5 reasons your business needs to ask for an NDA

As part of running a business you will often need to disclose sensitive confidential information to other people (such as investors, suppliers, partners and consultants). To protect this information as best you can, you should minimise the amount of confidential information you provide and ask the recipient to sign a non-disclosure agreement (NDA) before you disclose it.

What is an NDA?

An NDA is a legal agreement to prevent the misuse of confidential or sensitive information. If you are planning to disclose confidential information, requiring the recipient to sign an NDA means you can:

  • set out the purposes they can use the information for;

  • prevent them from disclosing the information to anyone else without your permission; and

  • require them to return or destroy the information at your request.

An NDA can be either one-way or mutual.

What’s the difference between a one-way NDA and a mutual NDA?

In a one-way NDA, the recipient of the information has most of the confidentiality obligations and will provide undertakings to you if you are giving them information.

In a mutual NDA, both parties have confidentiality obligations. You agree to keep any information the other person gives you confidential, and vice versa. This can be helpful to build trust as it shows that you are willing to give the same undertakings you are requiring from the recipient of the information.

I don’t want to take someone to court - is an NDA still useful? Although you may have heard that it is difficult and costly to enforce NDAs in court, which can be the case, an NDA is a powerful deterrent against misuse of your information in the first place. If you do suspect misuse, a formal letter asking the person to stop their actions will have more weight if you have a signed NDA in place, and the person may be more likely to stop without you needing to take court action.

Also, you never know what might happen in the future. If you do end up in court, a signed NDA can provide proof of your claim against someone who has misused your information. If you don’t have one, it can be harder to prove that you intended the information to be confidential.

There are other benefits of NDAs too! Read on for five reasons your business needs to ask for one.

  1. It discourages misuse of your confidential information

A signed NDA acts as a deterrent to discourage misuse of your confidential information by others. By signing a legal agreement before handing over information, you clearly notify the recipient that the information is confidential and can only be used in the ways you permit. You can set out the purposes that your confidential or sensitive information may be used for, and restrict the recipient from using the information in other ways (or disclosing it to other people). Having a signed NDA in place makes it difficult for the recipient to argue that they didn’t know the information was confidential, or that they thought they could use it for themselves.

  1. You can require destruction or return of materials A one way NDA or mutual NDA will typically require the recipient of confidential information to return or destroy the confidential information at your request, and you can ask for evidence that this has been done.

  2. You can establish trust

A signed NDA (particularly a mutual one) can help to establish a mutual bond of trust between you and the other party. Using a mutual NDA shows that you are thinking of the other party’s interests as well as your own, and that you are willing to give the same undertakings you are requiring from them. It may be easier to persuade someone to sign a mutual NDA, rather than a one way NDA.

  1. You can protect your intellectual property (IP), particularly patents, better It’s best to reveal as little information about your business ideas, inventions and other IP as possible. However, sometimes this cannot be avoided. If you disclose information about your invention/s without having an NDA in place, you could potentially lose the right to patent that invention later on. Other intangible assets, like customer and supplier lists, business plans, know-how, and financial records can also be protected by an NDA.

  2. It helps you to bring legal action Legal proceedings to enforce NDAs are relatively unusual, however, having an NDA in place puts you in a much better position if you do need to bring legal action. Without a signed NDA in place it will be much more difficult to bring legal action for misuse of information, and get compensation, as it will be harder to prove that you intended the information to remain confidential.

An NDA should be signed before you disclose any information, to avoid the recipient refusing to sign and/or difficulties with enforcement in court, however sometimes certain parties will refuse to sign one (such as some crowdfunding platforms). In those cases, you will need to make a commercial decision about whether and how much information you provide.

The content in this article is up-to-date at the date of publishing. The information provided is for information purposes only, and is not for the purpose of providing legal advice. ©Sparqa Limited 2021. All rights reserved.

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