Non-disclosure agreements – Are they worth it?

Commercial Directions

A frequent question for any commercial lawyer is whether a confidentiality or non-disclosure agreement (NDA) is worth the paper it’s written on. NDAs are a commonly used tool for businesses who want to investigate business possibilities with other business partners – for instance, joint ventures, investments, procurement, supply, distribution and licensing arrangements, franchising, sub-contracting and sales and purchases of shares and business.

NDAs can, however, often leave even the most business-savvy uncertain. They can be mutual, in which two (or more) parties share information and each party is bound (usually on reciprocal terms) not to disclose that information. Alternatively, NDAs can be one way – that is one party shares information with another, who is bound to keep that information confidential. In a one way NDA, there are very few obligations on the disclosing party and the majority of the obligations fall on the recipient of any information to keep that information confidential.

In principle, the benefits of NDAs are obvious. They can provide an added level of legal protection if confidential information is disclosed, they can encourage the free sharing of information, and they put other parties on notice that your confidential information is valuable to you and that you intend to defend any infringement or inappropriate disclosure of it. However, NDAs are not infallible. They can be unenforceable if they are too vague or broad. An NDA can also perpetuate a false sense of security: like any other contract, people may choose to breach them if the risk / reward ratio favours them to do so.

It is also important to note that there is some protection for parties in the absence of entry into a NDA. Australian law provides protection for ‘breach of confidence’ if confidential information which was disclosed in confidence is used without authorisation to the detriment of the party who communicated it. A party who can prove a breach of confidence may be entitled to compensation, an account of profits, an injunction or a declaration.

A breach of a NDA, on the other hand, provides the additional protection of being a breach of contract, giving the aggrieved party a right to sue on its terms. A breach of contract is often easier to prove than a breach of confidence, and an NDA may specify a remedy or entitle the aggrieved party to sue for damages.

So are they worth the paper they’re printed on? The short answer is ‘yes’, subject to a party’s willingness to pursue its rights under the NDA. Having one is infinitely better than not having one at all.

So while NDAs are not the ‘be-all and end-all’ for protecting confidential information, and are only effective if the person enforcing is willing to sue and undergo the costs and risks associated with court proceedings, they do assist parties to clarify what obligations are expected of them, and put everyone on notice of a party’s willingness to sue to protect their valuable property. For a quite limited up-front cost, this is definitely one situation in which the small cost is worth the investment.

Authored by: Tina van Epen, Partner and Sarah Hammond, Lawyer


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