Whether it’s new products, trade secrets or financial performance, information can be your most valuable business asset. It’s important to protect your business’s advantage over competitors and safeguard confidential information. One way this is done is with confidentiality agreements.
What Is a Confidentiality Agreement?
Sometimes also called a nondisclosure agreement or NDA, it’s a written contract between two parties, typically a business and a company or individual outside of the original business. Legally, it’s the best way to establish that sensitive or confidential information you’re sharing with a third party is not further shared with anyone else.
A confidentiality agreement is the best way to protect information from unauthorised use that could potentially harm your business. The same can be true if your business receives confidential information from others; you might be asked to sign an agreement to protect the other entity’s information. The contract should outline each party’s obligations and what happens if the agreement is violated.
Situations When a Confidentiality Agreement Is a Good Idea
In many industries and commercial sectors, confidentiality agreements are signed in a variety of situations and generally are put together when information about a company is going to be shared with an outsider or third party. Instances when this may happen include:
- During the sale of a business: Prior to disclosures and negotiations a confidentiality agreement should be signed between the prospective buyer and seller. This protects the seller and the business from the buyer potentially leaking confidential information to competitors should they end up not taking ownership. The wording of the confidentiality agreement should also address unauthorised use of disclosed information by the purchaser to compete with the vendor.
- Job interviews: When you’re interviewing a candidate who could potentially be hired at your company, a nondisclosure agreement may be signed between the two parties, legally binding the candidate from sharing confidential information discovered during the interview process.
- When receiving vendor services: If your company outsources data collection or server hosting for large amounts of data, a confidentiality agreement is usually signed to protect the integrity of the data being shared. NDAs might also be signed if you’re giving or receiving vendor services that necessitate outsider knowledge of sensitive business practices or data.
Why Are Confidentiality Agreements Put in Place?
A confidentiality agreement prevents a he-said/she-said situation and outlines relevant parties’ responsibilities in writing. It prevents sensitive or critical business information from ending up in the wrong hands, whether that’s customer data, financial information, leads on new products or trade secrets. It indicates that the company’s information is disclosed in trust and cannot be used for malicious purposes, or shared with third parties without the express written consent of the owner of the confidential information.
How Long is A Confidentiality Agreement Valid For?
The specific terms of the agreement will indicate the term of the contract. Some agreements are valid for a functional length of time.
- During the purchase or sale of a business, the agreement may be valid until the sale is complete and ownership has been transferred
- During a job interview or hiring process, the agreement may be valid until the person is hiredFor an employee who has left the company, the confidentiality agreement may last for a few months or years
What Should a Confidentiality Agreement Include?
At minimum, a confidentiality agreement should include the following terms:
- A comprehensive description of the confidential information being disclosed
- An obligation to keep this information confidential from third parties, including competitors, family members, or other business associates
- An obligation to use the information only for the purpose described
- Details on the limited circumstances when the individual may be obliged to disclose some information
- How long it will last
- What country’s laws apply to the agreement
Is the Confidentiality Agreement Legally Binding?
In New Zealand, they are legally enforceable, although the litigation process is often slow and costly. It can be difficult to prove that it was one particular entity who shared trade secrets or other confidential information with a third party. Furthermore, legal injunctions to prevent further disclosure are essentially useless if the information has already been shared with other parties. Businesses should seek legal advice to ensure their confidentiality agreements are tailored to fit their particular requirements.
When businesses construct specific confidentiality agreements, they can create content designed to protect assets and ensure that sensitive data remains secure.
If you would like to know more about selling your business, or preparing for maximum sales value you can learn more here: https://go.linkbusiness.co.nz/sellmybusiness/
