Non-Disclosure Agreements – ‘A First Commercial Test’

By Dawn Wattie, Surrey Business Lawyer

Non-disclosure or mutual non-disclosure agreements (“NDA”) are usually the first commercial agreements used in many new businesses to explore potential business to business arrangements between individuals or companies. NDA can be one-way meaning only the disclosure of information is coming from one party or two-way meaning both parties are disclosing information. It is often therefore the “first commercial test” to determine how another individual or entity approaches contractual arrangements. The issues raised in the negotiation and execution of a non-disclosure agreement often foreshadow how the individual or entity will handled more complex contractual arrangements and therefore is a useful exercise for due diligence purposes.

There are at least 3 general rules or best practices that should be incorporated into the drafting of an NDA: (1) they are purpose specific, often time limited agreements; (2) the confidential information and proprietary information needs to be defined and limited to the specific confidential information actually being disclosed; and (3) there needs to be a requirement to maintain the confidentiality of the confidential information and to specific the term of confidentiality.

The purpose of such non-disclosure is usually two fold: (1) to put a basic contractual agreement in place to protect specific confidential or proprietary information of one or both parties; and (2) to explore a specific potential business arrangement or activity.

NDAs can also be a useful and important exercise for new business entities as it causes the owners and managers of the business to turn their minds to what they consider to be confidential or proprietary information of the business, company or organization.

How a party responds to an NDA therefore tells the other party what kind of thought and consideration that party has given to what is confidential, how they wish the information to be protected and for how long and whether or not there is in fact intellectual property rights that are impacted by disclosure to a third party. All this is helpful in determining whether a long term relationship between the parties is possible and disclosed important due diligence information about the parties.

There are many forms of NDAs however when looking to cut or paste NDA language it is a good idea to consider the above-noted best practices related to drafting.