Nondisclosure Agreement (NDA): Types, Clauses, Benefits, Problems and Precautions (original) (raw)

Last Updated : 5 May, 2023

NDA stands for a non-disclosure agreement. An NDA can also be known as a confidential disclosure agreement (CDA), a confidentiality agreement, a secrecy agreement, or a proprietary information agreement (PIA). It is a written contract between two or more parties (for example, one can be an employee and the other can be an organization) that prohibits the sharing of confidential information with others that the organization or the issuer is willing to share with the employee. It is a legal contract that is signed between the two parties as part of an employment contract or settlement agreement to protect sensitive company information. For example, if you are an employer and ask any employee to sign the NDA form, that means you are asking them not to share the confidential information that is shared with them with any third person, and doing this might have you undergo legal action from the employer. The non-disclosure agreement is signed when you are going for any business deal while starting any new project, providing employment, dealing with sensitive client information, or discussing any commercially sensitive information with another party.

Types of Non-disclosure Agreements (NDA)

There are three types of Non-disclosure Agreements:

1. Unilateral NDA: A unilateral NDA, also known as an employee NDA, is an agreement that involves two parties where the issuing party (a company) makes some rules that are to be followed by the signing party (an employee) regarding the confidential information that they are not allowed to share with other persons or any other companies. In a unilateral NDA, the company sets terms and conditions for protecting their data and wants the employee to avoid disclosing any information that is being shared with them.
2. Bilateral NDA: A bilateral NDA, also known as a two-way NDA, is an agreement between two parties, where both parties may be between a company and an employee who does not want their confidential information shared with a third party. For example, in this type of agreement, both parties make terms and conditions and sign when they agree with the agreement. They sign the agreement to protect confidential information. The best example can be the merger of two companies, where both companies have to follow some rules regarding the disclosure of information.
3. Multilateral NDA: A multilateral NDA is an agreement that involves three or more parties where one of the parties discloses confidential information and wants the other parties to sign the agreement to keep that information confidential.

Some of the Clauses to be mentioned in the **Non-disclosure Agreement (**NDA)

• Identification of both parties and their accountants and attorneys: The identification proof of both parties that are signing the agreement should be in the non-disclosure agreement.
• Definition of confidential information: The most important is the definition of confidential information that is there in the non-disclosure agreement. A proper definition of what is deemed to be confidential between the two parties should be given in the non-disclosure agreement. In this section, the disclosing party should always try to mention all the confidential details related to the data that they want to protect from outsiders so that the employees do not breach anything that is in the agreement or that the employer wants them to keep confidential. Some of the confidential information may include accounting information, business operations, computer technology, customer information, marketing and sales information, etc.
• Term and duration: Every non-disclosure should have a well-defined time frame, and it should be clear to both parties when the time period will start and how long they have to keep the information confidential. There is no fixed time frame for such information, as some companies might ask their employees to keep the information confidential as long as they are working with them, and some might also not ask them to disclose all the information shared with them.
• Identify the purpose of disclosure: The employer should be aware of why they are disclosing this particular information to the employees. For example, if an employee is a software developer and the employer wants to make some changes to their website or application, they will have to share some confidential data with the employees that will be assigned to the tasks, and accordingly, the employer can make an agreement so that the employees are aware of it and do not share the confidential information with outsiders.
• Permitted use of the Information: The employer or the disclosing party should clearly specify the reason for sharing the information with the signing party, and they could be clearly informed about when they can use that confidential information shared with them with co-workers or outsiders in case of any requirement.
• No Binding Clause: This clause should always be included in any non-disclosure agreement because it tells the merger or the signing authority that this agreement is not a permanent one and that they can at any time withdraw their partnership or relationship whenever they feel convenient.
• Consequences that can occur due to the breaching of the information and the actions that might be taken: The employer should clearly mention the consequences that might be there if anyone tries to disclose the confidential information to outsiders, and the disclosing party should also clearly mention all the details regarding the actions that might be taken in case any person is found breaching the confidential information. The actions might include the termination of the employee from the current role. Also, in some cases, this can get more severe.

Benefits of Non-disclosure Agreement (NDA)

• Helps in protecting confidential information: One of the primary benefits of having an NDA is that it is very helpful for companies in protecting their confidential data like trade secrets, client lists, financial information, and other sensitive data from disclosure to outsiders. Employers nowadays ask their employees to sign the NDA to protect their businesses' confidential data.
• Gives clarity on what information is to be protected: The NDA gives employees or other parties a clear idea of what information is to be protected and what information they can share with other employees or outsiders.
• Creates good bonding and relationship with the merger and companies: The NDA helps to build a good understanding and relationship between the employer and employee, as the employee and the employer both know about the complete terms and conditions and they always try not to breach them, which helps companies protect their sensitive and important data from others. Also, this helps the merging companies build good trust and relationships, which directly build their businesses.
• Avoids conflicting situations: A proper NDA helps the companies or the issuing parties avoid conflicting situations with the employees or the signing parties. An NDA can play an important role in preserving business relationships, as the NDA provides companies with peace of mind in terms of their confidential information, and it always helps businesses avoid conflicting situations.
• Technical Security: The NDA helps companies protect their user credentials, like ids, passwords, and many other details related to the company's data, and nowadays, almost every employer is mentioning these details in their NDA to protect their company's data and credentials from scammers. Also, these policies protect the company's assets and data from hackers.

Problems if the Non-disclosure Agreement (NDA) is not followed

Some of the problems that organizations might face if NDA is not followed:

• Employment might be terminated: Employment might be terminated, and you would be restricted from applying again for employment with the same employer.
• Might face strict actions: Sometimes, if the organization is new, there might not be as many strict actions. In many places, the breaking of the NDA is not considered a crime, but it also depends on what was violated. So, depending on what was violated (suppose the contract is between the employee and the employer), the actions may vary and might lead to employee termination, and sometimes, it might get more severe also.
• Sometimes the breach of NDA might get personal: When you break a non-disclosure agreement, you might be threatened with being sued, or you might also have to pay for financial losses or related costs.
• Cost too much to the companies: Sometimes, creating and publishing the NDAs costs too much to the companies, as they have to hire lawyers for that, and if the NDAs are very long, the lawyers might demand more money. This is why this process gets costlier for the companies, as the agreement needs to be updated timely and with proper checks and guidance.
• Business loss or reputation loss: In many cases, the employer or the disclosing party has to face business losses as the non-disclosure agreement might contain many confidential items like financial data, trading secrets, product launch-related news, and many more that can cause harm to the business. The disclosure of such information which is related to the company to outsiders can also harm the company's reputation.

Precautions to be taken while creating or signing any Non-disclosure Agreement (NDA)

• Language should be simple and easy to understand: While writing any agreement, make sure that the information you want to convey to the other parties is written in a very simple language and that it should be easy to understand.
• Provide proper time to read and also provide a proper explanation when required: You must always give the signing parties the proper time to read the agreement, and in case they have any difficulty understanding any of the clauses that you have written in your NDA form, you should always try to explain them.
• Clarify the duration of the NDA: Always make sure that the details regarding the tenure of the NDA along with the expiration details are provided in the non-disclosure agreement, along with proper ways or guidelines to renew the agreement.
• Always try to hire lawyers to create the NDA agreement: The companies should always make an accurate agreement so that they do not have to face any losses due to that, and for that, they should hire a lawyer who can be made responsible for dealing with all the legal activities in the company.

The NDA is always considered one of the best agreements between the employee and the employer to protect critical information about the company or important credentials related to the company, which can directly harm the company's progress and also lead to the company's downfall. So, companies hire attorneys and advocates to frame the agreement as per the company's requirements and the information that the employer wants to safeguard from outsiders. The employer or the disclosing party should always create the agreement as per their business so that it does not create any problems with anyone later. Also, the agreement should not become problematic for the employees or the signing parties and most companies hire lawyers to make sure the agreement created is accurate.