As covered in a previous post (Can you keep a secret?) a key concern for a business is the need to protect its confidential information. So what happens when a company needs to share its confidential information with a third party? This was a question faced by one of my clients this week. My client was looking to engage an environmental consultant to carry out some environmental due diligence prior to a sale. My client was keen to ensure the fact that it had hired an environmental consultant remained confidential and so rang me to check what his options were. The most obvious solution to this problem is to enter into a confidentiality or ‘non-disclosure’ agreement (NDA).

What is an NDA?

In the simplest terms, an NDA is a contract between two parties where one party agrees to disclose confidential information to the other and the second party agrees that, in return for receiving the confidential information, it will keep that information confidential.  Under English law the Courts will enforce express contractual obligations of confidentiality imposed by one party on the other. Therefore an NDA should normally be enforceable.

As the saying goes, if it is as simple as that, anyone could do it! A recent case [1] demonstrates the importance of clear and careful drafting of NDAs. In this instance, the drafting of the parties’ obligations under the NDA was ambiguous and as a result, the disclosing party had to resort to obtaining a Court ruling on whether the information it had disclosed was protected by the NDA.

So what should a good NDA cover?

The most important provision of an NDA is the definition of what is meant by confidential information. It should be clearly drafted and wide enough to cover all the information being disclosed.

Secondly, the parties need to consider to whom the information can be disclosed. Ideally, this should be as narrow a group of people as possible. It stands to reason that the more people who know a secret the more chances there are that the secret will be leaked. The NDA should therefore contain detailed provisions setting out to whom the information can be disclosed and what can be done with the information once it is received. As the above example shows, a failure to clearly set out each party’s obligations under the NDA has the potential to fatally undermine the effectiveness of the NDA.

What happens if an NDA is breached? 

Unfortunately, a breach of an NDA can have serious consequences for the disclosing party. Because an NDA is a contractual agreement the injured party has the right to seek damages. However, damages may well be an inadequate remedy. The first concern on a breach of an NDA must be to prevent any further disclosure of the confidential information.  An injunction against the recipient preventing it from disclosing confidential information will be the most attractive remedy to a disclosing party under an NDA. Alternatively, the disclosing party may seek a Court order for specific performance against the recipient requiring it to take certain positive steps to prevent any further disclosure of the confidential information. Injunctions and specific performance are both equitable remedies and as such it is for the Courts to decide whether such remedies should be granted. It is good practice to include a provision in the NDA stating that damages will not be an adequate remedy and that an injunction or other equitable remedy will be available for breach of the NDA. Such a clause is, however, only persuasive and will not bind the Court.

Is an NDA the only option?

A specific NDA may be the preferred option but it is not always the only one. Often contracts between parties contain confidentiality clauses which will be sufficient. In the case of my client, as it will be engaging a professional consultant to carry out the environmental audit, it is likely that the consultant will be bound by confidentiality obligations contained in his engagement letter and so in this instance, an NDA may well be unnecessary.

This blog post was edited by Victoria Elliott. For more information, email blogs@gateleyplc.com.

[1] Dorchester Product Management Limited v BNP Paribas Real Estate Advisory & Property Management UK Limited ([2013] EWCA Civ 176)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.