Lorraine Dindi

Lorraine Dindi


June 20, 2023

What is an NDA and why is it important?

This article explains what an NDA is, when to use one and how it can be used to protect your confidential information.

What is an NDA and why is it important?

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a contract between a party disclosing confidential information and the party receiving that information. The receiving party, who is also known as the recipient, agrees to protect the other party’s confidential information by keeping it secure, not using it for unauthorised purposes, and not disclosing it to third parties. NDAs are crucial whenever sensitive information is being shared, but many individuals and businesses don’t understand when or how to use them.

How does an NDA work?

Like all other contracts, an NDA consists of an agreement by one party to fulfil an obligation to another in exchange for consideration (something of value). The obligation in an NDA is confidentiality i.e. the duty not to disclose the other’s confidential information once it has been made available to the recipient. The consideration in an NDA is the disclosure of the confidential information itself and any benefits the recipient will gain in the future from the other’s confidential information. For example, a non-disclosure agreement can protect the intellectual property rights of a discloser when sharing know-how or business information.

Like other contracts, the confidentiality obligation lasts for a specified term. During that timeframe the recipient must keep the confidential information secure, and this may include not copying, reproducing, disassembling or even reverse engineering it. If this obligation is breached, then the disclosing party may seek legal or equitable remedies in response.

There are different types of NDAs including one-way NDAs (also known as unilateral NDA) or mutual NDAs, depending on how many parties are sharing their confidential information to the others. If it's one party, then there is one receiving party and one disclosing party. If it's both parties, then they are both considered recipients of the other’s confidential information.

What is confidential information?

Confidential information can be anything, even if it is not marked as such, which is disclosed in circumstances giving rise to an obligation of confidence on the part of the recipient. It can be technical and/or commercial in nature, and constitutes a benefit conferred to the receiving party. All material and information which is not publicly available or independently developed by the receiving party can be confidential information. This type of information includes ideas, trade secrets, know-how, legal documents, business plans, information around a new product, customer lists, marketing information, diagrams and drawings, consents, computer software etc. Confidential information, notably, can be shared both orally and in writing but crucially it needs to be defined in the confidentiality clause of the NDA agreement. If certain information is not to be treated confidential then it must be clearly defined in the exclusions.

When should I use an NDA?

There are several situations where it has long been established that an NDA is valuable, such as when negotiating a license agreement or working with potential investors. NDAs tend to be used when hiring a new employee, independent contractor, or supplier. When exploring new business relationships, it is almost routine to sign an NDA in order to protect both parties’ confidential information.

Even in novel scenarios, NDAs should be used if a party will be sharing important information with the other and it matters to them that the other party understands the sensitivity of the information and thus undertakes to protect it. An NDA, if made properly, is a legally binding agreement so both parties need to intend to create legal relations when they sign one.

What happens if the receiving party breaches the terms of the NDA?

Disclosing confidential information or using proprietary information for their own benefit during the time period of the NDA is a breach of contract. The disclosing party can take legal action in the form of court order against the recipient to prevent any further breach and the discloser can sue the recipient for damages. NDAs a re legally binding contracts which is why it is important to understand the terms before entering into one in order to avoid breaches.

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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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