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Businesses use contracts to underpin transactions or make agreements with other parties. Contracts are legally binding and so parties must follow the terms otherwise they could be liable for a breach of contract. If a court finds you liable for breach of contract, you may have to pay damages. One type of contract is a non-disclosure agreement which businesses use to protect information. This article will explain what a non-disclosure agreement is and the reasons why you should have one.

What Is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA) is a contract that prevents a party from disclosing a specific piece of information. This information must be considered confidential information for the purposes of the agreement. Likewise, such information could be critical to the operation of a business or it could be a privacy issue. Whatever the reason is, NDA clauses are legally binding as long as they meet all the elements of a binding contract.

Once you have established what confidential information you wish to protect, you must make sure to carve out any information that does not need protection. Carved out information refers to anything that is already in the public domain or information that has been obtained from another source. 

What Can a Non-Disclosure Agreement Protect?

The law does not limit what an NDA agreement can protect. However, businesses typically use them to protect the following:

  • branding, including logos and marketing;
  • business ideas such as a business plan or model;
  • privacy information.

Reasons to Have a Non-Disclosure Agreement

During the Startup Phase

During the startup phase of a business, you need to protect your intellectual property. This is because your intellectual property may create a competitive advantage for your business. Likewise, if a third party were to disclose such information, your business could fail. Consequently, if you are a startup founder, ensure any foundational employees are subject to an NDA agreement. Hence, any breach of this agreement will provide you with options to enforce your NDA in court.

Protects Business Practices

Additionally, if there are certain business practices you wish to protect, it is wise to have your employees sign an NDA agreement. Importantly, NDA agreements with your employees stop them from disclosing your confidential information to competitors. Further, you can restrict your employees from disclosing confidential information after they finish employment with your business. 

Protect Customer Privacy Information

You may also need your employees to sign a non-disclosure agreement because of privacy issues. Your employees may be dealing with sensitive information from customers. Hence, it is important that you create legal obligations for your staff to protect such information through an NDA agreement. Ultimately, this agreement ensures your employees cannot reveal your customers’ sensitive information. Alternatively, you might add a confidentiality clause in your employment agreement

Pitching to Investors

Another situation where you should use NDA agreements is when you are pitching your business to investors. To convince investors to invest in your business, you might need to tell them confidential information or explain specific intellectual property. Before you do this, it is prudent to have them sign an NDA agreement. This legal protection ensures that they legally cannot disclose or steal your ideas. Likewise, if they do, you have options to seek compensation for their breach of contract.

Permitted Purpose

Additionally, you must also ensure that the confidential information you define in your NDA agreement can be used for a permitted purpose. For example, if your employees sign an NDA agreement to not disclose customers’ contact information, it is crucial that such information is for business-related matters. Otherwise, any use of the information could be a breach of the agreement. 

Importantly, your permitted purpose clause must be as specific as possible otherwise your contracting party may be able to find a way around it. 

Key Takeaways

As a business owner, contracts are an important tool to create legally enforceable agreements. This builds trust between businesses and helps regulate transactions and relationships. One such contract is the NDA agreement. While there are many reasons a non-disclosure agreement is helpful, it ultimately protects information that may harm a business if a party were to disclose it to the general public. This information could be intellectual property or private information. Importantly, ensure that your NDA agreements allow for such information to be used for its permitted purpose and that this permitted purpose is narrowly tailored. Otherwise, parties to the non-disclosure agreement may be able to find a way to legally disclose that information. 

For legal assistance with managing your business contracts or more reasons why a non-disclosure agreement can benefit you, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What happens if someone breaches a non-disclosure agreement?

You can then apply for compensation in court who will usually award damages.

Can I make amendments to my non-disclosure agreements?

While it is possible to make amendments, like any contract, both parties must consent to the changes. For example, you might infer consent from a party’s signature to the new changes.

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