What Is The Difference Between A Confidentiality Agreement And An NDA? Everything You Need To Know
Buying or selling an online business can be a complex process and it is important to have the right legal documentation in place so that the interests of both parties are protected.
One of the must-have legal documents that you will come across when buying or selling an online business is a non-disclosure agreement (NDA) (also known as a confidentiality agreement).
This article explains:
- what an NDA is;
- the difference between an NDA and a confidentiality agreement;
- the difference between a unilateral NDA and mutual NDA;
- what confidential information is;
- what key terms are often found in an NDA; and
- what happens when an NDA is breached and how an NDA protects buyers and sellers.
By the end of this article, you will have a good understanding of what NDAs are and how they work.
What Is An NDA (Or Confidentiality Agreement)?
An NDA or confidentiality agreement is a legal document that is used when two or more parties wish to share ‘confidential information’ with one another.
A properly drafted NDA or confidentiality agreement will:
- protect the confidential information of the person or entity disclosing the information;
- prevent the recipient from disclosing the confidential information to third parties or using the confidential information for any purpose other than what has been set out in the agreement; and
- set out details of the legal consequences for a party who breaches the agreement and any remedies available to the affected party.
While it is possible to source a template NDA online and draft it yourself, there are risks to this approach. It is often best to leave the drafting to an experienced lawyer who can help prepare the NDA and understand how it works.
What Is The Difference Between An NDA And A Confidentiality Agreement?
The terms ‘NDA’ and ‘confidentiality agreement’ are often used interchangeably.
However, from a practical perspective, there is no real difference between the two (except for the title).
An NDA or confidentiality agreement both serve the same purpose – to protect confidential information being shared between two or more parties from unauthorized use or disclosure.
From a legal standpoint, you can give a contract or agreement any name or title that you like but what really matters is the substance (as opposed to the form or title) of the document.
What this means is that it is important to understand the legal effect of the terms contained within the agreement and ensure they are sufficient to protect your interests.
Now that we have got that out of the way, we are going to use the term ‘NDA’ going forward when referring to non-disclosure agreements and confidentiality agreements in this article.
What Is The Difference Between A Unilateral NDA And A Mutual NDA?
A unilateral NDA or ‘one-way’ NDA, is a legal agreement that is used when one party is disclosing confidential information to another party but the receiving party is not sharing any of their own information.
Unilateral NDA’s are often used by:
- Vendors when providing confidential information to prospective buyers as part of a business sale process.
- Business owners when hiring new employees that will have access to confidential information as part of performing their role.
- Start-up companies when looking to raise funds from investors or other third-party lenders.
On the other hand, a mutual NDA, or ‘two-way’ NDA, is used when both parties intend on sharing information with one another.
A mutual NDA may be used:
- As part of a joint venture arrangement where the parties are working together to achieve a common commercial interest.
- In a situation where an investor or partner may be interested in acquiring a minority interest in a company.
Make sure that you have the right type of NDA in place and that you understand how it works. Otherwise, you could inadvertently enter into an NDA that protects the other party’s information but doesn’t provide you with any protection at all.
What Is Confidential Information?
Confidential information can include any information that one party provides to another ‘in confidence’ that is not already publicly available.
Some common types of confidential information include:
- Sensitive business information:
- financial information;
- trade secrets; and
- intellectual property.
- Personal information:
- an individual’s name and contact details;
- financial information such as bank account details or credit card numbers;
- government-issued identifiers such as social security number or tax filing number; and
- sensitive information, such as health data or biometric information.
- Details of a start-up business, including information about a prototype or MVP for a new product or invention.
It is important to be aware that many of the types of information listed above are also protected by statute.
For example, the handling of personal information is usually protected by a country’s privacy and data protection laws and many countries also have their own laws that protect intellectual property rights.
When drafting an NDA, you can define the term ‘confidential information’ in any way you wish. Just be sure that any definition you adopt captures all of the types of confidential information you wish to protect.
What Are The Key Terms Of An NDA?
Every NDA is different but there are some common terms and clauses that you will find in almost every NDA.
We have summarized some of these key terms below.
Definition Of Confidential Information
Getting the definition of ‘confidential information’ right in an NDA is crucial.
Drafting your definition of confidential information too narrowly can be a problem as you may inadvertently exclude certain items that you would have otherwise wanted to be covered by the terms of NDA.
Conversely, drafting the definition too broadly (or not defining it at all) can also cause ambiguity. If there is a dispute, a court may consider a definition too broad to provide any certainty for the parties under the NDA.
In these circumstances, it will be left to the court to interpret the NDA how they see fit and this may result in a less than desirable outcome.
It is worth spending some time thinking about the types of information you would like to keep confidential and ensuring that there is a level of specificity in your definition to cover these items. You can then add in some broader items to cover items that you may not have thought about.
Term Of The NDA
The term or duration of the NDA provides the parties with certainty about how long their obligations under the NDA will last.
Since NDAs are private agreements, the parties are free to agree to any length of term they wish.
There is no standard ‘term’ for an NDA. Instead, the duration of the NDA will be dependent on the circumstances that gave rise to the need for an NDA to be put in place.
For example, if you are selling an online business and potential buyers have requested copies of the financial records of your business, it is in your best interests to ensure that this information is not disclosed to your competitors (or the public at large) during the sale process.
Usually, the confidentiality obligations under an NDA would fall away after completion of the sale but if a potential buyer decides not to proceed with the purchase of your business after they have received copies of your valuable business information, you would want to ensure the NDA remains on foot for a few years after the buyer walks away so that they are prohibited from sharing it.
It is possible for the term of an NDA to be indefinite but this is not common practice since it would be very difficult to monitor and enforce. This is because some countries have a ‘statute of limitations’ that impose time limits that can prevent a seller from bringing an action against another party for breaching the NDA.
An NDA should include details of the specific rights and obligations of the parties under the agreement.
For the party or parties receiving confidential information, their obligations will usually include:
- only use and disclose the confidential information for the purpose authorized under the NDA;
- keep the confidential information safe and secure;
- only disclose the confidential information to persons authorized under the NDA;
- notifying the owner of the confidential information of any breach of the terms of the NDA; and
- on request of the owner of the confidential information, return and/or destroy any confidential information in the recipient’s possession.
While the definition of confidential information can be defined broadly in an NDA, there are often certain types of information that cannot be considered ‘confidential’ and are excluded from the confidentiality obligations under the NDA.
Excluded items will usually include any information:
- already available in the public domain (that has not been disclosed by the recipient);
- already know to the recipient;
- obtained lawfully by the recipient or from a third party;
- expressly indicated by the disclosing party as not confidential; and
- independently developed the recipient (without reference to the confidential information received).
The governing law under an NDA can often be overlooked but it is a very important aspect of an NDA.
The NDA sets out the terms on which the parties must use and disclose the confidential information but the interpretation of these terms can vary depending on which country’s laws govern the terms of the contract.
The parties under the NDA must agree on which country’s laws will govern the terms under the agreement and this choice is expressed in the governing law clause.
What Are The Risks Of Not Having An NDA In Place When Buying Or Selling A Business?
You have probably realized by now that if you are buying or selling a business, it is crucial to have an NDA in place.
But you may still be wondering what are the risks of not having an NDA in place? Here are some of the key risks associated with not having an NDA in place:
- You run the risk of any information you provide to a potential buyer during the sale process (including the fact that you are in the process of selling your business), being disclosed to your competitors, customers, suppliers, and everyone in between, without any legal recourse against the person who leaked it.
- If any details of your intellectual property (i.e. designs, patents, inventions) are made public before you have applied for registration, your competitors may take your intellectual property and pass it off as their own. This would obviously have a huge impact on your future prospects and ultimately, the value and sustainability of your business. While it would be possible to initiate legal proceedings in this instance, the time, effort, and costs involved will be significant.
- Even if you are not the one disclosing the information, if there is no NDA in place, the seller is likely to be reluctant in sharing their information with you. As a buyer, this is not ideal as you will be trying to conduct your due diligence and ascertain the true value of the business you are trying to buy with limited or incomplete information. This puts you at risk of making a poor investment decision.
- As a buyer, if you refuse to sign an NDA, you are making it very difficult for the seller to trust you. This could potentially put the whole sale in jeopardy as the seller may not feel as though you are someone that they wish to deal with.
What Happens If A Party Breaches An NDA And How Is The Affected Party Protected?
An NDA should include provisions that set out details of the dispute resolution process in circumstances where there is a breach of the terms of the NDA.
From the discloser’s perspective, the NDA should include the ability to obtain injunctive relief in the event that a recipient breaches their confidentiality obligations. An injunction is an order from a court that prevents the recipient from breaching or continuing to breach, its obligations under the NDA. For example, the court may order the return or destruction of any confidential information in the recipient’s possession to prevent a breach.
Damages are another remedy that may be available to an affected party under an NDA as a result of a breach. Usually, damages are awarded in the form of monetary compensation calculated based on any loss that has been/may be incurred by the affected party.
Whether you are disclosing or receiving confidential information under an NDA, make sure you understand what your obligations are before you sign. If you don’t, you may be on the hook for compensating the other party in the event of a breach.
If you are selling an online business, it is crucial that you have any potential buyers enter into an NDA to ensure they understand their obligations relating to the use and disclosure of any information that you provide to them.
There are loads of free template NDAs available online today and it can be tempting to prepare your own NDA to save money on lawyers fees.
While you can do it yourself, it can be tricky to get the wording of an NDA right, so it is often worthwhile engaging an experienced lawyer to help you draft the NDA.
Without a properly drafted NDA, you can expose yourself to the risk of your valuable information being misused or even entering into the public domain without any legal recourse.
The benefit of buying or selling your online business through a full-service broker like Empire Flippers is that our experienced lawyers will draft NDAs and other necessary legal documents for you, leaving you free to focus on the next exciting step of your entrepreneurial journey.
Give our business analysts a call if you’d like to learn more about how to buy a profitable business or sell your existing business for a life-changing exit.