Building a confidentiality clause

How to build a confidentiality clause

In this article, we have a look at some of the important aspects that must be kept in mind when drafting confidentiality clauses.

Most disputed terms WCC ranking: 

outside top 30

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26

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13

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.

Building blocks of a Confidentiality Clause

building a confidentiality clause

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.

Confidential Info of Affiliates & third-parties

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

  • disclosed before the Signature Date will also be regarded as Confidential Information under the confidentiality clause;
  • 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
  • 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 in confidentiality clauses.

Generally, the purpose of the disclosure is linked to the extent to which the Receiving Party can use the confidential information. 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.

If you are acting for a Party that will disclose most of the Confidential Information, make sure to use narrow and specific wording for the purpose!

Labelling

If you are mainly 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.

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.

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, you must be 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 act 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.

Example clauses

You will mainly be disclosing information

1.           CONFIDENTIAL INFORMATION

1.1         Confidential Information means:

(a)         all information disclosed between the Parties disclosed in connection with the Purpose.

disclosed in connection with the Purpose.

1.2         Disclosing party:  The Confidential Information of both Parties will be protected under this Agreement and both parties will therefore be regarded as a “Disclosing Party”.

1.3         Affiliate confidential information:  Confidential Information will include any Confidential Information of any Affiliate of the Receiving Party.

1.4         Third party confidential information:  Confidential Information will include any Confidential Information of any third party.

1.5         Labelling:  Labelling of Confidential Information is not required. 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.

1.6         Time of disclosure:  The Confidential Information will include Confidential Information disclosed before and after the Signature Date.

1.7         Excluded information:  The following information is not Confidential Information:

(a)         information known to the Receiving Party before disclosure by the Disclosing Party;

(b)         information that is or becomes publicly known, not as a result of a breach of this Agreement by the Receiving Party;

(c)         information developed independently by the Receiving Party in circumstances that are not a breach of this Agreement; and

(d)         information which Receiving Party receives from a third party who can disclose the Confidential Information free of restriction and without obligation.

1.8         Notification and disclosures required in terms of law:  If the Receiving Party is required to disclose Confidential Information to satisfy a court order or to comply with any applicable law the Receiving Party will notify the Disclosing Party in writing before such disclosure to enable the Disclosing Party to protect their interest; and

1.9         Obligations and disclosures required in terms of law:  If the Receiving Party is required to disclose Confidential Information to satisfy a court order or to comply with any applicable law the Receiving Party will only disclose the legally required portion of the information and use reasonable endeavours to protect the confidentiality of such information (the onus is on the Receiving Party to demonstrate that they have complied with this provision).

1.10      Handling of Confidential Information:  A Receiving Party must not disclose the Confidential Information to any third party without first obtaining written consent from the Disclosing Party.

1.11      Standard of care:  A Receiving Party must protect the Confidential Information of a Disclosing Party by using the same standard of care to safeguard their confidential information.

1.12      Steps required to protect Confidential Information:  A Receiving Party must take reasonable steps to prevent any unauthorised disclosure of the Confidential Information.

1.13      Unauthorised access:  A Receiving Party will immediately notify the Disclosing Party if the Receiving Party becomes aware of any loss or any unauthorised access to, or use or disclosure of, any Confidential Information in the control of the Receiving Party or their authorised recipient.

1.14      Cooperation:  The Receiving Party must cooperate with the Disclosing Party to investigate and mitigate any adverse effects of unauthorised access to, or use or disclosure of, any Confidential Information.

1.15      Rights of the Disclosing Party:  A Disclosing Party can at any time require:

(a)         the Receiving Party to return any Confidential Information;

(b)         the Receiving Party to expunge any Confidential Information from any device;

(c)         the Receiving Party to destroy any material relating to the Confidential Information;

(d)         the Receiving Party to cause the return or destruction of any Confidential Information which the Receiving Party disclosed to any third party; and/or

(e)         a written statement under oath that the Receiving Party has not retained any such Confidential Information and that no third party has retained any such Confidential Information.

1.16      Authorised Recipients:  A Receiving Party can disclose the Confidential Information to their representatives, employees, consultants, or professional advisors, if necessary and to the extent required to fulfil the Purpose.

1.17      Confidentiality undertakings:  If a Receiving Party intends to disclose the Confidential Information to their representatives or employees, such representatives or employees must sign a confidentiality undertaking that is to the satisfaction of the Disclosing Party.

1.18      Acknowledgment:  A Receiving Party acknowledges that unauthorised or unlawful use or disclosure of the Confidential Information can cause irreparable damage to the Disclosing Party.

1.19      Indemnity:  The Receiving Party indemnifies the Disclosing Party against any, and all loss suffered where the Receiving Party, or their representative or employee, discloses or uses the Confidential Information unlawfully or without the Disclosing Party’s consent.

1.20      Injunctive relief:  The Receiving Party acknowledges that monetary damages may not be a sufficient remedy for unauthorised or unlawful use or disclosure of the Confidential Information and a Disclosing Party can ask a court for injunctive relief without waiving any other rights or remedies.

1.21      No limitation:  Notwithstanding anything agreed to between the Parties, a claim for breach of the confidentiality provisions, or a claim under 1.19, will not be limited or excluded under any limitation of liability or exclusion of liability provision.

1.22      Ownership and rights:  The Disclosing Party will remain the owner of all rights relating to the Confidential Information. Where rights must be granted in respect of the Confidential Information, such rights are only granted to the extent required to fulfil the purpose in Purpose.

1.23      Termination and survival:  The confidentiality provisions in this Agreement will survive the termination of this Agreement.

1.24      Period:  The confidentiality provisions in this Agreement will bind the Receiving Party for an indefinite period.

1.25      Disclaimer:  The Disclosing Party disclaims all representations, warranties, or assurances for the Confidential Information, including for accuracy, performance, completeness, suitability, or third-party rights.

 

You will mainly be receiving information

1.           CONFIDENTIAL INFORMATION

1.1         Confidential Information means:

(a)         any information of the Disclosing Party relating to strategic objectives and planning for the existing and future needs;

(b)         any information of the Disclosing Party relating to technical, scientific, commercial, financial or market information, know-how, and trade secrets;

(c)         any information of the Disclosing Party relating to data concerning business and donor relationships; and

(d)         any information of the Disclosing Party relating to plans, designs, drawings, functional and technical requirements and specifications.

disclosed in connection with the Purpose.

1.2         Disclosing party:  The Confidential Information of both Parties will be protected under this Agreement and both parties will therefore be regarded as a “Disclosing Party”.

1.3         Labelling:  For Confidential Information to be considered confidential, the information must be marked as confidential or if disclosed orally, identified as confidential in writing within 7.

1.4         Time of disclosure:  Only Confidential Information disclosed after the Signature Date will be regarded as Confidential Information under this Agreement.

1.5         Excluded information:  The following information is not Confidential Information:

(a)         information known to the Receiving Party before disclosure by the Disclosing Party;

(b)         information that is or becomes publicly known, not as a result of a breach of this Agreement by the Receiving Party;

(c)         information developed independently by the Receiving Party in circumstances that are not a breach of this Agreement; and

(d)         information which Receiving Party receives from a third party who can disclose the Confidential Information free of restriction and without obligation.

1.6         Handling of Confidential Information:  A Receiving Party must not disclose the Confidential Information to any third party without first obtaining written consent from the Disclosing Party.

1.7         Rights of the Disclosing Party:  A Disclosing Party can at any time require:

(a)         the Receiving Party to return any Confidential Information;

(b)         the Receiving Party to expunge any Confidential Information from any device;

(c)         the Receiving Party to destroy any material relating to the Confidential Information;

(d)         the Receiving Party to cause the return or destruction of any Confidential Information which the Receiving Party disclosed to any third party; and/or

(e)         a written statement under oath that the Receiving Party has not retained any such Confidential Information and that no third party has retained any such Confidential Information.

1.8         Authorised Recipients:  A Receiving Party can disclose the Confidential Information to their representatives, employees, consultants, or professional advisors, if necessary and to the extent required to fulfil the Purpose.

1.9         Period:  The confidentiality provisions in this Agreement will bind the Receiving Party for 1 years after the Agreement ends.

1.10      Warranties:  The Disclosing Party warrants that they have the right to disclose the Confidential Information to the Receiving Party.

1.11      No further warranties:  The Disclosing Party makes no other express, implied, or statutory warranties in respect of the Confidential Information.

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The Author

Martin Kotze is a commercial lawyer with over 10 years of experience. He specialises in transactional work within the Tech, Financial Services and Property industries. 

He is also one of the co-founders at DocNinja and regularly advises listed companies to small and medium enterprises on how to contract better with their customers. 

Martin Kotze

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