Importance of Non Disclosure Agreement (NDA) or Confidentiality Agreement

CA Puja Sharma , Last updated: 16 April 2022
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Introduction

A Non Disclosure Agreement is a legal contract signed between two or more parties who share personal and sensitive knowledge or information for varied purposes and want to ensure that such information remains confidential. It is a written agreement through which the parties agree to not disclose or forward personal information to any third parties. Therefore, it provides an understanding of all that secretive information and prohibits its sharing until the contract ends or as mentioned in the agreement.

Non Disclosure Agreement (NDA) is also termed a Confidential Agreement (CA), Confidential Disclosure Agreement (CDA), Secrecy Agreement (SA) or Proprietary Information Agreement (PIA). The Indian Contract Act, 1872 states that an agreement shall be properly stamped and executed to be valid and legally enforceable.

Critical elements of an NDA

One can prepare a customized NDA according to the requirements. However, there are a few elements that every NDA must contain-

• Names of the parties involved.
• Terms and conditions of the agreement.
• A brief background on the agreement and what information it contains.
• A statement on the confidential information in the agreement and how it shall be used.
• Any exceptions from confidentiality that relate to information already available to the public.
• Method of return of the confidential information after its use.
• Proper time frame for the duration of the agreement.
• Any other provisions as required.

Types of NDA

NDAs can be classified into unilateral, bilateral or multilateral based upon the parties' obligations.

• Unilateral NDA: It is also called a one-way agreement. It has two parties involved where one party called the disclosing part shares his confidential information with the other or the receiving party. Under a unilateral agreement, it is expected that the disclosed information will not be shared by the receiving end with any third party.
• Bilateral NDA: A mutual or two-way NDA is also called a reciprocal or two-way. Here, both the parties disclose information to one another, and they intend to protect it from third parties. Such NDAs are useful when business ventures decide on mergers or joint ventures.
• Multilateral NDA: It involves three or more parties. Here, one of them discloses the information and the remaining parties are required to protect it from further disclosure. Such a type of NDA is advantageous as they remove the need of having unilateral or bilateral NDAs separately between the parties involved.

When to execute an NDA?

NDAs are an essential instrument for conducting business deals, and there are various instances when they can be used for protecting sensitive information from being misused:

• When you start a new project with a unique idea, you can enter into NDA with your collaborators or contract workers.
• With experts, while you need their advice on your new product.
• During the process of due diligence.
• While entering into deals with investors for investments in your company.
• When you enter into business agreements with service providers and want to refrain them from sharing your company's sensitive information with the competitors present in the market.
• With top executives and employees of a business to protect trade secrets.
• If you deal with sensitive client information and need to protect the same.
• Can be made with the employees when providing employment that they will not share your company's trade secrets.

Importance of signing NDA

• Protects business trade secrets, thereby safeguarding the organization's interest.
• It is an essential legal document that settles any conflict between the contracting parties in the future related to confidentiality.
• NDAs help understand what is considered confidential and help the parties adapt to their obligations and maintain secrecy.
• It builds trust between the parties as NDAs impose severe penalties on those who default.
• Enhances client relationships by securing their confidential information.
• Overall, it protects the data, builds privacy and gives the right to sue the other party if any of the terms are breached.

Further, in the case of the service industry, it's better to execute an NDS and other agreements. Whenever a service provider engages with the service recipient, he runs this agreement so that the recipient can share the required information with confidence that the other person will maintain the secrecy.

The author is the founder of M/s Puja Sharma and Associates, a Chartered Accountant firm in Jaipur. The team of professionals at the firm drive technology-enabled service offerings. Our internal and external processes are driven by technology at every stage.