Non Disclosure Agreement: An imperative tool for safeguarding corporate affairs.

A Non-Disclosure Agreement (“NDA”), also referred to as a confidentiality agreement, is a legally binding contract in which one party consents to disclose confidential information about the operations of the organization or products to another party and such party consents to hold this information in confidence for a predetermined period of time. A Non Disclosure Agreement (NDA) is governed by the Indian Contract Act, 1872, which specifies that it as an enforceable contract. It is advised to stamp the NDA in order to assure its continued validity and enforceability.

The penalties over the breach of the agreement are generally specified in the agreement itself and the breaches and infringements are dealt accordingly. If in any agreement the penalty is not specified, then, it has to be clearly mentioned that the person guilty of violation or breach of contract shall be sued for such misappropriation.

Advantages of NDA

Following are some major benefits of entering into an NDA –

• A Confidentiality Clause in the Non Disclosure Agreement clearly defines the ‘confidential matter’ for which the Non Disclosure Agreement is entered into.
• It helps in maintaining the utmost secrecy between the parties by binding them legally through various clauses constituted under the non disclosure agreement. This prohibits the receiving party from disclosing the confidential information.
• Various clauses of the Non Disclosure Agreement also draw the timeline up to which the party is obliged to maintain the secrecy. This period could be beyond the effective period of the NDA itself.
• Non Disclosure Agreement is legally binding and thus the party infringing the agreement would be legally liable to compensate the damages to the aggrieved party (which is mostly the disclosing party).
• The dispute can be referred to an arbitrator or even taken to the court, if the nature of violation of the terms of the agreement so demands. That’s how the proprietor of the confidential information is granted relief as they undertook the necessary efforts to safeguard the shared confidential information through the Non Disclosure Agreement.

There are various events or circumstances under which an NDA shall be entered into and signed, which are as follows:

• In a business deal;
• While taking expert’s advice on a new product;
• While starting a new project;
• While investigating a possibility of investment with other party;
• While providing employment;
• While signing a contract worker for a sensitive project;
• While dealing with sensitive client information;
• While discussing commercially sensitive information with other party, etc.;

So as to keep it secured as per the terms of the Non Disclosure Agreement which are inserted to protect the proprietary information from being misused.

Application of NDA

Discussing business idea:

NDAs are generally required when two companies enter into discussions about doing business together but want to protect their own interests and the details of any potential deal. In this case, the language of the NDA forbids all involved from releasing information regarding any business processes or plans of the other party or parties.

Employee’s NDA

Where a company is recruiting any personnel who shall be exposed to any confidential or price sensitive information, that has the capacity significantly impact the company, then, such new recruits are required to sign an NDA, in order to safeguard the confidentiality of such sensitive information. For some companies, all employees will be required to sign the agreement; for others, only select departments or types of employees will be subject to the agreement.

Protecting trade secrets

NDAs may also be signed before discussions/meetings between a company seeking funding and potential investors. In such cases, the NDA is meant to prevent competitors from obtaining their trade secrets or business plans. However, there might be investors, who will be reluctant to sign NDAs. Not only will this potentially prevent them from sourcing future deals with different companies, the agreement may be very difficult to enforce and will prove wrong-doing. Instead of being burdened by a legal contract even after declining an investment opportunity, most investors will simply not sign the agreement.

Market strategy

In all of the above, the information that is being protected may include a marketing strategy, sales plan, potential customers, a manufacturing process, or proprietary software. If an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages.

Does section 27 of the Contract Act affect the enforceability of NDAs?

In theory, the attempts of employers to maintain their secrecy through a non disclosure agreement should not clash with Section 27 of the Indian Contract Act, 1872. The section prohibits any agreement which hampers a person from exercising a lawful trade, profession, or business. The only exception stated in the section is regarding the selling of goodwill, which is not applicable to confidentiality agreements. For a contract that is found to be restraining trade, it is essential that such restrictions must be either:

• Reasonable; and
• In the nature of public interest

Inference

A non-disclosure agreement (NDAs) plays a crucial role in protecting sensitive information and fostering trust between parties involved in business transactions, collaborations, or employment relationships. By establishing legally binding obligations regarding the confidentiality of certain information, NDAs safeguard proprietary knowledge, trade secrets, and other valuable assets. When used effectively and in conjunction with other legal measures, NDAs can provide the necessary framework to foster successful collaborations, business relationships, and innovation in today’s fast-paced and competitive environment.