What is an NDA Agreement?
A Non-Disclosure Agreement (NDA) is a legally binding contract that establishes a confidential relationship between two or more parties. It protects confidential information or sensitive information of a company which could be detrimental for the company if disclosed. It is commonly known as a confidentiality agreement or proprietary information agreement in India. NDA is an essential document before starting a contractual agreement, and it is a common business practice.
In an NDA, the parties are bound to not disclose the information covered by the NDA . If the recipient discloses any information which is prohibited by the NDA, then the disclosing party can move to the court for granting an injunction, for damages for breach of contract and compensation for loss incurred due to leakage of information. In India, the law of NDA comes under the law of contract and the Indian Contracts Act, 1872 governs them. There are various laws such as Trademarks Act, Copyright Act, the Patent Act, etc., which have provisions regarding confidentiality breaches. Even though the breach of NDA is a breach of contract, it also amounts to a tort i.e., it is a wrongful act against the party.
Essentials of an NDA in India
An NDA Agreement in India should incorporate the following key elements:
Parties to the agreement: It is important that the NDA Agreement clearly identifies the parties to the agreement. The agreement can be made by individuals or by organizations. In cases where the parties are organizations, it is essential for the NDA Agreement to specify the name of the organization, its legal status (for example, whether it is a sole proprietorship, partnership, corporation or limited liability company), the name of its country of organization and its mailing address. Where the NDA Agreement is made by individuals, the NDA Agreement must also mention the full legal names of the parties to the agreement.
Confidentiality obligations: The NDA Agreement must clearly state the confidential information that is protected under it. This information will generally include proprietary information, innovation, research and development, technical information, business plans and trade secrets. It is important for the NDA Agreement to meticulously describe the information that is considered confidential by the parties to the agreement.
Duration: The NDA Agreement must clearly state the time period for which confidentiality obligations under the NDA Agreement will apply. In general, courts in India will seek to give legal effect to the terms of the NDA Agreement as specified therein. Although parties to an NDA Agreement in India have a relatively free hand to determine the duration of the confidentiality obligations, courts in India will generally not enforce an NDA Agreement that imposes indefinite confidentiality obligations on the basis that such restrictions would amount to perpetual restraints of trade.
Different Types of NDA Agreements
A Non-Disclosure Agreement is a universal standard in all industries and sectors today. We discuss below the types of NDA’s commonly used in India.
• Unilateral NDA’s: A Unilateral NDA is an agreement between two parties with obligations to one another. In a unilateral NDA, there is an owner of the information, and a party that has access to a specific part of that information. It is a common type of NDA and is commonly used when only one party is the receiving party of information. A unilateral NDA may be used in many situations where an organization needs information to hire a third party. It’s for example commonly used when passing information to employees, third-party contractors or consultants, as long as the disclosure is limited. For example, a software company should use a unilateral NDA when entering into a contract for consulting services, because the contractor will likely have access to the company’s proprietary information while performing the contract.
• Bilateral NDA’s: A Bilateral NDA is often called a Mutual NDA or a Bi-Directional NDA. In this type of NDA both parties, the disclosing party that wishes to maintain secrecy from the receiving party, and the receiving party that has received confidential information have an obligation to maintain confidentiality of any kind of information exchanged between them.
• Multilateral NDA’s: Multilateral NDAs are often signed when a third party is involved in the transaction or arrangement. Typically in a transaction it will involve one party disclosing confidential information to more than one party, and the other parties receiving the confidential information must also be bound by the agreement. A possibility exists that one of the parties receiving information may also disclose this to a third party that may not be under obligation to maintain the confidentiality, allowing the confidential information to reach a public domain. Therefore the Multilateral NDA covers all the parties to maintain the confidentiality vis-a-vis all the other parties involved in the agreement. In the business context, a Multilateral NDA is used where more than two companies are engaged in a joint venture and they want to exchange information amongst themselves.
Types of NDA’s are generally common world over and operate in similar fashion.
Legal Provisions Governing NDAs in India
The legal framework governing NDAs in India includes several key pieces of legislation, with the most relevant being the Indian Contract Act, 1872, the Information Technology Act, 2000, the Competition Act, 2002, and the Indian Penal Code, 1860 (the Penal Code).
The Indian Contract Act, 1872 (the Act) governs contracts in India. Under the Act, every agreement is a contract if it fulfills the following conditions: Without fulfilling these requirements, an agreement will fail the test of enforceability and result in a non-binding arrangement between parties. My friend Jie Yang reminds me that under Chinese Contract Law, there is much more of a bright line test, where if formulaic even a handshake is sufficient. RTWF? (Those who can decipher this will be scorned by all others.) Even if some of the strict requirements of the Act are not fulfilled, some agreements may still be enforced under Section 27 of the Act. Section 27 states, "every agreement, by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void". Under the Act, confidentiality/non-disclosure provisions are enforceable as long as they are defined with reasonable certainty. Further, there is no restriction to the duration of the confidential term.
The IT Act takes further steps to protect technological information by defining ‘computer resources’ to include amongst other things: software, operating systems, network of computers and data. The IT Act specifies that "computer data base" is a collection of data kept in a systematic manner and the expression "data" means a representation of information facts, concepts, or instructions in a manner suitable for processing by a computer. On this basis, the Delhi High Court in its judgement, Intel v Vedanta, held that "the concept of confidential information emerges from the nature of the relationship between the disclosing party and the recipient of such information. The right of the Disclosing Party to such information flows from the fact of special relationship between the parties, vis-à-vis the business activity they pursue". The judgement also held that the definition of ‘computer resource’ under Section 43 of the IT Act is not exhaustive as it includes all data, computer systems, software, data bases, network or communications links or resources. These provisions refer to the imposition of a monetary penalty in case a resource or computer system is damaged or if the information is disclosed. Thus, in case of disclosure of information, the person in default is liable to pay the owner one to three times the amount of the actual loss caused. Further, the person in default must compensate the person affected by the violation against each omission or commission in addition to the compensation determined under this sub-section.
Under the Competition Act, any unauthorized use of information exchanged between companies that have agreed not to directly compete with each other is prohibited. The Competition Act also makes it unlawful for companies to engaging in anti-competitive behavior, and imposes a duty to not unreasonably disclose ‘secret’ scientific or commercial information that creates a risk of harm to the party entitled to confidentiality. Thus, although certain legislative and regulatory measures protect the confidentiality of trade secrets and information in India, translating these laws into practice is often a challenge, which again warrants a careful examination of the facts.
How to Draft an Effective NDA
Drafting a well-defined and enforceable Non-Disclosure Agreement is crucial to protecting confidential information in India’s business landscape. Below are the important steps needed to draft an effective NDA.
Identifying and defining the confidential aspects
It is essential to specifically define the subject matter of an NDA and be restricted to those aspects. The confidentiality obligations shall state the extent of information that a party is restrained from disclosing and actively protect such information in all circumstances.
Outlining the obligations
The NDA must specifically enumerate the obligations of both the parties to the agreement. The obligations include but are not reduced to the following: a) keeping the information confidential b) ensuring that any information is not disclosed to a third person or third parties not privy to the NDA c) ensuring that all communication and information is only carried out and made to the concerned and the specified party, d) taking all commercially reasonable measures to safeguard any such information.
Outlining the exceptions
The NDA must also outline the exception under which the confidential information would be disclosed . Usually, a disclosure of confidential information is permissible in the following circumstances:
(a) Disclosure of such information is mandated by court proceedings.
(b) Disclosure of such information is ordered by a statutory authority, an arbitration tribunal or a quasi-judicial authority.
(c) Disclosure of such information is required for obtaining a legal opinion.
(d) Disclosure of such information is required for responding to any bona fide query raised by the regulators.
Limiting the time period
The NDA should specify a time period, which determines the life span of the agreement during which the information shall remain confidential. The NDA will continue to subsist even after the termination of the agreement until the information ceases to be confidential, or a mandatory Court order is passed.
Concluding the NDA
The NDA must contain the concluding provisions which must show that parties enter into the agreement freely and without any coercion or force, and is willing to abide by the terms of the agreement. The concluding provisions will also include the governing law, which must also provide the applicable remedies available upon a breach of either parties’ obligations arising from the NDA.
Common Pitfalls in NDA Agreements
In India, a non disclosure agreement may fall prey to the limitation of getting prepared in haste or by over burdened legal teams. The common snares are as follows:
• Vague language: NDA language is often poorly crafted, leading to an agreement that could cover just about anything. Many contracts are too long to read. This means less time for the courts to decide a case should there be a dispute.
• Overly broad definitions: As mentioned above, businesses need to do more than simply use the same category of what they are trying to protect as a guide to defining confidential information. For example, a big mistake is not categorizing the specific types of information that are sensitive to your business.
• Failure to designate which parties to the agreement have access to confidential information: As mentioned above, the scope of the permitted parties needs to be spelt out clearly, as stated in the NDA, or it may mean nothing at all.
• Not defining exactly what constitutes protected information: Need to define what is considered as protected information and what isn’t. Is video surveillance considered confidential? If a certain piece of information is covered in the licensee’s product brochure, is it still confidential? This is where trade secret law comes into play.
• Not having the NDA reviewed by a lawyer: As noted above, non disclosure agreements are enforceable under Indian laws, but leave it to the Indian lawyers to draft.
Enforcement of Breach of NDA and Remedies
In the event of a breach of the NDA, a party may file an injunction suit against the NDA violating party to obtain an injunction with respect to certain activities. In the first instance, the court may grant an interim injunction restraining the NDA violating party pending the adjudication of the case. The applicant in an interim injunction application needs to establish a prima facie case in favour of the applicant and that an irreparable injury could be caused to the applicant in the absence of an interim order; and balance of convenience must favour the applicant. In the event that the plaintiff succeeds in obtaining an interim injunction, the court usually directs one of the parties to a suit to deposit security for damages caused. The damages are usually assessed by the court at the time of passing of the final order and such damages are either granted on the basis of loss to the plaintiff or on the basis of loss to the defendant injuncted. The damages are determined at the discretion of the court and the plaintiff is required to make out a case for the award of damages. In cases where the confidentiality clause in a contract does not provide for liquidated damages for breach, the plaintiff may seek liquidated damages to avoid the difficulty in proving actual damages. The award of punitive or exemplary damages is at the discretion of the court and is dependent on the facts of each case and the determination of liability. The court does require the plaintiff to prove any pecuniary loss suffered as a result of the infringement before awarding damages. In cases where the plaintiff seeks damages or profits derived by the defendant from the breach of contract, the plaintiff would be required to allege and prove quantum of damages and ensure that all damages consequential to the breach are included and proven.
When and Why Should You Execute an NDA
In India, non-disclosure agreements (NDAs), also known as confidentiality agreements, are ideally employed when it is vital to safeguard sensitive information shared between two or more parties. There are several scenarios in which an NDA is a useful tool for legal protection.
NDAs are particularly important in the context of pre-contractual negotiations. When parties are engaging in discussions with the potential of leading to a business relationship, they frequently need to share proprietary information with each other in order to evaluate the proposed relationship. NDAs are commonly used by both parties to protect this sensitive information before any formal agreements are signed.
They are equally important in the context of employment agreements in India. Employers looking to recruit people for more senior positions in their companies will often expect that successful candidates will sign an NDA before commencing work. The importance of this practice in the Indian context should not be overlooked. An employee in India is legally subject to a duty of confidentiality and this applies both during the course of employment and afterwards. However, in practice, an employee may be tempted to share or utilise confidential information for their own gain. In order to ensure an employee does not take advantage of their general obligation of confidentiality, employers may choose to ask employees to sign an NDA agreeing not to disclose any confidential information during and after their employment.
Another common context for NDAs can arise following a party’s acquisition of another business. During the integration period between the two businesses , it is unusual for the buyer to want to fundamentally change the mindset or objectives of the company that is being acquired. This is usually a required period of adjustment that requires certain stability to work towards the agreed goals, and in this context the buyer must ensure the acquired business does not breach confidentiality agreements with third parties. The buyer may also want their own staff to be bound by confidentiality obligations. In this situation, NDAs may be used by the parties in order to maintain confidentiality within the buyer’s company while also ensuring the acquired business continues to treat its confidential information with the necessary care.
When it comes to exit strategies, NDAs are extremely useful. If a business has reached the point where it has achieved all the objectives of a private or public company and chooses to initiate its removal from public trading or from the private company register, there is still a need to protect the business’ remaining confidential information. At this point, NDAs can be used to regulate outgoing personnel and members of the business so that they cannot continue to exploit any remaining confidential information that was pertinent to the business.
In conclusion, NDAs can be useful to protect a business when there are either relationships that involve confidentiality such as partnership agreements or shareholder agreements. They can also be useful for protecting confidential information relating to employment, acquisitions and exits.
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