Non-disclosure agreements (NDA) or confidentiality agreements are used between two entities with the purpose of sharing private information over the span of the agreement. During this period, both parties retain the goal of keeping the information confidential. These agreements are typically used to maintain secrecy about an initial conversation between two parties prior to committing to a type of transaction or a more official agreement. Information that is required to be kept confidential is typically of high value and could potentially make the operations of a business more difficult without sharing the confidential information. Consequently, businesses will often use NDAs to secure their information. The primary purpose of this article will be to explore the five main benefits to utilising NDAs.
The Main Benefits of Properly Utilising Non-Disclosure Agreements
1. Gives the Parties a Sense of Security to Share Private Information
If a business is in possession of a large amount of confidential information, it is not unusual to be reluctant to share it with others, thus potentially hindering any potential business-related opportunities you may develop. This could be attributed to the fact that any other parties potentially may not have sufficient information from your business to feasibly provide aid. This also could lead to the progress in conversations to stall.
For example, you may have fully created an idea for a profitable mobile app. However, you are concerned that discussing your idea with a developer may lead to them taking your idea and market it for themselves.
However, if there is not sufficient information provided, the developer will not be able to tell you the terms of their aid. This may include if and how they can assist you as well as a potential quote for their help. These problems naturally could lead to a halt in progress. This may be solved however, by using NDAs, which would specify; what is the confidential information, why the other party may use the information; the duration of the confidentiality; and any consequences for breaking the obligations set by an NDA.
2. A Non-Disclosure Agreement Can Specify What Information is Meant to be Confidential
A function of a non-disclosure agreement is its ability to specifically outline what information is meant to be ‘confidential’. Thus, the party that is seeking to disclose information would likely look to have the definition set in general terms. This definition should also have any sensitive information regarding the commercial interests of a business regardless of if the information is delivered in a tangible form, a written form which is marked as confidential, or provided verbally.
Alternatively, if you are the party that is meant to be acquiring the information, it may be in your interests to have the definition of ‘confidential information’ more specific. This is because it will provide the relevant information to determine what specific information is considered confidential.
3. Places Restrictions on the Use of Confidential Information by a Party
In a practical application, it is not unusual to have to share confidential information to another party for them to provide a quote for their services. Consequently, there is a natural worry that the other party may utilise your information for their own goals. An example of the other party utilising your information could include marketing your ideas or even sharing it with other clients.
Also known as the ‘purpose’, a confidentiality agreement places certain restrictions on the way the other party can handle your information. One example of this may be defining the ‘purpose’ to be a negotiation for a future business transaction where one of the involved parties is to provide a quote for the other party. Another example may be for an interested buyer to do their due diligence on the specific business they are looking to buy.
4. Provides and Enforces Consequences for any Breaches
Not only do non-disclosure agreements specify how confidential information should be handled and protected, it also sets out any consequences for breaching the terms of the agreement. Having any consequences formally written out and mutually agreed on will likely limit the potential of either party disclosing information.
Non-disclosure agreements will typically state that if the party which receives information breaches the terms of the agreement, the party that is responsible for disclosing the information is to be compensated. Furthermore, it also typically states that the party that is responsible for providing the information may be able to apply to the courts for an injunction on sharing the information.
5. Can Preserve Important Business Relationships
Typically, businesses require a continued maintenance of business connections. Especially in relationships where there is consistent flow of private information, it is of great importance that both parties involved have a sense of security in the ongoing privacy of their information. By having the written, formal agreement between the two parties involved, it provides a mutual sense of security as well as prevents any future disputes regarding the confidential information.
Summary
The primary function of non-disclosure agreements is for when there is a necessity for a business to share confidential information, and they wish to ensure that the information remains private otherwise. These agreements can set out certain requirements between each party such as what information is considered confidential; how can the information be used by either party; the duration on the protection of the information; and any consequences which may arise for breaching the agreement. Having a non-disclosure agreement can allow for the continued growth of current corporate connections as well as the creation of new connections.
FAQ
What are non-disclosure agreements?
Non-disclosure agreements are a type of agreement between two parties that allows for the secure disclosure of private information. These agreements will typically specify the exact terms of keeping the information secure. This can include specifying what information is private or any consequences for breaking the agreement.
Can NDAs limit the way which the information is used?
NDAs will often specify a ‘purpose’ for the information. This means that the there is a specific set of rules for the party receiving information on how and why they may use the disclosed information.
Do NDAs have to be formal, written agreements?
No, NDAs can be used prior to entering into any formal arrangements or any transactions to ensure the security of any prior conversations. This is not uncommon as business will often have to reveal private information to start business with another party.
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