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What is an NDA? Non-Disclosure Agreement explained!

You have probably heard about an NDA at some point in your life, whether it was in a movie, celebrity gossip, job experience, etc. If you have ever wondered what is an NDA and what it entails, this article is for you.

What is an NDA (Non-Disclosure Agreement)?

An NDA or Non-Disclosure Agreement is a legal contract between two or more parties that either restricts a party or all parties from sharing or abusing confidential information shared by the other party. An NDA is similar to a vow of secrecy except that it’s a legally binding agreement recognized even by courts.

Sometimes, an NDA is not a standalone contract but will be part of a much larger contract or agreement.

An NDA is meant to protect private business/individual information that is exchanged during any communication, negotiation, or cooperation between parties. The information exchange can be between businesses, individuals, and other legal entities such as societies and NGOs.

Most importantly, an NDA is only enforceable when it covers legal activities, technology, or knowledge. Protecting the secrecy of illegal operations with an NDA is useless and invalid as no court of law will recognize such an agreement.

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There are two main types of NDAs which are explained below

Types of NDAs

Unilateral NDAs

The most common type of confidentiality agreement signed between two parties. A Unilateral NDA restricts the party receiving confidential information from abusing it or sharing it with others. A Unilateral NDA is one way and it only restricts the receiver of the sensitive/confidential information.

Mutual NDAs

Mutual NDAs are signed between two or more parties who want to exchange confidential information but at the same time want to prevent their partner(s) from using this knowledge beyond the scope of their cooperation. A Mutual NDA is two-way and it applies to all parties who are part of the Non-Disclosure Agreement. Mutual NDAs can be further divided into:

  • Bilateral NDA: An equally applied agreement between two parties.
  • Multilateral NDA: An equally applied agreement between three or more parties.

A Non-Disclosure Agreement (NDA) is also sometimes called a Confidentiality Agreement (CA), a Confidential Disclosure Agreement (CDA), a Proprietary Information Agreement (PIA), or a Secrecy Agreement (SA).

In short, an NDA is a legally binding agreement (in writing) that protects intellectual property (like unpatented technology, unpublished content, trade secrets, know-how, plans. etc.) and private information (such as an address, personal secrets, medical history, etc.).

Non-Disclosure Agreement (NDA) for Software Development

When an individual or organization hires a third-party development company to create their software, the developers must inevitably gain insight into the organization’s key information and trade secrets to effectively develop the required software.

Confidential information such as financial information, user database, business secrets, secret recipes, employee salary, contacts, transactions, logins, etc. might be needed by the developers depending on the type of software the organization wants.

The questions are:

  • “How does the organization ensure that the development company does not disclose such sensitive information to their rivals?”
  • “How does the software development company ensure that their employees do not disclose a client’s private information or source code?”
  • “How does the development company ensure that the organization does not disclose their secret development tactics and tricks”
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All questions can be solved by signing an NDA.

In 1 and 3, a bilateral mutual NDA signed between the organization and the development company will ensure that neither party can share confidential information about the other party.

In 2 a unilateral NDA signed between the development company and each of their employees will ensure that none of the development company’s staff can disclose clients’ confidential information.

What’s inside an NDA?

An NDA should describe all aspects of

  • cooperating parties
  • confidential and public information
  • consequences of breaking the agreement
  • how the information will be used in very specific and exact language.

Unclear or vague definitions leave a lot of room for different personal interpretations from either party. To avoid disputes, make sure your NDA is very clear and precise to avoid leaving any loopholes that can be exploited.

Sadly, there’s no single one-NDA-fits-all template, which stipulates what areas must be covered in an NDA. However, to write a great NDA, some common topics must be addressed. These topics include:

  • Identities of the parties involved in the agreement
  • Definition and list of what is confidential and what is not
  • Exclusions/Exceptions when it’s acceptable to breach the NDA
  • Duration of enforceability of the NDA
  • Explicit Description of the correct use of revealed information
  • Who has the right to handle the confidential info

When is a Non-Disclosure Agreement (NDA) Used?

An NDA is used when someone or everyone wants to stop others from sharing their sensitive information. Below are a few scenarios where an NDA is applicable:

  • When negotiating your product’s sale, manufacture, design, concept, etc.
  • When one or both parties have their shared proprietary information that cannot fall into the wrong hands
  • When pitching new a concept or product to potential investors
  • When business cooperation requires you to share sensitive information
  • When hiring employees who will handle your clients’ confidential information

Consequences of Breaching an NDA

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Sometimes there are situations where a party privy to your confidential information and under an NDA is forced or allowed to disclose it. Most of these situations are stated within the NDA. Moreover, If they receive a court-ordered subpoena, they are required by law to divulge this information. Consequently, your confidential information will become public knowledge.

Besides these situations, if they share your confidential data thereby breaching the NDA, you can demand restitution or take legal action against them for damages due to their breach of contract. The party in violation of the NDA is subject to lawsuits and punitive measures corresponding to the degree of lost profits and opportunity. Furthermore, the case could be taken to criminal courts.

After a breach of an NDA, two options are available to the victim.

1. Court of Law Arbitration

Due to the nature of public courts, confidential information shared during proceedings will become public knowledge. This is not desirable for most individuals as they still want to protect their sensitive information.

Also, courts of law further have unattractive traits such as attorney fees, resolution takes time, etc. If a victim wins the case, they will get financial compensation from the breaching party as previously set in the contract.

2. Alternative Dispute Resolution (ADR)

Also called External Dispute Resolution, involves activities that seek to address disputes without turning to litigation. ADR may be further divided into:

  • Mediation: a neutral party helps the parties discuss and find an acceptable resolution
  • Negotiation: the parties resolve their differences without any help from a third party
  • Private Arbitration: a neutral party acts as the court to judge the case and confer the arbitration award to the winner.

Additionally, breaching an NDA is not advisable even if you might win the case. It not only sours the relationship between signatories, but it will hurt your credibility and reputation in future business deals with other companies.

To conclude, what is an NDA?

It’s a legal contract that aims to maintain the secrecy of intellectual property and company/individual secrets.

A fish with his mouth closed never gets caught.” – Fuad Alakbarov

Recommended Reading: Service Level Agreement (SLA) Explained

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