Guide To Confidentiality Agreements
02 Nov 2021
A confidentiality agreement, also known as a confidential disclosure agreement (CDA), protects commercially sensitive information about a business when it needs to be shared with a third party, for example, potential investors or a business purchaser.
These are distinct agreements as opposed to say confidentiality obligations that may be placed in an employment contract to prevent an employee from sharing confidential information belonging to the business outside of that business or taken by that employee on leaving the business to a competitor business.
Prior to disclosing any sensitive information to employees, clients, or service providers, it is important to protect your business by ensuring that the recipient is aware that the information is confidential in nature and failure to respect this will result in a penalty. Your business can achieve this through the use of a confidentiality agreement.
What is a confidentiality agreement?
A confidentiality agreement is a written legal contract that lays out a series of binding conditions that prevent an individual or business from disclosing confidential information and ensures it is treated confidentially.
When disclosing confidential information, it is unrealistic to expect the recipient to keep the information confidential indefinitely. In usual circumstances, the CDA will state the time period for which the recipient is legally bound to keep the information confidential. This time period will generally depend on the nature of the industry, for example, the technology sector where information loses its commercial value relatively quickly would not require a lengthy confidentiality period. Nearly all recipients of confidential information will want to ensure there is a definite date after which they are no longer bound by confidentiality. Agreements will also allow for a recipient to be no longer bound by the confidentiality obligations should the confidential information enter the public domain.
If a confidentiality agreement expires, you may still have rights under IP (intellectual property) law to protect your copyrights or patents.
In addition to not disclosing the information, a confidentiality agreement also stipulates that the third party must actively ensure that the information in question remains a secret. This may involve:
- Imposing restrictions on how the information in question can be used
- Protecting databases
- Preventing employees from accessing information
- Ensuring that any subcontractors are also bound by the same CDA
Confidentiality agreements are often used in employment situations to protect the business against the disclosure of any commercially sensitive information that could have a negative financial impact or harm the company’s reputation and public perception.
Before disclosing information about your business that you believe to be commercially sensitive, you should consider the following:
- Does the information need to be shared or can you proceed without the disclosure of the confidential information?
- If you are disclosing information to another organisation, is that organisation subject to regulatory rules on confidentiality? For example, solicitors who are regulated by the Law Society and are subject to strict professional rules around client confidentiality.
If disclosure of information to a third party is needed and you do not believe that they are subject to professional confidentiality rules, the use of a confidentiality agreement will give your business sufficient protection against a breach of confidentiality.
When should a business use a confidentiality agreement?
What constitutes ‘commercially sensitive information’ will vary from business to business, but the following scenarios are common examples of when a confidentiality agreement should be considered:
- Describing an invention, new product or technology to a potential partner that isn’t yet patented or where you don’t have intellectual property protection.
- Sharing business information with a prospective buyer or franchisee. This information may include detailed management accounts, business plans, projected forecasts, or key clients.
- Providing information to a service provider such as a freelancer or subcontractor to allow them to quote for work.
The confidentiality agreement can then be:
- An initial agreement as part of preliminary business discussions.
- Form part of a commercial contract such as a joint venture or franchise agreement.
- Form a stand-alone agreement between your business and a third party that complements the main contract.
What are the key provisions in a confidentiality agreement?
Although the exact details of confidentiality agreements varies, they often include the following provisions:
- A description of the general subject matter of the CDA.
- A definition of “confidential information” (which may refer to documents being marked as
- confidential, etc).
- Obligations to keep the information confidential and to use it only for a defined purpose.
- Exceptions to the confidentiality obligations (e.g. if the information is already public knowledge).
- Conditions under which the information may be disclosed to employees and, sometimes, other persons.
- Disclosure requirements under the Freedom of Information Act 20002.
- Obligations to return the information and make no further use of it, in defined situations (e.g., upon request by the disclosing party).
- The duration of the confidentiality obligations and other miscellaneous provisions, including ownership of intellectual property, statements that the parties are not obliged to enter into any further agreement, and that no warranties about the information are given.
What are the different types of confidentiality agreement?
The different types of confidentiality agreements are:
- Unilateral or ‘one way’ confidentiality agreement – involves two parties where only one of them will disclose confidential information to the other. These are most commonly used when protecting trade secrets.
- Bilateral, ‘mutual’ or ‘two-way’ confidentiality agreement – involves two parties where both intend to disclose confidential information to the other. These are commonly used when businesses are considering a merger or joint venture.
- Multilateral confidentiality agreement – involves three or more parties. These are commonly used when there are multiple parties involved and at least one party will be disclosing confidential information to the others. It avoids the need to complete multiple confidentiality agreements.
What happens if you breach a confidentiality agreement?
Any party that breaches a confidentiality agreement may have the following legal challenges brought against them:
- An injunction – an injunction is usually the first remedy if your business discovers that there is an intention to breach confidentiality. An injunction application can be issued to prevent the third party from disclosing or using the information.
- Damages to compensate the injured party for their losses.
- A fee covering the amount the recipient of the confidential information would otherwise have paid for a license to use the information.
- An accounting for any profits the recipient made from exploiting the confidential information they received.
A well drafted confidentiality agreement will detail all the remedies open to the parties in the event of a breach, and it may seek to quantify in advance the amount of damages that the disclosing party would receive, although these types of specific clauses are not always enforceable.
Are confidentiality agreements legally binding and enforceable?
Provided that the confidentiality agreement has been drawn up by a competent commercial solicitor and correctly executed, a confidentiality agreement will be legally binding. The main issues arising from CDAs is usually whether they are enforceable.
In order to assess the enforceability of a CDA, you need to consider the following:
- Is the information really confidential? If the information isn’t a secret then it won’t be protected.
- Does the confidential information belong to you? If the information doesn’t belong to you then you cannot control its circulation.
- Is the information in the public domain? Your confidentiality agreement may not protect you if the recipient of the information also gets it from a third party or can prove it was already publicly available.
- Information shared with a third party prior to signing a confidentiality agreement will not be covered by its scope.
- Can you prove a breach of confidentiality? It may be difficult to prove that the recipient was responsible for breaching the terms of the CDA.
- Confidentiality agreements cannot be enforced if used to prevent appropriate disclosure about breaches of the law or illegal activity like sexual misconduct.
- Is the confidentiality agreement clear or overreaching? The definition of what information is confidential must not be so broad as to make the agreement too vague to comply with, or mean that complying with it would be too restrictive.
- Can the breaching party afford to pay any damages? A business or individual may have limited funds preventing them from paying for damages or any losses you may suffer as a result of a breach.
- Restraint of trade issues such as a non-compete clause or restrictive covenant in a CDA may not be valid as it is deemed anti-competitive or unreasonable in its scope.
What information is not covered by a confidentiality agreement?
CDAs will not cover information that:
- Is already in the public domain or was disclosed to the recipient prior to the confidentiality agreement being signed.
- That is already known by the third party as they received it from another source.
Benefits of confidentiality agreements
If you need to release or share confidential information with a third party or your employees, a confidentiality agreement is an effective way to protect your business by providing a legal justification for the protection of your information. In the event an individual clause in the CDA is deemed invalid, the remainder of the agreement should remain fully enforceable.
Additionally, a confidentiality agreement alerts any third parties that you intend on protecting your trade interests and that through the completion of a CDA you have the means and legal protection to do so.
How Richard Nelson LLP’s commercial solicitors can help with confidentiality agreements
Confidentiality agreements will require specialist legal advice. Our team of experienced commercial solicitors will work closely with your business and can assist you in drafting and negotiating your confidentiality agreement to ensure your commercially sensitive information is sufficiently protected when working with third parties. Get in touch to see how we can help you with your bespoke confidentiality agreement.