Running a business and remaining competitive on the market, requires tight security on a lot of important data. Unfortunately, not every market player is honest enough for you to feel secure without any additional safeguards. Therefore, it has become standard practice to sign non-disclosure agreements when signing contracts. In my article I will show you what exactly a non-disclosure agreement is, describe how it should be structured and also answer the question what can happen if you do not sign such an agreement.
Non-disclosure agreement – what is it
Non-disclosure agreements are probably familiar to everyone running their own business, whether as a freelancer or a manager of a large team of people. It is common practice to sign such agreements prior to the actual cooperation or negotiations that precede it. It is at the initial stage of any collaboration that the parties most often share sensitive information that may constitute company secrets.
This article is part of a series on the Implementation Agreement. Below you will find links to the other entries. If an article is not yet linked, it means that a blog post about it will appear in the near future.
Non-Disclosure Agreement (NDA) – a template NDA
A non-disclosure agreement has become so commonplace that it is often signed even when no confidential information is shared. Nonethrless, I feel that this makes the parties feel more secure. However, without getting into the merits of signing such an agreement in every possible situation (because a separate article could be written about that), it is worth knowing what a non-disclosure agreement or a confidentiality clause included in the content of a given agreement, e.g. an implementation agreement, actually consists of.
What elements should an NDA (non-disclosure agreement) contain?
In general, each non-disclosure agreement answers five questions:
- who?
- over what period of time?
- to what extent?
- under threat of what sanction?
- will be required to maintain confidentiality.
Elements of an NDA Agreement:
1. Who?
Answering the first question is quite simple. Non-disclosure agreements can be either unilateral or bilateral. In the case of a unilateral agreement only one of the parties, i.e. the party receiving the confidential information, will be bound to confidentiality. This can happen on any software project, where it is usually the ordering party that provides the contractor with confidential information about its business. Rather unsurprisingly, in the case of a bilateral non-disclosure agreement both parties will be obligated to maintain confidentiality. This is because both parties will be receiving confidential information and disclosing such information at the same time.
2. Over what period of time?
Non-disclosure agreements are most often fixed-term contracts. They are concluded for the duration of a given project (contract) and for several years after its completion. You may come across different durations of these types of contracts in the market. The market standard does not exceed five years after the project or contract in question is completed.
3. To what extent?
Each non-disclosure agreement should specify the categories of information that are to be treated as confidential by the parties and for which appropriate security measures must be taken to maintain confidentiality. So, what is confidential information?
Confidential information can be understood as:
- any category of data explicitly identified in the non-disclosure agreement,
- data as to which the disclosing party has taken appropriate steps in order to protect them against disclosure,
- data marked as confidential by a party during the course of cooperation (e.g., through a watermark on an electronic document or through information in an email message),
- data that may constitute a business secret.
Among all of the above, the definition of business secret is most transparent and unambiguous. Its precise definition can be found in Art. 11 of the Unfair Competition Act. According to it, a business secret is understood as technical, technological and organizational information of an enterprise, not disclosed to the public, or other information of economic value to the enterprise, with respect to which necessary steps have been taken to maintain confidentiality.
Importantly, all of these conditions must be met in order for a given piece of information to constitute a business secret. If the information is confidential to you but you have not taken appropriate steps to protect it, you will not be able to benefit from the protection of the Unfair Competition Act.
Non-disclosure agreements may define other information considered by the entrepreneur to be confidential and which is not explicitly a business secret. Each element can be of different economic value to every entrepreneur.
When defining confidential information, it is also useful to indicate for what purpose the information may be used by the other party. The most common and simplest solution is to link the possibility of insider trading to another major legal relationship that connects the parties, e.g., to the execution of an IT project.
4. Sanctions
In confidentiality agreements, sanctions always cause the greatest controversy. I am sure you have experienced situations where the other party has offered very high liquidated damages for each breach of confidentiality.
By default, either party may seek damages under the general rules of the Civil Code. This means that if a party discloses confidential information, the other party will have to demonstrate damages and evaluate the amount of damages in order to seek compensation. Demonstrating the amount of damages is often very difficult, so liquidated damages are a common solution. In such a case, the injured party will only be left to prove that confidential information was in fact disclosed. However, it will no longer have to prove the amount of damage, because it was predetermined by the contractual penalty. However, the Civil Code provides for a possibility to claim damages exceeding the amount of the stipulated contractual penalty. Such a possibility must be explicitly stated in the agreement.
The actual ability to prove infringement is a separate issue. I can tell you from experience that it is very difficult to prove in court that a non-disclosure agreement has been violated.
5. Exclusions
Non-disclosure agreements most often include a directory of information which the parties will not be required to treat as confidential. These most often include:
- publicly disclosed information,
- information known to the other party prior to disclosure,
- information that is required to be disclosed by law, court order or administrative decision.
6. Additional components
A non-disclosure agreement may also include elements other than those indicated above. Primarily, these elements may address issues of what to do with the confidential information after the termination of the agreement and how to protect the disclosed confidential information. In addition, the parties to the agreement may explicitly indicate to whom (e.g. legal counsels and employees) they may provide the disclosed confidential information without the consent of the other party
A lack of NDA vs. the Unfair Competition Act
What if no non-disclosure agreement has been concluded?
There may be times when you fail to conclude a non-disclosure agreement, whatever the reason. If so it happens, are you vulnerable? First of all, the Unfair Competition Act comes to rescue. According to the Act, disclosing, using or acquiring someone else’s information constituting a business secret constitutes an act of unfair competition. Among other things, if such is the case, you can claim damages. In addition, according to the Civil Code, if in the course of negotiations a party has made information available on trust, the other party shall be obliged not to disclose and not to communicate such information to other persons and not to use such information for their own purposes, unless otherwise agreed by the parties.