Unless you own a business big enough to have a legal department, you may need to draft an NDA at some point, perhaps when you engage an external contractor. We strongly recommend consulting a legal professional when drawing up any form of contract. If you choose to do it yourself, these tips will ensure your NDA is robust.
- Determine the purpose of the NDA. It needs to describe the information you want to keep confidential and the consequences of disclosing that information.
- Choose the right type of NDA. The type of NDA, whether unilateral or bilateral, will be determined by your circumstances.
- Draft the confidentiality clause. This is the most important element of the NDA. This clause outlines the information that is considered confidential and cannot be disclosed without prior written consent from the other party.
- Include a time limit on the confidentiality clause that determines how long the information must remain confidential. Once the time limit expires, either party can disclose the information without fear of legal repercussions.
- Include an exceptions clause. This clause excludes certain information, the disclosure of which does not constitute a breach of the confidentiality clause. The exception clause may cover, for example, information in the public domain and information disclosed before signing the agreement.
Don’t rely on the NDA alone
While an NDA is a valuable tool for protecting confidential information, it is not a substitute for a comprehensive strategy for managing and protecting intellectual property. In South Africa, this could involve a combination of NDAs, patents, trademarks, and copyrights, as well as data security measures in compliance with POPIA. Intellectual property (IP), trademark, and contract law are complex fields. A legal professional will ensure your contracts are effective and your IP is properly protected.
Seek professional legal advice
As attorneys, we will protect your interests and ensure your NDA contains the essential elements that make it enforceable. We will also ensure it is reasonable, fair, and easy to understand. We speak plain English. If you need help to draft an NDA or you’d like us to review one you have been asked to sign, or if you need help to protect your IP, contact Simon today on 086 099 5146 or email firstname.lastname@example.org.
The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.