The NDA is usually drafted to impose a duty of confidentiality, allowing a party to reveal its confidential information to the other party for a limited period of time and only for a specific purpose, such as six months while the parties decide whether or not to enter into a particular commercial arrangement. Where both parties have confidential and proprietary information which is relevant to the purpose of the NDA, then the NDA is drafted to impose mutual obligations. If the parties ultimately do not agree to enter into the relationship examined, then the parties cease disclosing to each other confidential information and go their separate ways. When this happens, the recipient usually is obliged to return to the disclosing party any confidential information it received, or destroy it. Nonetheless, and though not usually recommended, some NDA’s allow the recipient to keep one copy for its records, so that it can use it as evidence in any dispute that may arise. In addition, the parties continue their undertakings to keep the information disclosed to them as confidential after termination of the NDA, sometimes for a limited period of time.
Broader Purpose and Scope of Confidentiality in Full Agreement
Once the parties decide that the initial examinations they conducted with respect to each other were successful enough to proceed with a commercial arrangement, they prepare a full agreement that addresses the parties’ respective rights and obligations. It is important that the agreement include confidentiality undertakings not unlike the ones in the NDA initially signed by the parties. However, since the parties are now entering into a long-term, intensive relationship, consideration should be given to the nature of the relationship and the kind of confidentiality and other related undertakings the parties should commit to toward each other.
What Happens to the NDA When the Full Agreement Gets Signed?
The express ‘purpose’ of the NDA ends when the parties enter into a comprehensive agreement. The comprehensive agreement usually includes a standard ‘miscellaneous’ provision stating that it constitutes the full understanding of the parties and no other agreements, whether verbal or oral, relating to the matters covered in the agreement are valid. Such a provision negates the validity of the NDA once the comprehensive agreement is signed. Nonetheless, the NDA should be expressly terminated, but the confidential information disclosed under it and before the parties sign the commercial agreement should be included under the confidentiality obligation in that agreement.
The definition of confidential information may also need to be revised and expanded in the comprehensive agreement from what was covered by the NDA. When the parties entered into the NDA they were considering each other’s experience, and technical capabilities and requirements in order to perform the tasks that would be part of the full relationship. Once the parties agree to bind themselves in a comprehensive commercial agreement, one party may disclose, or may have to disclose, to the other party other kinds of confidential information, such as its customer lists, financial data, or supplier lists. Therefore, the definition of what information is to be considered confidential in the comprehensive agreement should be examined to ensure that all the various kinds of information that are contemplated to be disclosed in the context of the agreement are given the appropriate weight and description.
Is the Existence of the Relationship Confidential?
Sometimes the parties to an NDA do not want their customers or competitors to know that they are considering a relationship with each other. This is particularly true when there is a concern by at least one of the sides that if the relationship does not work out, it could result in some harm. In such case, it is appropriate to include in the NDA an undertaking to keep the existence of the NDA and the purpose of that NDA confidential.
But once the parties enter into a comprehensive agreement, both parties ideally should be able to reveal the existence of the contract. If there is some overarching commercial or legal reason why the parties should not be able to unilaterally disclose the existence of the agreement or its purpose, then the parties should try to agree that such disclosure may be made with the mutual consent of the parties regarding the nature, text or content of the disclosure, which consent may not be unreasonably withheld.
Confidentiality Related Undertakings Post-Termination
When the parties reach a comprehensive agreement it is time to also consider how much they are investing in the relationship, such as in terms of time, expense, and the foregoing of other opportunities. They should also consider the potential damage they may incur if the relationship terminates, particularly if the termination is due to a breach or is earlier than originally prescribed in the agreement, even without ‘cause’. Some of the things to think about are whether a breach of the confidentiality obligation will result in irreparable harm. If so, then the parties may agree in advance on a sum of money as stipulated damages. While confidentiality undertakings are not frequently litigated, it is recommended to have the parties consent to obtaining injunctive relief in any court having jurisdiction, particularly if they have advance notice of a potential violation of the undertaking.
