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Non-Disclosure Agreement: What are they and how do they work?

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Last editedJan 20212 min read

Businesses usually have trade secrets and know-hows forming the core of their practice. The need to prevent such vital information from leaking is why we have non-disclosure agreements. A non-disclosure agreement is a contract between two parties requiring a party to keep confidential a given information they’re privy to. 

Non-Disclosure Agreement Explained

It's in the interest of businesses to protect their sensitive information from leaking out to competitors or the public. This cannot be left to chance, hence the need for a non-disclosure agreement.  

A non-disclosure agreement, also known as confidentiality agreement, is a binding agreement between two parties that compels one party who has access to relevant information about a company or business to refrain from exposing such information. 

This agreement is legally enforceable between the parties. As such, if the party who is obliged to protect the information discloses it to an unauthorised person, the other party to the agreement can sue for breach of contract. In such cases, the court can compel the offender to compensate the other party for the breach. 

A non-disclosure agreement can be used in various ways including protection of client information, marketing plans, and plans for new products. 

It is also used during negotiations with potential investors. This ensures that such investors cannot obtain sensitive information or trade secrets and use it to start up a competitor company. 

How a Non-Disclosure Agreement Works

A non-disclosure agreement performs two vital functions. They are as follows:

  • It protects confidential and sensitive information or trade secrets. It does this by compelling parties to the agreement to refrain from divulging such sensitive information. 

  • It protects upcoming patent rights. Patent rights to monopoly of one’s invention over a given period, needs to be kept secret prior to its grant. When an innovation is being created, persons privy to how it’s created usually sign a non-disclosure agreement. This serves to prevent the disclosure of such innovation prior to a grant of the patent. 

Elements of A Non-Disclosure Agreement

Every non-disclosure agreement has certain core elements. These elements find their way into various non-disclosure templates around the world. They are as follows:

  • Parties: The first element of a non-disclosure agreement is the parties that the agreement will affect. For instance, it can be two companies or a company and its employee. 

  • Confidential information: This element identifies the information that the parties consider and intend that the non-disclosure agreement will cover. Usually, this is the most detailed part of a non-disclosure agreement. 

  • Time Limit: This aspect of a non-disclosure agreement template determines how long the obligation to maintain privacy will last. For instance, it will cover cases where an employee resigns from the employment.

  • Exclusion Clause: This aspect of the non-disclosure agreement identifies the various items that do not fall under the non-disclosure agreement's scope. For instance, this aspect may concern information that is already available to the public. It also stipulates when the party can disclose such confidential information. 

  • Miscellaneous Section: This aspect of a non-disclosure agreement contains various details that are incidental to the agreement's operation. For instance, it contains the relevant laws guiding the contractual obligation between the parties. It can also stipulate the dispute resolution mechanism. 

Essentially, a standard non-disclosure agreement is similar to a standard contract. As such, it comes into force only when both parties to the non-disclosure agreement append their signature to the document. 

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