What Is a Non-Disclosure Agreement (NDA)?

A non-disclosure agreement is a legally binding contract that establishes a confidential relationship. The party or parties signing the agreement agree that sensitive information they may obtain will not be made available to any others.

Non-disclosure agreements are common for businesses entering into negotiations with other businesses. They allow the parties to share sensitive information without fear that it will end up in the hands of competitors. In this case, it may be called a mutual non-disclosure agreement.

Key Takeaways

  • An NDA acknowledges a confidential relationship between two or more parties and protects the information they share from disclosure to outsiders.
  • The NDA is common before discussions between businesses about potential joint ventures.
  • Employees are often required to sign NDAs to protect an employer's confidential business information.

The Non-Mutual Agreement

Such agreements also are often required of new employees, if they may have access to sensitive information about the company. In such cases, the employee is the only party signing the agreement.

An NDA may also be referred to as a confidentiality agreement.

Understanding the NDA

The NDA serves a purpose in a variety of situations.

NDAs are generally required when two companies enter into discussions about doing business together but want to protect their own interests and the details of any potential deal. In this case, the language of the NDA forbids all involved from releasing information regarding any business processes or plans of the other party or parties.

Some companies also require that new employees sign an NDA If the employee has access to sensitive information about the company.

NDAs are also commonly used before discussions between a company seeking funding and potential investors. In such cases, the NDA is meant to prevent competitors from obtaining its trade secrets or business plans.

Keeping Plans Secret

In all of the above, the information that is being protected may include a marketing strategy and sales plan, potential customers, a manufacturing process, or proprietary software.

If an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages.

An NDA is a legally binding agreement. A violation can lead to legal penalties.

What to Include in an NDA

NDAs may be customized to any degree but there are six major elements that are considered essential:

  • The names of the parties to the agreement
  • A definition of what constitutes confidential information in this case
  • Any exclusions from confidentiality
  • A statement of the appropriate uses of the information to be revealed
  • The time periods involved
  • Miscellaneous provisions

Defining Miscellaneous

That last "miscellaneous" item might cover details such as the state law or laws that apply to the agreement and which party pays attorney fees in the case of a dispute.

Templates for non-disclosure agreements and samples of standard agreements are available from a number of legal websites.

The Disclosure Agreement

Increasingly, individuals are asked to sign the opposite of a non-disclosure agreement. For example, a doctor may require a patient to sign an agreement that the patient's medical details may be shared with an insurer.