How Non-Disclosure Agreements Work: 4 Elements of an NDA

A non-disclosure agreement (NDA) is a legal contract stipulating what details constitute a party’s private proprietary information and the penalties for disclosing such confidential information outside the terms of this agreement type. Businesses typically use confidentiality agreements, which set the ground rules for sharing information. NDAs outline public knowledge and what specific information must remain private.

The primary purpose of an NDA is to keep sensitive information secret. Intellectual property, financial information like pricing, manufacturing processes, trade secrets, product development details, and customer lists are just a few of the things these mutual agreements can transform into especially protected information.

A breach of this agreement type allows for people or business entities to take legal action should a party step outside the bounds of the confidential relationship established by the binding contract. Sharing information, in these circumstances, can incur harsh financial penalties.

These legal agreements, which are enforceable by court order, help manufacturers keep their new products secret, dictate the terms of confidentiality between independent contractors and their clients, and can help set up the terms and conditions of privacy for anyone engaged in a joint venture. The confidentiality clauses vary depending on what’s required in any given scenario.

While NDAs fit different needs for many types of legal and business relationships, there are several main types. These three specify how many parties must keep information confidential:

1. 1. Unilateral: A unilateral NDA specifies one party as needing to keep information confidential. Many non-compete agreements that employees sign as they begin new jobs double as unilateral NDAs—the agreements prevent the employees from sharing the company’s business information publicly but do not require the company itself to maintain confidentiality in return.
2. 2. Bilateral: A bilateral NDA is a mutual non-disclosure agreement between two parties. Mutual NDAs like this ensure both parties involved will keep each other’s information secret so long as the agreement is in effect.
3. 3. Multilateral: Much like a bilateral NDA, multilateral NDAs dictate that all parties involved keep certain types of information secret. These agreements can be bilateral themselves or encompass any number of parties where mutual privacy is necessary.

Each NDA is unique, but most borrow from the same basic template of elements to ensure they’re up to the right caliber. Here are four common components you’ll see in NDAs:

1. 1. Definition of confidential information: An NDA will directly specify a party’s confidential information. If the verbiage around confidential matters is vague, it can lead to problems should someone in the agreement share what they know publicly. Such disclosure may or may not violate the NDA unless it’s directly spoken to in the language of the contract.
2. 2. Time period: While some NDAs are indefinite, many of these legal documents specify a period of time during which the terms of the agreement will be enforceable. The termination of this agreement type requires an end date or it will bind one or both of the parties to secrecy in perpetuity. Regardless of whether the agreement’s terms of confidentiality remain indefinite or terminate, all cases require an effective date that outlines the time period in which secrecy is enforceable by law.
3. 3. Consequences for a breach of contract: One of the primary purposes of this agreement type is to prevent the sharing of business information, which is why NDAs must name consequences for a breach of contract. It’s necessary that these financial penalties—remuneration for the damages caused by breach of the agreement—are specified in writing to incentivize all parties from breaching the contract.
4. 4. Severability and no-waiver clauses: Often included upon the legal advice of law firms, these two clauses aim to prevent lawful loopholes from voiding the contract’s enforceability. A severability clause manages to keep the rest of the contract intact if a court of competent juridisction finds one or more sections of the agreement violates the law. Meanwhile, a no-waiver clause extends the time period in which the parties of the agreement can file suits if a breach of contract occurs.

Whether you’re a small business owner, an employee, or a potential investor in a new startup, you may have to eventually sign NDAs at one point or another—their presence in the business world is ubiquitous.

The provisions of this agreement call for the receiving party (the person or entity receiving confidential information) to keep the information of the disclosing party (the person or entity disclosing the confidential information) secret. The contract may include some mutual confidentiality, though it is not required.

If you’re the receiving party, you must keep the information specified in this agreement confidential if you don’t want to incur hefty financial penalties. Depending on state law, there are certain exceptions to this—for instance, if the company engages in illegality or a person acts in a discriminatory or harassing way. Many states will provide exceptions to non-disclosure terms to ensure receiving parties can still report abuses of power. If you’re the disclosing party, you should ensure your contract is ironclad legally and fair in substance and then reserve the right to sue if it’s ever breached by the receiving party.

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