An NDA (often referred to as confidentiality agreement) is a legally binding contract which creates a confidential relationship between the parties. The parties agree that sensitive information obtained from the other will not be made available to any others (with some exceptions). We recommend, as with the purpose of any contract review, understanding the key terms of these agreements before committing your business to them.
NDAs are common for businesses entering into negotiations with other businesses. They allow parties to share sensitive information without fear that it will end up in the hands of competitors.
A mutual NDA, applies where each of the parties share confidential information with the other and the rights and obligations are applicable to both parties on the same basis.
However NDAs may be unilateral in that only one of the parties receives confidential information, and only the receiving party is bound by confidentiality obligations.
It is not uncommon for oil & gas operators to ask tenderers to sign a unilateral NDA, despite confidential information being shared by both parties, giving the operator freedom to share received information with:
- any of its JV partners,
- lenders or financiers,
- professional advisors and insurers,
- its affiliate companies, and
- other of its contractors.
What happens if there is a breach of the NDA?
The party suffering the breach usually reserves the right to:
- sue for all financial losses (to the extent permitted by law) suffered by it; and
- raise an action in the courts (e.g. injunction/interdict) against the breaching party to ensure it ceases the breach.
Service Companies Checklist:
- Will you be sharing commercially sensitive information that you want to protect? If so, ensure the NDA is mutual.
- Read and understand the terms of the NDA to ensure they are relevant to the purpose for which it is being used.
- Ensure the “permitted purpose” is clear and wide enough to allow all parties to do what is necessary but not wider.
- Will you need to share the commercially sensitive information you receive with a third party (e.g. subcontractors, your affiliates, professional advisors etc)? If so, make sure this is written into the NDA, but that your counterparty is sufficiently restricted in disclosing your information.
- If sharing the commercially sensitive information with a ‘permitted party’ ensure they are contractually bound to you by the same confidentiality obligations as exist under the NDA under which you are receiving the information. N.B. Your employees/contract personnel should already be signed up to a general confidentiality undertaking under their contracts of employment/hire, and your external lawyers should have an automatic duty of confidentiality.
- How long will you be bound by the confidentiality obligations? Anything between 2 – 10 years is common. Ensure the period is relevant to your purpose and the confidential information being shared.
- Are you entering into a NDA governed by a foreign law or with an overseas counterparty? If so be cautious and ensure you understand the risks involved. E.g. if your NDA is mutual, there may be complexities and higher costs in enforcing your rights against a foreign counterparty.
- You will need to have an internal process in place to ensure compliance with your obligations to avoid breaches. E.g. make the relevant people in your organisation aware of the restrictions placed on your business under the NDA.
Despite NDAs being frequently used by businesses and commonly and mistakenly seen as benign agreements make sure you give the agreement proper consideration and review before signing.
If not, you could find yourself unwittingly committed to some unreasonable obligation(s) for a long period or releasing valuableinformation without adequate protection.