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Why is a Non-Disclosure Agreement Important?

July 1, 2021

In order to understand the importance of a non-disclosure agreement, let’s start with the basics and first take a look at what exactly an NDA is.

What is a Non-Disclosure Agreement?

When discussing plans with employers, other businesses, outsourced teams, etc a business may need to share confidential information, trade secrets or other secretive data or knowledge. It is important for the business to ensure that this information is not duplicated, misused or unwantedly made public by the receiving parties. To maintain this confidentiality, a non-disclosure agreement is signed between the disclosing party and the receiving party. 

A non-disclosure agreement (NDA) is a legal document, also known as: Confidential Agreement (CA), Confidential Disclosure Agreement (CDA), Secrecy Agreement (SA) or a Proprietary Information Agreement (PIA). It is an agreement to discuss confidential agreement among involved parties and decide not to disclose it to any outside parties. 

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Types of Non-Disclosure Agreements

There are essentially three types of NDAs: Unilateral NDAs, Bilateral NDAs and Multilateral NDAs

  1. Unilateral NDA – Under this agreement, there are two parties. Of these, one party is the disclosing party that provides classified information to the receiving party and the receiving party agrees to not disclose the information to anyone outside of the agreement. 
  2. Bilateral NDA – Here as well, there are two parties involved. However, in this case both parties share confidential information with each other and they both agree to conceal this information from outside parties.
  3. Multilateral NDA – For a multilateral agreement, there are three or more parties involved and at least one of them is the disclosing party whereas all others are the receiving party who agree not to disclose the information being disclosed. 
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What to Include in a Non-Disclosure Agreement?

When drafting an NDA, one should ensure to include all relevant information to avoid any complications in the future. In order to draft an NDA that is valid and strongly supported, you should consider including these elements:

  1. Parties Involved – This section should outline the details of all parties that are involved in the agreement. This includes all the disclosing and receiving parties as well as any other party that may need access to some or all of the confidential information for carrying out any agreed activity.
  2. Confidential Information – This is possibly the most relevant component of any non-disclosure agreement as it lays out the extent of the information being given out that is protected under the NDA. It should detail the scope and scale of the information in a clear and concise manner to make sure no conflicts arise.
  3. Exception – Here, the parties will lay out any situation where disclosing of the information to an outsider is acceptable as a result of any exceptions. 
  4. Terms and Conditions – Another important component of an NDA is the terms and conditions. In this section, the disclosing party lays down a set of rules and regulations for the receiving parties to follow and their duties. It also sets out the consequences of leaking any information if applicable. 
  5. Validity Period – An NDAs validity period specifies the duration of the NDA and the time or situation under which it will be terminated.

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Why is a Non-Disclosure Agreement Important?

Although patents, trademarks and copyrights are useful for protecting intellectual properties and business ideas, yet there may be other details such as methods, special processes, trade secrets, etc that remain unprotected. For the purpose of keeping this information confidential and maintaining their competitive advantage, a business may find it useful to sign a non-disclosure agreement with all parties to whom the information is disclosed. If you are considering whether or not to draft an NDA, read below to understand the benefits of non-disclosure agreements. 

Certainty while sharing confidential information

It may be required for you or your business to disclose secretive knowledge to another party for many purposes. This is generally a risky move as your information could be leaked making you lose your competitive edge in the market or simply exposing personal data. However, by using an NDA you can confidently share any information with another party without having to worry about the information being leaked to outside parties. 

Clear scope of confidential information

When you discuss anything with the receiving party, it might get difficult to establish a set of boundaries regarding what information is considered confidential and what is not. By writing everything down in a non-disclosure agreement, you can determine exactly what information is included in the agreement. Generally, to avoid conflicts, the disclosing party would prefer to have a broadly defined scope.

Specified uses of confidential information

There are many reasons why a business may need to share confidential information with employers, suppliers, clients, other businesses or other parties. An NDA allows you as the disclosing party to specify exactly what purpose the receiving party can use the information for. For instance, in the case of NDA for software development, a company may need to disclose personal data. In order to prevent it from being misused, the company can clearly define the purpose for which it is to be used so that the receiving party cannot use it for personal gain. 

Establish consequences of breach of NDA

Though, a non-disclosure agreement is important for defining the scope of confidential information and specifying its uses. However, unless the consequences of breaching the terms of the NDA are defined it is meaningless. If the NDA is breached, it may result in the disclosing party to suffer some damage or loss. As a result, the disclosing party would need to be compensated for it. As a result, when the consequences of violating an NDA are specified, it provides the receiving party with motive to comply with the terms of the NDA. Additionally, in case the receiving party fails to do so, it ensures that the damage borne by the disclosing  party is recovered.

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It is not compulsory under any situation to sign an NDA. However, for the reasons mentioned above it is always advisable to do so in order to protect any confidential information being exchanged among two or more parties. 

Under the Registration Act of 1908 in India, it is not required to register a non-disclosure agreement. However, it is desirable to have it registered in order to prevent any conflicts and disputes.

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Student at Trinity College Dublin. Keen writer and avid reader.

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