Confidentiality Agreements in commercial trading relationships

To protect this information, the party disclosing information (e.g. a seller in a transaction) will typically require the receiving party (e.g. the buyer in a transaction) to enter into an NDA, imposing certain obligations on the receiving party regarding the use of the disclosing party’s confidential information. There are three types of NDAs:

• A unilateral or ‘one-way’ agreement between two parties, where one party shares confidential information with the other.
• A bilateral, mutual, or two-way agreement between two parties, where both intend to share confidential information with the other.
• A multilateral agreement involves three or more parties, with at least one party sharing confidential information with the others.

This article sets out the main considerations and provisions related to NDAs in corporate transactions and commercial trading relationships. It also explains their limitations and offers practical advice on sharing confidential information.

Key elements of an NDA

• Parties involved:The disclosing party (e.g. a seller in a transaction) shares confidential information. The receiving party (e.g. a potential buyer) agrees not to disclose or misuse the information.
• Definition of confidential information: This clearly defines what constitutes confidential information, and it should not be drafted too widely. It typically includes financial information, customer lists, trade secrets, operations, etc.
• Obligations: Typically includes a requirement to maintain the confidentiality of disclosed information and restricts the receiving party’s use of confidential information for a permitted purpose (in a trading agreement, this could be share confidential pricing information with a counterparty to help them set competitive prices). Without such restrictions, a receiving party could gain a competitive advantage or commercial benefit even if the transaction or arrangement does not proceed.
• Duration: Specifies the duration of confidentiality (e.g. during negotiations, the term of the arrangement, and beyond). Some agreements have a perpetual confidentiality obligation, though confidential information will lose its value over time so it may make sense to provide for an end date.
• Permitted/mandatory disclosures: Identifies exceptions to the confidentiality obligations (e.g. disclosures required by law, to professional advisors, with prior written consent or where information is already in the public domain).
• Return or destruction of confidential information: This contains a right to require the receiving party to return/destroy any confidential information it holds if the transaction or arrangement aborts.
• Consequences of breach: Outlines remedies for a breach. Typically, a receiving party will ask for an indemnity for loss arising from the misuse or disclosure of confidential information, which a receiving party would typically resist arguing that the disclosing party’s remedy should lie in a breach of contract claim.

Limitations of NDAs

Disclosing confidential information under an NDA often outweighs the risks as it encourages acquisition discussions and negotiations. Key limitations of NDAs include:

• No guarantee: NDAs do not guarantee protection, especially if the receiving party does not intend to comply.
• Injunction limitations: Injunctions rely on detecting breaches in advance; once confidential information is public, it may be of little or no use as the information cannot be made a secret again. They can be slow to obtain and difficult to enforce internationally.
• Legal remedies: Damages or account of profits may be available, but they might not fully compensate for future value of the information.
• Difficulty in proving loss: It can be difficult to quantify the financial impact (i.e. the monetary damage) of the misuse of confidential information. Proving that a loss directly resulted from the breach of the NDA can be complex. Moreover, some losses, such as damage to reputation or loss of competitive advantage, are intangible and harder to prove in court.
• Recipient considerations: Even honest recipients might inadvertently consider disclosed information in their commercial plans.

Protecting confidential information

Given the above limitations, set out below are practical examples of how confidential information can be protection during a transaction:

• Withhold/delay the sharing of current or sensitive information (e.g. customer lists, pricing, formulas) until the disclosing party has confidence that a final agreement is close.
• If needed, aggregate data.
• Consider providing hard copies only.
• Use controlled data rooms with monitored access, and consider watermarking and limiting printing in virtual data rooms.
• Consider watermarking and limiting printing in virtual data rooms.

Comment

While it is impossible to completely eliminate the risk of unauthorised disclosure, it can be managed. NDAs are a key tool in managing such risk. It is important that they are drafted clearly and for enforceability, in order to protect valuable information.

Contact our Corporate & Commercial team if you would like help with confidentiality agreements in commercial trading relationships.