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<p>Confidentiality agreements, also known as non-disclosure agreements (NDAs) are one of the most commonly used commercial contracts. While recent headlines have rightly focused on the misuse of NDAs in employment settings, particularly in silencing victims of misconduct, the legitimate and ethical use of NDAs in business is essential for protecting commercial interests.</p>
<p>At their core, NDAs are contracts designed to prevent the unauthorised disclosure or misuse of sensitive information. Used ethically and appropriately, NDAs can be valuable tools for businesses to safeguard confidential data, trade secrets and proprietary knowledge. In this article, we explain how NDAs can be used responsibly and ethically and why they’re important for businesses.</p>
<h3>What is an NDA?</h3>
<p>An NDA is a legally binding contract between parties that protects confidential information from being shared. Otherwise known as a confidentiality, secrecy or proprietary information agreement, NDAs are commonly used at the outset of business relationships to allow for sharing of business information and to prevent the unauthorised disclosure of sensitive data.</p>
<p>Like a business’s very own Fort Knox, NDAs are designed to keep valuable property completely secure, acting as a legal fortress around sensitive information. They can be unilateral – in other words, one party discloses information and the other must keep it secret – or mutual, in which case both parties share information and agree to keep this information private.</p>
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<h3>Why do businesses need NDAs?</h3>
<p>In 2015, <a href="https://www.computerweekly.com/news/4500250705/A-third-of-employees-will-sell-company-data-if-the-price-is-right-study-reveals" target="_blank" rel="noopener">a study conducted by Clearswift</a> found that around a third of employees would risk being fired or facing criminal convictions for selling company information if the price was right. 3% would sell company data for £100, 18% would accept £1,000, 25% would be open to bribes of £5,000, and for £50,000, as many as 35% of employees would sell sensitive commercial data.</p>
<p>Of course, some time has passed since this data was released, but these statistics reveal how valuable an NDA can be for businesses. Below, we outline the main reasons why businesses might consider using NDAs.</p>
<h4>Safeguarding sensitive information</h4>
<p>At any point in a business’s life cycle, there may be times when it’s necessary for the company&#8217;s success that sensitive information is protected. This could be concerning employee confidentiality, customer data or proprietary knowledge.</p>
<p>It’s also potentially the case that during negotiations, such as a prospective partnership, investment or acquisition, the business will require sensitive commercial information to remain private until agreements are finalised.</p>
<p>For example, during commercial discussions, a supplier may be given access to sensitive data relating to a business. An NDA can prevent them from using this data for their own benefit or sharing this data with competitors.</p>
<h4>Protecting trade secrets and commercial knowledge</h4>
<p>Intellectual property (IP), which can include patents, copyrights, trademarks, designs and trade secrets, as well as manufacturing processes and customer lists are all potentially crucial business assets. NDAs legally bind parties to keep these proprietary elements confidential, preventing competitors from gaining an advantage.</p>
<h4>Business ideas</h4>
<p>Entrepreneurs will often have a need to share their ideas with potential investors or business partners. NDAs can help ensure these concepts remain private until a formal business arrangement is established, reducing the risk of idea theft.</p>
<h5>Can independent contractors ask businesses to sign NDAs before a pitch?</h5>
<p>Yes. An independent contractor can ask a business to sign an NDA to protect their work before a pitch is presented to protect their IP. However, they may find that the person with the greater bargaining power in these scenarios will insist on using their own form of NDA.</p>
<h4>Preventing misuse of confidential information for personal gain</h4>
<p>NDAs don’t just prohibit the sharing of confidential information – they can prohibit people from using confidential information for their own benefit. In other words, if somebody wants to use confidential information to develop their own work, launch a competitor business or gain a commercial advantage, this could constitute breach of an NDA – even if they haven’t shared the confidential information to others.</p>
<p>Most NDAs include clauses that restrict both disclosure and the use of confidential information, ensuring that the party receiving the information cannot exploit it in any way, even indirectly.</p>
<h3>The limits and strengths of NDAs</h3>
<p>While NDAs are powerful, they are not absolute. Their enforceability depends on clear, lawful drafting. For example:</p>
<ul>
<li>An NDA must define confidential information precisely.</li>
<li>Overly broad or vague NDAs may be struck down by courts.</li>
<li>NDAs cannot be used to conceal illegal behaviour or prevent whistleblowing.</li>
</ul>
<p>Moreover, NDAs complement, rather than replace, other legal protections. Under <a href="https://www.legislation.gov.uk/uksi/2018/597/contents/made" target="_blank" rel="noopener">the Trade Secrets (Enforcement, etc.) Regulations 2018</a>, businesses are only protected if they can demonstrate that they took reasonable steps to keep information confidential. An NDA is one such step.</p>
<h3>Data Protection Act vs NDAs</h3>
<p>Selling commercial data to a rival could make an employee criminally liable under the <a href="https://www.legislation.gov.uk/ukpga/2018/12/contents" target="_blank" rel="noopener">Data Protection Act</a>, if it includes personal data, as was the case when the Information Commissioner’s Office (ICO)<a href="https://www.osborneclarke.com/insights/employee-criminally-liable-under-the-data-protection-act-for-taking-confidential-information-to-competitor" target="_blank" rel="noopener"> prosecuted an individual for selling sensitive data about company clients</a>.</p>
<ul>
<li>See also: <a href="https://linnearcms.wpenginepowered.com/resources/commercial-law-2024-roundup-key-cases-developments/">Commercial law 2024 roundup: key cases and developments</a></li>
<li>See also: <a href="https://linnearcms.wpenginepowered.com/resources/what-does-new-eu-ai-act-mean-your-business/">What does the new EU AI Act mean for your business?</a></li>
<li>See also: <a href="https://linnearcms.wpenginepowered.com/resources/how-to-issue-shares-in-your-company/">How to issue shares in your company</a></li>
</ul>
<p>If the commercial data being sold does not include personal data, the Data Protection Act alone is not enough to protect a business.</p>
<h3>How NDAs protect sensitive business information</h3>
<p>NDAs outline specific obligations for all parties, restricting them from disclosing protected information. They legally reinforce confidentiality and can include consequences for breaches, thus deterring unauthorised disclosures. By clearly defining what constitutes confidential data, NDAs provide businesses with a legal recourse if information is leaked.</p>
<h3>When is an NDA needed?</h3>
<p>Businesses should use NDAs in situations where confidential information must be shared with contractors, investors or external stakeholders, among others. Common scenarios include:</p>
<ul>
<li>Discussing potential partnerships or mergers</li>
<li>Sharing business plans with investors</li>
<li>Providing access to proprietary software or technology</li>
</ul>
<h3>What to include in an NDA?</h3>
<p>A well-drafted NDA should be clear, comprehensive and legally enforceable. Key elements to include are the following:</p>
<ul>
<li><strong>Scope</strong>: define what constitutes confidential information and the receiving party&#8217;s obligations.</li>
<li><strong>Duration</strong>: specify how long the NDA remains in effect.</li>
<li><strong>Exceptions</strong>: identify circumstances where disclosure may be legally required, such as court orders.</li>
<li><strong>Consequences of a breach</strong>: outline the legal repercussions if confidential information is disclosed.</li>
</ul>
<h3>Can anyone write an NDA?</h3>
<p>We advise businesses seeking to draft NDAs or confidentiality agreements to seek legal counsel. A poorly written NDA may contain loopholes that render it enforceable in court, and a legal specialist can ensure the agreement is robust, watertight and ethical.</p>
<h3>Common mistakes or risks when using NDAs</h3>
<p>Businesses who draft NDAs without the advice of a qualified lawyer may make errors when drafting or enforcing NDAs, including the following:</p>
<ul>
<li><strong>Overly broad terms</strong>: if an NDA is too vague or restrictive, it may be deemed unenforceable in court.</li>
<li><strong>Failure to define confidential information properly</strong>: NDAs should explicitly state what is covered.</li>
<li><strong>Not including a time limit</strong>: a perpetual NDA may not always be enforceable.</li>
<li><strong>Ignoring jurisdiction issues</strong>: ensure that the NDA is legally valid in the applicable region.</li>
</ul>
<h3>What happens if you break an NDA?</h3>
<p>NDAs are civil contracts, and therefore breaking one isn’t necessarily a crime. However, breaking an NDA can result in severe financial or legal consequences. For example:</p>
<ul>
<li><strong>Financial penalties</strong>: the breaching party may be required to compensate for damages, and may be required to pay associated legal costs.</li>
<li><strong>Legal action</strong>: the injured party can take the matter to court to seek an injunction or further legal remedies.</li>
<li><strong>Reputational harm</strong>: breaching confidentiality can damage a business’s credibility and relationships.</li>
</ul>
<p>Regardless of an NDA having been signed, under common law and the <a href="https://www.legislation.gov.uk/uksi/2018/597/contents/made" target="_blank" rel="noopener">Trade Secrets (Enforcement, etc.) Regulations 2018</a>, it’s illegal to share trade secrets or reveal sensitive company information to a competitor, as we highlighted above. In extreme cases, breaking an NDA can lead to criminal charges.</p>
<h3>Protecting your business’s sensitive information</h3>
<p>NDAs are essential tools for businesses when it comes to protecting valuable and confidential business information. But they must be used ethically and responsibly. Used properly, NDAs can protect trade secrets, facilitate investment and ensure trust in strategic partnerships.</p>
<p>Consulting a legal expert when drafting an NDA is recommended to ensure it is enforceable and tailored specifically to your business’s needs. At Linnear Legal, we provide a range of <a href="https://www.linnearlegal.co.uk/commercial/">commercial law services</a>, including with regard to NDAs. <a href="https://www.linnearlegal.co.uk/get-in-touch/">Speak to a lawyer</a> today.</p>


Non-disclosure and confidentiality agreements for businesses

Learn when and why your business should use NDAs or confidentiality agreements to protect confidential information from breaches and misuse.

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