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Drafting effective contracts is the best way to stay protected when making business transactions. The more effective your contract is, the easier it will be for the courts to enforce it if a dispute arises. The court will also be able to grant you damages (money) for any loss you suffer if your contracting party breaches the contract. In addition, some businesses may use non-disclosure agreements to protect certain sensitive information. This article will explain what a non-disclosure agreement is and how you should draft it to remain effective. 

What is a Non-Disclosure Agreement?

A non-disclosure agreement is a legally binding contract that stops a person from disclosing certain sensitive information to anybody else. For example, businesses often use these agreements to stop an employee from disclosing any trade secrets about their work. They are legally binding, so a person who signs a non-disclosure agreement can be sued for any breaches. If you are drafting a non-disclosure agreement, you must draft it well so that the courts can enforce it.

Type of Non-Disclosure Agreement

Firstly, you must ensure that you choose the correct type of non-disclosure agreement. This will depend on the relationship between yourself and the contracting party and the type of confidential information you are trying to protect. This article outlines the three types of non-disclosure agreements below.

Mutual Non-Disclosure Agreements

A mutual non-disclosure agreement should be used when both parties have confidential information that needs to be protected. This is a two-way agreement that: 

  • allows both parties to disclose confidential information to each other; and 
  • prevents both parties from disclosing confidential information to anyone else. 

One example of where you should use a mutual non-disclosure agreement is when prospective business partners are negotiating. In this case, you will want to disclose certain information, but ensure that your valuable confidential information is not in the public domain.

Employer-Employee Non-Disclosure Agreements

As the name suggests, an employer-employee non-disclosure agreement controls the relationship between an employer and an employee. In this case, the employer will be the disclosing party, while the employee will be the receiving party. Employees will generally be a party to certain confidential information, such as trade secrets, through the nature of their job. Therefore, this information must be protected so that your competitors do not find out about valuable confidential information that gives you a competitive advantage. 

Merger and Acquisition Non-Disclosure Agreements

Businesses use merger and acquisition non-disclosure agreements when they are undergoing large commercial transactions. If you are proposing a merger or acquisition, then businesses will disclose all relevant confidential information relating to both companies. This agreement will protect this information from being leaked to the public. 

Note: the agreement will be in force whether the proposed deal goes ahead or not. 

Key Clauses to Include in Your Non-Disclosure Agreement

Next, you must also make sure that you include the following relevant clauses when you are drafting an effective non-disclosure agreement.

Obligations

The obligations clause should clearly define: 

  • what information is confidential; and 
  • to who you can disclose this information. 

This clause must be highly accurate and specific, as you do not want the clause to be too wide or too narrow. For example, an overbearing clause would be one that stops employees from disclosing confidential information to other employees who may actually need to know it. 

Damages

In addition, you should also include a clause that relates to damages in your non-disclosure agreement. This clause will outline what the penalty will be if your contracting party breaches the contract by disclosing any sensitive information that they are not supposed to. Setting a damages figure in advance will discourage your contracting party from breaching the contract.

Other Considerations

Privacy

Finally, you must also keep privacy considerations in mind when drafting an effective non-disclosure agreement. The non-disclosure agreement must protect any private information that you collect as a business. This means that your employees must securely store private information and they cannot disclose it to anyone. Any breach of this could result in your business facing an investigation by the Privacy Commission.

Key Takeaways

All business owners will use contracts in their daily operations. However, these contracts must be effective for them to work. You can use an effective non-disclosure agreement to stop people from disclosing certain pieces of confidential information. This information might relate to trade secrets or other types of private information. Any breach of the contract can result in legal proceedings or the termination of an employee’s contract. For legal assistance with managing your contracts, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do non-disclosure agreements expire?

Non-disclosure agreements can have an expiry date which means that the person bound to the contract is not obligated to withhold the information after this date.

Do I have to have a non-disclosure agreement to protect information?

It is always best to utilise a non-disclosure agreement to protect information. You can also incorporate them into your employment contracts. 

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