Most small business owners have at least heard of nondisclosure agreements (NDAs), and many have used one during the course of their business. In this age of prolific information sharing, an NDA is an important legal document that’s widely used across all industries.
Still, some business owners have a lingering question: Is a nondisclosure agreement legally binding? In short, the answer is usually yes. We explore some important details concerning NDA legality below.
Is an NDA legally binding?
As an accepted legal contract between parties, an NDA is legally binding if done properly and signed by the parties to it. However, the agreement must meet certain conditions. For example, you need foundational elements, such as
- Full legal names. Identify the parties who are agreeing to the terms of the contract. Without the names of involved parties, the NDA cannot specify who is beholden to its terms.
- Definition of Confidential Information. Define what information the parties signing the document should not disclose. Without defining the information that’s meant to be kept secret, the parties may not know what they can and cannot disclose. Likewise, the contract should state what the exceptions are, for example, most NDAs state that information that is publicly available as of the date of the contract is not “confidential information”. In addition, the omission of these definitions will make enforcing the contract at a later point difficult.
- Scope. Indicate how broad (or narrow) the scope of the NDA is regarding the parties’ obligation to keep the defined information confidential. For example, what purposes can the recipient of the information use it for, and who if anyone can they disclose it to without breaching the contract? Without a clear scope of obligation, the parties cannot know to what lengths they must go to keep the defined information secure.
- Date of signing. Include a date of signing to indicate at what point the parties agree not to share the defined information moving forward. Without a date of signing, it will be unclear how long the recipient of the information must protect (not disclose) it.
- Agreement term. Note how long the NDA is to remain in effect — i.e., how long the parties must refrain from disclosing the information to anyone other than those who are deemed acceptable in the contract. Without an agreement term, the parties cannot be sure how long they must uphold the terms of the NDA.
Andrew Legrand, attorney and founder of Spera Law Group, adds that the legality of NDAs shouldn’t be your only concern. Another question you should ask is whether the NDA is actually enforceable everywhere. For example, if you live in the United States and sign an NDA with a developer in China, it may be binding on the other party, but could you enforce its terms in court in China?
“But if the developer breaches the agreement, how do you go about enforcing your remedies? This is where working with a lawyer before drafting and signing your NDA can put you and your confidential information in a safer position,” Legrand advises.
Organizations should draft NDAs with this question in mind: How am I going to enforce the terms I include in this contract? “Sometimes, we know it’s impossible to enforce, but put one together anyway. At least you’re mentally and operationally prepared if the contract is breached. Knowing it’s impossible to enforce is better than thinking it’s possible when it actually isn’t,” Legrand explains.
In Legrand’s experience, enforceability is typically a bigger hurdle to business owners attempting to ensure the party signing the NDA abides by it. “But NDAs are relatively simple contracts, and absent a vice of consent under state law, they are typically legally binding.”