What is an NDA?
An NDA is a legal contract between two parties. It is a legally binding contract usually between a provider and a recipient of confidential material, knowledge, or information. It ensures that both parties do not disclose any confidential information stated in the agreement.
NDAs are used to help you protect your business. They’re commonly used in settings where sensitive information must be necessarily shared or disclosed during the course of business while ensuring the confidentiality of that information.
In other words, they allow two parties to share information with one another, whilst also legally promising each other not to use that sensitive information outside of their relationship in a way that could negatively impact the other party.
What are the three types of NDAs?
NDAs have a wide variety of names, but they all serve the same purpose and are used for the exact same reason 一 to protect sensitive information.
Common names for NDAs include:
- Confidentiality agreement (CA)
- Confidential disclosure agreement (CDA)
- Proprietary information agreement (PIA)
- Secrecy agreement (SA)
Although they are all used for the same purpose, there are three main types of NDAs that slightly differ from one another.
1. Unilateral NDA - These only involve two parties. In this case, only one party would like to disclose certain information to the other party and ensure that the other party won’t disclose it to others.
This type of NDA is most common in employment contracts. For example, when you have an employee, you will often be sharing confidential information with them as part of their work. However, your employee is not sharing will not need to share any personal confidential or sensitive information with you. In this case, your employee will be making a promise to you that they will protect the information you share with them, and it is unilateral because the confidentiality clause only applies one way.
More examples include:
- Exploring investment opportunities
- Requesting bids for work on a specific project
2. Bilateral NDA - These are also known as mutual NDAs. They still involve only two parties, however, in this case, both parties disclose sensitive information to each other and both would like said information to be protected.
A great use case for a bilateral NDA is for the purposes of mergers and acquisitions. In this scenario, both businesses would want to know more information about one another to decide if they actually would like to go ahead and make a decision to merge. Thus, both parties would want their own information to be protected.
Several other examples include:
- Selling your company
- Acquiring a company
- Merging with another company
- Negotiating a business partnership
As an example of a company merging with another company, we can examine the merger between Grab Holdings and Altimeter Growth Corp, one of the largest mergers in Singapore, which is to be approved on November 30, 2021.
In this merger, a bilateral NDA would have been used as in merger and acquisition transactions, confidentiality and proprietary information would have had to be shared between them.
3. Multilateral NDA - Multilateral NDAs involve three or more parties. In this case, at least one party discloses information to the other parties while the other parties ensure that the information will be protected.
These types of NDAs are useful because they can be used in place of three separate bilateral NDAs for example. The whole agreement is reviewed, executed, and then implemented under one agreement which can make negotiations easier and more straightforward.
Now that we’ve gone over what an NDA is, what it is used for, and what its different types are, let’s go through what information is protected under them.
What kind of information is protected under an NDA?
NDAs can protect a wide variety of confidential information. Here are a few examples:
- Unique manufacturing processes
- Business strategies
- Sales and marketing plans or techniques
- Vendor and customer databases
- Softwares, passwords, and system specifications
- Secret formulas or recipes
These types of information are often trade secrets and if competitors were able to access this information then it could be detrimental to the other party.
The list of information that is protected under an NDA remains open though. The Singapore courts have, for instance, explicitly recognized a wide range of information capable of being protected as confidential information including:
- Communication between a lawyer and their client
- Telephone bills and receipts
- Medical research questionnaires
- Engine designs
- Internal financial information
What kind of information is not protected under an NDA?
It is important to note that although an NDA can protect a wide variety of confidential and sensitive information, it has its limits. Always practice discretion when it comes to disclosing trade secrets to other parties.
Here are just a few examples of information that cannot be fully protected with an NDA:
- Information that is known prior to signing the NDA
- Information that is in the public domain
- Information that gets disclosed by a third party not involved in the agreement
- When the law or government requests information to be disclosed
For instance, client lists are generally confidential pieces of information that are often protected under an NDA. However, if the information of the customer list can also be obtained from public sources, there is a chance it could be considered public knowledge and is thus deemed non-confidential.
What are common myths around NDAs?
Although NDAs are relatively simple to create, they still do cost some time and money to draft. However, not having the safety and protection of an appropriately-drafted NDA could end up potentially costing you more if trade secrets were to ever be disclosed.
Here are three common myths often surrounding NDAs, and why people are hesitant to sign or create one.
“I don’t need one.”
Trust can often take time to build, and yet it can take seconds to break and a long time to repair. We’d all like to think that the other party we are working with is trustworthy and will keep information confidential, and end up believing we don’t actually need an NDA.
However, no matter how much you trust someone, it is still worth documenting their intention to keep information confidential as mistakes and accidents can happen. People make mistakes even if they are trustworthy and having an NDA in place will help your business address any accidental disclosures or any other mistake by the other party.
For example, if the other party accidentally discloses confidential information to a third party, you can request the other party to remedy the situation at their own expense instead of having to deal with it yourself having done an NDA.
“It will scare off potential prospects.”
When you’re getting close to making a deal, some people may think that the idea of having to sign an NDA may scare off their potential prospects. However, an appropriately-scoped NDA should not scare people away, but instead reflect a sign of sophistication and professionalism on your part.
You can learn a lot about your prospect by how they react to being asked to sign an NDA. If the agreement is appropriately-scoped and your prospect really doesn’t have any intention of disclosing confidential information, then signing an NDA should be a breeze.
“They are useless.”
It would be misleading to say that NDAs are completely bullet-proof, however, it would also be wrong to say that they are completely useless. As a business, these NDAs allow you to talk, negotiate and discuss freely with third parties such as investors, manufacturers, or collaborators without any fear.
This is because NDAs offer you insurance, with a path of action if a breach of contract ever occurs. Without them, it will be much harder to ensure that valuable information about you and your business is and will be protected.
What terms will an NDA generally contain?
Now that we’ve gone through what an NDAs is as well as its significance to your business, let’s discuss what is commonly found on NDAs and what you should be looking out for.
- Identification of parties and their obligations - An NDA should clearly identify each party involved, especially who the receiving party is to the information in order to ensure protection and confidentiality of the information being disclosed.
- Description of confidential information - It should also describe what should be considered confidential. This is where we can be specific about what information is considered a trade secret, which could be client lists, product road maps, and so on.
- Timeframe of agreement - Typically, the party disclosing any confidential information would want a non-disclosure agreement to be indefinite. However, the recipient party would want to have a clear idea of an end date or a timeframe for the agreement. If the timeframe for the agreement is too short, then you may be at risk of competitors learning about your secrets. Too long and you may be at risk of people not wanting to work with you.
- Consequences of a breach - In addition to defining what information is considered confidential, an NDA will also define consequences in case of a breach for damages. These consequences could be a termination of the contract or injunctive relief from the court.
When asked to sign an NDA, always look out for any vague language to protect yourself, understand the scope of the agreement, and be wary of any potential extreme consequences if a breach were to happen.
Get your NDA today
From a tech startup to an established enterprise, any technology company that collaborates with third parties sells products or services, or raises capital will find that NDAs provide more than a remedy for breach.
An NDA is a crucial document that will help protect sensitive information and ensure your innovative ideas and processes do not get stolen by your competitors. They can also help you take action in the case of any accidents or mistakes by the other party.
Lexagle makes contracts simple and accessible for everyone. It is a contract management platform with a design-driven approach to minimise the complexity around contracts, creating a simple-to-use interface for every part of the contract ecosystem. Ensure your information remains confidential with us today.