man signing a contract

What are the benefits of non-disclosure agreements (NDAs)?

The purpose of a contract is to add certainty to the commercial relationship between two parties; often it is the legal method of recording an understanding that already exists in the minds of the parties. If one of the parties commits a breach so serious that it undoes the purpose of that relationship (a repudiatory breach) then contract law serves to put the aggrieved party back into the position they would have been had the repudiatory breach not happened. So if you ask a company to install a telephone line at your property and they do not, you are entitled to a refund – you are back in the position you were in before you entered into the contract.

Time, as a concept (and as far as we can possibly understand and interact with it) is linear in nature. This means what has happened cannot be undone. Events of the past are locked in history for eternity and dates are fixed markers against which events are marked – for example, the Battle of Hastings shall always be in 1066. As a result of this, anything which was secret but is disclosed can no longer be a secret. There is no way of reverting back to a previous event and changing the outcome of it.

This means that, on the face of it, a non-disclosure agreement (NDA) serves little purpose. If the point of the contract is to reverse a wrong and there is no way you can (legally!) force people to forget information – the damage is done. However, NDA use is common place in business and there are real benefits to the proper and effective use of NDAs. Here’s why:

Elicit a party’s attention

“Please can you promise to keep my valuable information confidential?” This is the question you are asking when you ask someone to sign an NDA. If they refuse to sign, that might be a “no”. Do you really want to enter into a commercial relationship with that party?

In addition, where you are approaching others with confidential information they might expect to see an NDA – and if you don’t have one, they might see an opportunity to take advantage of an ill prepared business.

Damage limitation

This is a key point of a well drafted NDA – it will specifically stipulate that damages are not restricted to financial recompense. This means that, in a worse case scenario, you can apply to the courts to have the party who have breached the agreement to be legally gagged. This is in addition to financial payment of the damage caused by the breach (and your costs for sorting out the resulting issues).

The only solution

Except for a few exceptions (such a solicitor/client, doctor/patient) there is no automatically occurring duty of confidentiality under English law. This means that, even if you trust someone, the law will not “see that trust” and will punish you for failing to obtain a contractual obligation of confidentiality from that person. Given the low cost/high benefit of NDAs, there really is no excuse not to have a proper document to hand for when you need it.

Don’t try this at home

The IP team at Stephens Scown deal with NDAs on a day to day basis. We are sometimes asked to assist in matters where parties have either drafted their own NDA or got one from the internet (with little or no cost). In most cases these NDAs are entirely unenforceable and are worthless – occasionally, they are legally binding agreements, but rather than binding the parties to confidentiality, they are bound in different ways, often as a partnership.

Partners to a partnership are jointly and severally liable to the debts of the partnership. If you are anticipating entering into an NDA with someone and then find yourself liable for their debts, the question of whether that party is going to keep your secrets becomes a secondary issue.