What Is a Non-Disclosure Agreement (NDA), and When Do You Need One?

April 6, 2022
What is a non-disclosure agreement (NDA)? An NDA is a contract that creates a confidential relationship between parties that need to share sensitive information. Learn about standard and mutual non-disclosure agreements, what terms NDAs typically include, when you need them, how to create an NDA draft or agreement template, what happens if you break an NDA, and more.

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a contract between parties that need to share sensitive information, typically as part of a business partnership or employer-employee relationship. The NDA is a legally binding agreement that protects private information by establishing a confidential relationship.

Why create an NDA?

When you’re sharing confidential information with someone outside of your organization, it’s common to require the recipient to sign an NDA before releasing that information. An NDA can cover any type of information from business models or test results to embargoed press releases or product reviews. For example, you might ask an outside accountant to sign an NDA to protect your organization's sensitive financial information.

An NDA creates the legal framework to protect intellectual property or other valuable information from being stolen or shared with competitors or other third parties. Breaking an NDA can trigger a host of legal ramifications, including lawsuits, financial penalties, and even criminal charges. The NDA therefore incentivizes the recipient to safeguard the confidential information as they would any sensitive information pertaining to their own organization.

Three essential functions of an NDA

NDAs serve three main purposes:

Identifying protected information

By drawing a line between the information that is confidential and the information that the other party can share, NDAs effectively classify information. This mutual understanding can actually streamline the working relationship, allowing the parties to work freely within the boundaries created by the confidentiality agreement.

Protecting sensitive information

Signing an NDA creates a legal obligation to keep sensitive information confidential. Any leak of that information, including an accidental leak, will generally constitute a breach of contract. Recipients of confidential information protected by an NDA must safeguard it as if their own business interests are at stake, because they are.

Protecting patent rights

Because public disclosure of a pending invention can sometimes void patent rights, an NDA can protect an inventor while they develop a new product or concept.

Types of NDAs

NDAs generally fall into two main categories: unilateral and mutual. Under a unilateral NDA, one party agrees not to reveal the other party’s confidential information. Under a mutual NDA, each side agrees not to share confidential information supplied by the other side. These two types of confidentiality agreements are identical in all other aspects, including enforcement and the consequences of a breach.

A mutual NDA is necessary when the relationship involves a mutual exchange of information. Examples might include mergers and acquisitions, real estate joint ventures, or teaming agreements. It’s important to ensure that each side has equitable protections and obligations so that the agreement doesn’t unfairly favor any party.

When is an NDA necessary?

There is no limit to the types of business relationships that might benefit from NDAs. However, here are six specific scenarios in which the parties will frequently sign a confidentiality agreement:

Hiring employees

These are the people with the greatest range of access to confidential and proprietary information. Employers must safeguard against employees sharing sensitive data while on the job or after they leave. Even during a job interview, an employer may share sensitive information with a prospective employee, so it may behoove them to have candidates sign NDAs.

Hiring outside vendors

From management consultants to software developers, contractors often need to access sensitive data, including trade secrets, in order to understand the business well enough to provide their services.

Selling products or services

When you sell or license a product, especially a highly technical one, you’ll want to ensure that the recipient can’t share any sensitive information about your offering with competitors or other third parties.

Onboarding new clients

When you start providing a good or service to a new buyer, your business may become privy to that organization’s sensitive information. An NDA can protect both parties by clarifying the acceptable uses of any shared data or secrets.

Entering business partnerships

Whether it’s a temporary joint venture or a longer-term arrangement, business partners need to establish relationships of trust, and that entails sharing information about their own businesses with each other.

Preparing for mergers and acquisitions

Businesses must share sensitive information about their finances and operations during the due diligence phase of a merger or acquisition. There might be multiple recipients, from potential acquirers to intermediaries and brokers.

Five requirements for an NDA

Creating an NDA entails identifying the parties to the exchange, defining what constitutes confidential information, and laying out the scope of the agreement and the parameters for sharing the protected information. The party that owns the sensitive information should be careful not to disclose it before the contract is signed.

An NDA can cover whatever the parties need, but every NDA should contain these five elements:

  • The names of the parties to the agreement
  • A definition of what constitutes confidential information under the NDA
  • Any exclusions from confidentiality, including specific types of information and permissible recipients
  • Appropriate uses for the shared information
  • The time period during which the information must remain confidential

What happens if you break an NDA?

The repercussions for breaking an NDA are outlined in the contract. Usually, the other party will sue the party that breaks the agreement. Depending on the relationship of the parties and the terms of the agreement, that lawsuit may result in a monetary fine, termination of employment, the return of an asset, or other remedies.

How can you create an NDA template?

The best way to create an NDA template, as with any other contract, is to examine what has worked best for your organization in the past. If your team hasn’t already entered any NDAs, then you can start with the most basic requirements and add to your standard agreement over time, based on experience.

Limitations of NDAs

An NDA can’t always provide redress if a business’s confidential information is compromised. For example, if the information covered in an NDA becomes public in another way — such as in response to a court proceeding or subpoena — then the NDA’s protection will likely no longer apply in future.

Learn more

When you have hundreds of active NDAs (or more), manually reviewing, negotiating, and tracking them becomes a herculean task. The problems compound if you have different team members in different offices preparing their own versions of NDAs for different transactions.

Need help tracking your NDAs, or reviewing the language in your existing contracts to create a standardized template? Evisort’s AI was designed to do just that, without the hassle of hours of manual labor. Create, access, and track all of your NDAs and other commercial agreements in one end-to-end contract management platform that you can implement in fewer than 30 days without document migration or IT involvement.

Ready to learn more? Schedule a demo of Evisort today.

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