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/ 09 Jan 2014

Why use a Confidentiality Agreement?

The law of confidence serves to protect information that is confidential in nature (including commercially sensitive information) and to prevent a person who has received such information from gaining an unfair advantage by using or disclosing the confidential information without the consent of the discloser. However, the scope of the protection afforded by general principles of the law of confidence is not always clear, so where it is necessary to share confidential information, the framework for the disclosure and receipt of such information is frequently governed by the terms of a confidentiality agreement, also known as non-disclosure agreement (NDA).

It is important to remember why a confidentiality agreement is required i.e. to protect confidential information which may be commercially sensitive information. It is to be implemented in pre-contract situations e.g. where an entrepreneur wishes to divulge information about their next big business idea to an investor. It is therefore a PRE-CURSOR to a main contract which will then take over and should incorporate all the necessary confidentiality terms (and more) going forward.

In English law, the general rule on confidential information is that the courts will enforce obligations of confidentiality that one party imposes on another expressly by contract. With the exception of e.g. certain statutory restrictions, public bodies, public policy reasons, public domain and implied terms), the rule is that parties to a confidentiality agreement can agree which parts of the information that they are exchanging are confidential, and which are not; and set out what the party receiving the confidential information can and cannot do with it.

Before prescribing what the recipient can do with confidential information, the parties will need to define what they mean by confidential information. The parties can agree what information should be categorised as confidential save to the extent that the information is already in the public domain. While certain information, such as secret formulae, will clearly have the necessary quality of confidence, the confidentiality of other information may not be so obvious.

The basic duty that the discloser will want to impose on the recipient is that it will hold the information in strict confidence and will not disclose it to any person without the discloser’s consent. The discloser may also require the recipient to undertake only to use the information for a specific purpose e.g. to evaluate a proposed transaction. In most cases, the recipient will want the ability to disclose the information to certain third parties, such as its directors and certain employees. For this reason it is common for NDAs to require the recipient to enter into a confidentiality agreement with any third party on the same terms as the confidentiality agreement between it and the discloser, often known as a back-to-back NDA. The original NDA should state clearly that any back-to-back agreement should impose the same obligations on the authorised recipient as the NDA does on the recipient.

To give effect to the commercial reality of a transaction and to strengthen the definition of confidential information, an NDA will often set out what is not confidential information. For example, an NDA might provide that the recipient’s duty of non-disclosure does not apply to information which is in the public domain.

Further, there is no maximum limit on the time for which an NDA can remain in force and the parties may agree that their obligations will last until the confidential information becomes public although a two or three-year period has now become common.

The discloser will want to have the power to require the recipient (and its authorised recipients) to destroy, or return to it, documents containing confidential information. This is an important provision for the discloser, as it will allow it to have control over any copies that the recipient makes, or any document that the recipient creates based on the confidential information.

UK-based parties to an NDA may want to use English law as the governing law and give the English courts exclusive jurisdiction over disputes under the NDA for the fact that firstly, there are efficient and well-established procedures for enforcing interim injunctions where a party has committed a breach of confidence, which will prevent that party from committing any further breaches and, secondly, English law does not impose a duty on the parties to negotiate in good faith, so a discloser who has a strong bargaining position may want to exclude any liability for the accuracy of information it provides under the agreement. Such might fall foul of the duty of good faith in another jurisdiction. If you want to impose an obligation of good faith as to the accuracy of the confidential information, it is best to have this expressly included in the agreement.

Where a confidentiality agreement grants exclusive jurisdiction to the English courts but one of the parties is based outside the UK, it is advisable that the non-UK party should give an address in the UK to which the other party can send notice of service of proceedings, and the clause should state that proceedings will be taken to have been served once notice is received at that address. This will allow the other party to serve proceedings on the non-UK party quickly, which may be important where time is of the essence (for example, on an interim injunction application). The process for serving proceedings on parties in other jurisdictions, even within the EU, can be complex and time-consuming.
Finally, it is important to note that although an NDA will often state that damages will not be an adequate remedy, and that an injunction and other equitable remedies will be available for breach of the NDA, the court does have complete discretion over equitable remedies, and such a clause will not necessarily lead a court to conclude that damages are inadequate. However, when deciding whether to grant an injunction, the court will take into account the fact that the parties had formally recognised that an injunction would be more appropriate than damages.

If after this brief overview, you would like any advice on NDAs or to have yours reviewed or drafted, do get in touch with the commercial team at Hanne & Co to discuss your requirements as we would be more than happy to help!

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