Building a confidentiality clause

Most disputed terms WCC ranking: 

outside top 30

Most important terms WCC ranking: 

26

Most negotiated terms WCC ranking: 

13

Components of a Confidentiality Clause

building a confidentiality clause

Which type of confidentiality clauses are there?

There are two types of confidentiality clauses:

  • Only one of the Parties to the Agreement discloses Confidential Information (one-way confidentiality)
  • Both Parties to the Agreement discloses Confidential Information (mutual confidentiality)

What is the purpose of a confidentiality clause?

If certain information relating to your business ends up in the wrong hands, it can be devasting for your business. Therefore, to protect against situations where someone discloses confidential information a non-disclosure agreement (NDA) will be entered into or a confidentiality clause will be inserted in the Agreement governing the transaction concluded between the parties.

Confidentiality Agreement vs NDA vs Proprietary Information Agreement vs Secrecy Agreement

These agreements may have subtle differences, however, in practice, they all aim to achieve the same purpose – i.e. to prohibit the disclosure of information that can damage or negatively impact a business.

Which types of agreements typically contain confidentiality clauses?

Any agreement that may require one of the Parties to the agreement to disclose confidential information in order to enable the other Party to give effect to the agreement. For example:

  • Employment agreements;
  • Services agreements;
  • Distribution agreements;
  • Software development agreements; 
  • etc.

Main components

What is Confidential Information?

There are a couple of approaches when it comes to defining Confidential Information.

Suppose you need to get out of the blocks quickly. In that case, you can consider stipulating that all information exchanged between the Parties relating to the Purpose must be regarded as Confidential Information.

Another approach may be a more detailed and specific approach where you stipulate the type of information that will be regarded as confidential information. For example:

  • any information of the Disclosing Party relating to financial structure, accounting methods, cash flows, revenue forecast methodology, and market forecast methodology;
  • any information of the Disclosing Party relating to plans, designs, drawings, functional and technical requirements and specifications;
  • etc.

TIPS!

To avoid certain disputes in the future, remember to stipulate:

If information disclosed before the Signature Date will also be regarded as Confidential Information under the confidentiality clause;

If information of the Disclosing Party’s Affiliates must be treated as Confidential Information (also remember to make sure your definitions of “Affiliate” and “Control” aligns with the intention of the Parties); and

If information of any third parties disclosed by the Disclosing Party must be treated as Confidential Information.

The purpose of the disclosure

The purpose of the disclosure plays an important role when it comes to confidentiality clauses.

Generally, the purpose of the disclosure is linked to the extent to which the confidential information can be used by the Receiving Party. So, for example, the Confidential Information can only be used to the extent that it is required by the Receiving Party to give effect to the concluded Agreement. If the Receiving Party uses the Confidential Information for any other purpose, the Receiving Party will be in breach of the confidentiality clause.

TIP!

If you are acting for a Party that will be disclosing most of the Confidential Information, make sure to use narrow and specific wording. 

Other components

Labelling

If you will mainly be receiving Confidential Information, it will help if you require “labelling” of information. This will assist you in knowing which information must be handled with care.

TIP!

When you are the Party that will mainly be Disclosing Information you would likely want to follow a different approach. For example, you can stipulate that any information that the Receiving Party should reasonably have understood (because of legends or other markings, the circumstances of disclosure, or the nature of the information) to be confidential will be regarded as Confidential Information.

Permitted receivers / authorised recipients

A permitted receiver is usually a person who works for or assists the Receiving Party somehow. For example, the Receiving Party’s lawyers or accountants.

TIP!

If you are acting for the Disclosing Party, You want to impose various obligations on the Receiving Party regarding permitted receivers. For example, the Receiving Party must require the permitted assigns to sign confidentiality undertakings that are to the satisfaction of the Disclosing Party if the Receiving Party wants to make available the Confidential Information to a permitted receiver.

Excluded information

Information generally excluded from Confidential Information:

  • information known to the Receiving Party before disclosure by the Disclosing Party;
  • information that is or becomes publicly known, not as a result of a breach of this Agreement, by the Receiving Party;
  • information developed independently by the Receiving Party in circumstances that are not a breach of this Agreement; and
  • information which Receiving Party receives from a third party who can disclose the Confidential Information free of restriction and without obligation.

Handling of Confidential Information

If you are acting for the Party that will mainly be disclosing confidential information, it is important that you are clear on how Confidential Information must be handled.

As a start, you want to impose certain obligations on the Receiving Party, for example:

  • The Receiving Party must protect the Confidential Information by using the same standard of care to safeguard their confidential information; and
  • A Receiving Party must take reasonable steps to prevent any unauthorised disclosure of the Confidential Information.

 

Also, consider what needs to happen if the Receiving Party becomes aware that there has been unauthorised access to the Confidential Information. Generally, you would want to impose an obligation on the Receiving Party to report the unauthorised access as soon as possible and to assist in mitigating any adverse effects of the unauthorised access.

On the flip side, if you are acting for the party that will mainly be Receiving Confidential Information, you want to limit express obligations that may open you up to liability claims.

Ownership of Confidential Information

There may be situations where Confidential Information that is disclosed may be used by the Receiving Party in one of their processes.

Make sure to expressly state that no ownership relating to the Confidential Information will transfer to the Receiving Party.

If you are acting for the Party that will mainly be disclosing Confidential Information, and if the Receiving Party requires any rights to use the Confidential Information, stipulate that any rights granted in respect of the Confidential Information are only granted to the extent required to fulfil the purpose expressly stated in the confidentiality clause.

 

Warranties

A typical warranty you will see within a confidentiality clause is where the Disclosing Party warrants that they can disclose the Confidential Information. As a Receiving Party, you want this warranty. You do not want to get caught up in a situation where you receive confidential information from a Disclosing Party that they were not supposed to disclose.

As a Disclosing Party, you want to disclaim all representations and warranties relating to the Confidential Information. In other words, you do not want to make any warranties in respect of the accuracy, completeness and suitability of the Confidential Information as this may open you up to claims. 

 

Duration

Confidentiality clauses should survive termination of the Agreement. It will not hurt to stipulate this expressly.

Another aspect that needs to be addressed in your confidentiality is clause is how long will the confidentiality provisions be binding on the Receiving Party.

One approach is to provide that the confidentiality provisions will remain binding as long as the Confidential Information is retained. Another approach may be to provide a fixed period for which the confidentiality provisions will apply after termination of the Agreement.

A fixed period approach may favour the Receiving Party. However, if you will disclose any trade secrets, you should definitely look at providing that the confidentiality provisions will apply indefinitely, to the extent allowed by applicable law.

Remedies

Confidentiality clauses should survive termination of the Agreement. It will not hurt to stipulate this expressly.

Another aspect that needs to be addressed in your confidentiality is clause is how long will the confidentiality provisions be binding on the Receiving Party.

One approach is to provide that the confidentiality provisions will remain binding as long as the Confidential Information is retained. Another approach may be to provide a fixed period for which the confidentiality provisions will apply after termination of the Agreement.

A fixed period approach may favour the Receiving Party. However, if you will disclose any trade secrets, you should definitely look at providing that the confidentiality provisions will apply indefinitely, to the extent allowed by applicable law.

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