This article on ‘CONFIDENTIALITY DISCLOSURE AGREEMENT AND ITS REQUIREMENTS’ is written by an intern at Legal Upanishad.
The article will be covering Confidentiality Disclosure Agreements, their purpose, limitations, types, elements, mainly focusing on the need for a CDA followed by conclusion and suggestions.
In businesses or small start-ups, there occur circumstances where a person is needed to disclose some business-related valuable and confidential information to the third party or a company. While they disclose such information, it is required by the business to maintain the secrecy of the information shared so that the intellectual property and uniqueness of the business is protected. Hence, Confidentiality Disclosure Agreement (CDA) comes into play to ensure that such a third party maintains the confidentiality of the information shared.
WHAT ARE CONFIDENTIALITY DISCLOSURE AGREEMENTS?
Confidentiality Disclosure Agreement, popularly known as Non-Disclosure Agreement or Secrecy Agreement, governed by the Indian Contract Act,1872 is a legally enforceable contract that formulates a confidential relationship between the person sharing secret information and the person to whom the information is shared. CDA restricts the other or both parties from sharing confidential information outside the agreement. For example, an employment contract between the IT company and IT developer.
Scope of maintaining confidential obligation:
Through CDA, the person receiving the information is obliged to keep such confidential information confidential which means that the receiver is bound to restrict the outsider to have access to it. Also, the receiver is restricted from using the information for its own benefit.
Exclusions from maintaining confidential obligation:
However, there is some exclusion where the receiver is excluded to maintain the confidential obligation of some information. The exclusion is of such information which is already present with a receiver, which is already public, which the receiver has developed independently of the confidential information and which is disclosed to the receiver by an outsider.
What is included in a CDA?
A confidentiality disclosure agreement comprises of:
- The parties to the agreement involved in CDA by mentioning their names and address;
- Definitions which includes a brief layout of information covered in CDA;
- Obligations of parties which mentions the obligation limit of contracting parties and what will happen in case of its breach;
- The time limit for protection of information under CDA;
- Returning of information as a confirmation that after expiration of time limit, the information has been duly returned or else destroyed by the contracting parties;
- In case of breach of CDA by any contracting parties, possible legal actions which can be invoked.
PURPOSE AND BENEFITS OF CDA
Purpose of CDA:
The main purpose of a CDA is twofold which is confidentiality as well as protection of the information. A CDA creates a legal obligation over the receiver to protect the ideas as well as information from being shared and misused by any third party outside the agreement and competitors. However, there exist some main functions of a CDA which are:
To identify secured information:
CDA helps to classify such information which is already secured and confidential and thereby asking parties to work within the limits of the agreement.
To protect sensitive and crucial information:
The parties signing CDA are bound under a legal obligation to maintain the secrecy of the sensitive information in any case. In case, if the information gets leaked or misused, legal action can be invoked against the receiver.
To protect the patent right:
If there occur prior public disclosure of a pending and secret invention to the public, it takes away the patent rights of the inventor. Therefore, CDA protects the patent rights of inventors over their inventions.
Benefits of entering into a CDA:
There are several benefits of entering into a CDA such as
- Being a legal contract, legal actions can be brought against parties entering into the agreement in case of any breach of any term.
- Protects the intellectual property and uniqueness of the organization.
- Removes the chances of getting disclosure of confidential information externally.
TYPES OF CDA’s
In a broad manner, there are three kinds of CDA’s which are:
Unilateral or Non-Mutual CDA:
In this type of agreement, two parties are involved and only one party discloses the confidential information to another party while the other party is bound to maintain the confidentiality of the information and prevent it from further disclosure. For example, while signing an employment contract, an employee is exposed to confidential information such as about the company or the data he receives as his employment part.
Bilateral or Mutual CDA:
In this type of agreement, both the parties are equally involved where information is disclosed from both sides and both the parties are obliged to maintain the confidentiality of the information from external disclosure. For example, two companies collaborating or merging together, the internal information about both the companies is disclosed.
In this type of agreement, more than three parties are involved where only one party disclosed the secret information while the others are obliged to maintain its confidentiality. For example: when a food franchise shares the recipe secrets of its special dish with other chefs working under the franchise.
WHAT IS THE NEED FOR A CONFIDENTIALITY DISCLOSURE AGREEMENT?
When a business requires investors, or new employees, or new partners or shareholders, at any of such time, the confidential information of business is shared with external individuals thereby increasing the chances of such information being misused without any security of releasing. CDA is a protection pocket to ensure that the organization maintains safety while moving ahead. There can be a certain situation that can trigger the requirement of a CDA such as:
Selling and licensing a Product and Technology:
When a particular organization seeks to sell or license any of its product or technology, it is required that any valuable and information whether technical or financial or regarding any other owned material shall not be disclosed completely with the third parties and if disclosed shall be protected through CDA.
An employee having confidential information with them:
The Employees of the organization have access to the organization’s confidential information while working. Therefore, it is required to ensure that the information is not leaked by any of the employees. CDA helps to ensure the same while employees are working or leaving the organization.
During negotiations between partners of the organization:
While making an offer or negotiating with the new partners, there comes a certain situation where much of the valuable information of the organization gets disclosed in front of the new partners like financial or personal information which is needed to be protected. CDA is made to protect the same.
When an organization is merged with or is acquired by some other organization, every detail about the merging company is disclosed in front of the ruling company including confidential information such as financial or operational information. While the M&A process, such information is also disclosed with brokers and intermediaries which are required to get protected. CDA is helpful to retain the same.
While starting a fresh project:
While expanding a business or starting a fresh project there can be involvement of business shareholders. NDA bounds the claims and ambiguity from happening between the shareholders.
WHETHER CDA’S ARE ENFORCEABLE IN INDIA?
Confidentiality Disclosure Agreements are enforceable in India. However, the registration of the CDA is not mandatory like other similar agreements under Registration Act, 1908. It contributes to the credibility of the agreement and thus makes it legally enforceable within national boundaries
CONCLUSION & SUGGESTIONS
As we have discussed various aspects of Confidentiality Disclosure Agreements, it can be thus observed that the time limit for the validity of CDA is for a specific period of time and not forever. Also, there exists a faded account of the law towards the reasonable restrictions which are to be imposed upon the parties after the termination of CDA. In today’s time period where trade secrets of business which comes under confidential information need unlimited protection shall be settled by the law. Further, it is concluded that CDA is a great tool for businesses to retain their speciality and uniqueness alive in today’s competition.
- Confidentiality Disclosure Agreements (CDAs)/NDAs. https://www.osp.pitt.edu/osp-teams/clinical-corporate-contract-services/negotiations/confidential-disclosure-agreements-cdasndas.
- Scope of Confidentiality Sample Clauses. Law Insider. https://www.lawinsider.com/clause/scope-of-confidential-information.
- Confidentiality and Non-Disclosure Agreement- Key things to keep in mind before disclosing confidential information. Arogya Legal. https://arogyalegal.com/2019/article/confidentiality-and-non-disclosure-agreements-key-things-to-keep-in-mind-before-disclosing-confidential-information/.
- Overview of Confidentiality Agreements. IOWA State University. https://www.extension.iastate.edu/agdm/wholefarm/html/c5-80.html.
- Confidentiality Agreements. SEC.gov. https://www.sec.gov/Archives/edgar/data/.