The confidentiality agreement creates the precondition for sharing certain information with an investor and being sure of its confidentiality.
Almost any serious discussion between founders and venture capitalist involves the exchange of business information that is not public and therefore not likely to be accessible to everyone. It is therefore in line with the founders’ legitimate need for protection to protect this information from unhindered access.
With the confidentiality agreement, the contracting parties commit themselves to such confidentiality. Find out more about how the confidentiality agreement works here.
What is a confidentiality agreement?
A confidentiality agreement is a contract that protects confidential information from publication or disclosure to unauthorised third parties by obliging one or both contracting parties to maintain silence about exchanged information, conversations or negotiation results.
In the event of a breach of the confidentiality obligation, the confidentiality agreement may provide for a contractual penalty.
There are a few different names for confidentiality agreements with roughly the same meaning. Alternative terms for the confidentiality agreement are, for example:
- Confidential Disclosure Agreement (CDA)
- Non Disclosure Agreement (NDA)
- Proprietary information agreement
- Secrecy agreement
Instead of the term “-agreement”, the terms “-declaration”, “-obligation” or “-contract” are sometimes used for the aforementioned terms, e.g. confidentiality declaration, confidentiality obligation or confidentiality contract. What is meant is usually the same thing, namely a contractual obligation to maintain confidentiality.
Areas of application
A non-disclosure agreement is regularly of high importance in connection with negotiations on the licensing of industrial property rights and the related exchange of (additional) know-how.
Before the actual contract negotiations, start and confidential information are exchanged, the contracting parties should agree on how to handle the sensitive information to be exchanged regularly.
In addition, confidentiality agreements are necessary for various constellations of cooperation and collaboration. In addition to the protection of secrets in the relationship between employer and employee, various forms of outsourcing, as well as customer-supplier relationships, should be mentioned.
Other areas of application of non-disclosure agreements concern mergers and acquisitions and equity investments.
Types of confidentiality agreements
Different types of confidentiality agreements can be distinguished, differentiated according to the respective area of application:
- Standard confidentiality agreements;
- Individual confidentiality agreements;
- Framework confidentiality agreements;
- Standard confidentiality agreements for special purposes;
- Confidentiality agreement for electronic access to databases;
- Confidentiality agreement for personal data;
- Multilateral confidentiality agreement;
- Confidentiality clauses in main contracts.
Main elements of a confidentiality agreement
Here are the essential elements of a confidentiality agreement:
- Contracting parties;
- The subject of the confidentiality agreement, i.e. as precise a description as possible of the reason for the exchange of information as well as a clear and comprehensive definition of the information to be kept secret;
- Duration and scope of the confidentiality obligation;
- Possible customer protection provisions;
- Possible non-competition and non-solicitation clause;
- Rights of use;
- Contractual penalty in case of breach of confidentiality obligations and other contractual obligations;
- Obligations to return and destroy information;
- Conditions for the disclosure of information to third parties.
Confidentiality agreements should contain as detailed provisions as possible to avoid disputes later on. It should be noted that the provisions should not be formulated too broadly. Otherwise, the limits to immorality or a breach of good faith can quickly be exceeded.
The following main points should be regulated in confidentiality agreements:
1. Definition of confidential information
For laypersons, it is often difficult to find a generally applicable definition for confidential information. Nevertheless, it can be useful to develop such a definition. Some contract negotiations can drag on for months.
In the meantime, more information may have to be disclosed than was originally intended. If a common definition of confidential information has been established in the confidentiality agreement, there is no need to draft new ones.
Example of a general definition: “Confidential is all information that is exchanged in writing between the contracting parties and has been marked as confidential.
2. Naming of confidential information
To avoid overly broad provisions, the most important confidential information should be named verbatim in the non-disclosure agreement. This way, in the event of a dispute, the original intention of the parties can always be referred back to.
Example: source codes, software, business plans, data carriers
It is also advisable to introduce a preamble to the contract in which the objectives of the cooperation are listed separately.
3. Designation of non-confidential information
To avoid the risk that the confidentiality agreement has been formulated too narrowly, thereby restricting a contracting party’s freedom of competition too much, it should always be expressly agreed, for the sake of clarification, which information is not to be treated as confidential.
Example: general knowledge, expert knowledge, the knowledge that has become known by chance.
4. The use of the confidential information
The agreement of confidentiality only makes sense if a detailed agreement is made that specifies the concrete use of the information. Among other things, it is agreed how the information is to be used and passed on to the employees of the contracting parties.
It can be explicitly regulated which employees may have access to the information. Often different levels of confidentiality are used.
Example: High confidentiality level – only the management may have access to the information, Medium confidentiality level – the entrusted assistants with the specific service may have access to the information, Low confidentiality – employees of the secretariat may have access to the information.
5. Duration of contract
There is no legal regulation for the contractual duration of a confidentiality agreement. If no contractual provision is made on the duration of the contract, the agreement must be interpreted.
In case of doubt, the parties will aim for an unlimited duration of the contract. In individual cases, however, this may also constitute a disadvantage to one party. It must therefore always be ensured that an appropriate contract duration is specified.
6. Contractual penalties
Powerful non-disclosure agreements are characterised by the promise of a contractual penalty in the event of a breach of the confidentiality obligation. The background to this is that causality and the amount of the damage are otherwise hardly verifiable for the party concerned.
7. Use of the findings if the contract is not concluded
Problems often arise when the hoped-for cooperation does not materialise after the contract negotiations. In practice, it can often be observed that the parties have already developed common ideas or solutions in the course of the contract negotiations.
In such a case, concrete contractual agreements are essential. In the confidentiality agreement, it can be regulated which of the contractual partners owns such ideas, concepts or solutions and who may further use them.
However, it can also be agreed that both parties have rights to the ideas developed and that both parties can use these ideas for their purposes.
Limitations and risks
A confidential agreement is there to secure the exchange of information between two parties. It only refers to disclosing existing information to each other without the risk of it becoming available to others.
However, such agreement (typically) does not contain any rules on what to do with new developments. A confidentiality agreement is therefore not sufficient for development collaborations.
Since the line between information exchange and the emergence of new ideas is often gradual, it is imperative that companies closely monitor how an exchange develops and conclude a cooperation agreement in good time.
In the development phase of products and processes, it is also important to bear in mind that it may even be rather disadvantageous to receive information from a counterparty that is active in a very similar field.
If the other side comes to the same conclusions as you, there may be a dispute as to whether one side has taken over the knowledge from the other (and would therefore not be entitled to patent it).
Confidential information is at risk of unwanted disclosure. In the age of the internet, confidential information can be made known to an audience of millions in a few simple steps. For this reason, confidentiality agreements are a useful basis for contract negotiations. Get legal advice to protect your confidential information in the best possible way.
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