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A non-disclosure agreement (NDA) or a confidentiality agreement is a contract where one or more parties agree not to disclose confidential information that they have shared with each other.
Even though an NDA cannot guarantee that a recipient of the confidential information will not misuse that information, we explore below why it is beneficial to have an NDA in place, in particular covering the role an NDA can play in the context of a proposed company sale.
What if you don’t have an NDA?
In the absence of a written agreement, a duty of confidence may still arise but in order to rely on this, the disclosing party must show the information had the necessary quality of confidence (i.e., not be in the public domain), and that it is being disclosed in circumstances importing an obligation of confidence. Whilst this would seem obvious in the context of a sale the requirements can sometimes be difficult to demonstrate, which is why a written agreement is always preferable as provided the information is not already in the public domain, it will satisfy both requirements.
In the context of a company sale the Legal Due Diligence process will require a seller to disclose a significant amount of information about the target company to the buyer. This is likely to include sensitive financial and commercial information. As a result the seller should only disclose such information where he can be sure that the buyer is placed under an obligation of confidence, and for the reasons mentioned above this is why an NDA is preferred.
Breach of Confidentiality
An obligation of confidentiality is breached where information is disclosed to unauthorised recipients, and/or used for an unauthorised purpose.
Where no agreement is in place, the courts will be required to look more deeply into the facts of the case, by assessing the type of information disclosed, whether it has a nature of confidence in the first place and whether the duty of confidentiality was imposed on the buyer.
The main remedy for breach of confidentiality is damages for loss suffered but quite often it is more important to ensure the information remains confidential and to suppress any unauthorised disclosure before it happens. Therefore it should always be the case that a potential breach can be headed off at the pass by the use of injunctive relief to prevent such unauthorised disclosure. Once information has already been placed in the public domain then it is the question of damages that will need to be considered.
Key terms of an NDA
To ensure that the best possible protection is afforded to the confidential information, the following key terms should be included in an NDA:
As referred to above, an NDA cannot guarantee that the confidential information will be protected, and that the risk of an unauthorised disclosure will be eliminated. However, it provides a safety net and makes it much less burdensome to pursue a claim for breach of confidentiality. It also helps a seller focus on what needs to be disclosed and put in place procedures to prevent information being disclosed to unauthorised persons.
If you are thinking of selling your business or require general advice regarding confidentiality agreements, Ansons Solicitors’ Corporate are here to help. Please contact Neil Jones on 01543 431184 or email firstname.lastname@example.org
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