The legal term “nondisclosure agreement” and the acronym NDA appear in the news far more often than any other type of contract — aside from sports news about the salary negotiations of star athletes. While it’s rare to read in the news about a lease or a purchase order linked to scandal, stories about unsavory employers, celebrities, and politicians using NDAs to silence whistleblowers have become a journalistic staple in recent years.
Though NDAs have become notorious as a way to legally cover up wrongdoing, the reality is that a nondisclosure agreement is a common, legitimate, and ethical tool for businesses to keep individuals from disclosing confidential information — such as client lists, sales strategies, or products in development — that would give competitors an unearned advantage.
While an NDA is a legally enforceable contract, it’s distinctly different from a typical contract. It’s important to understand these differences so that you can write an NDA that provides the confidentiality you need.
How an NDA differs from a typical contract
Hear the word “contract,” and the first thing that likely comes to mind is buying or selling something, whether a product or a service. Contracts like these are the legal underpinning of business, and while they can be impenetrably complicated for complex business deals, every contract of this sort — from a lease to a purchase order to a corporate merger — has four basic elements:
- The agreement between the party offering the good or service and the party that intends to purchase it
- The consideration, which most people refer to as the cost. Consideration is the thing of value, usually (but not always) money, that the parties will exchange for the provided good or service.
- Contractual capacity, which states that the parties signing the contract are legally capable of doing so. In practice, this means they are legal adults who understand the contract and the obligations it will entail.
- A lawful object, which means whatever the parties are contracting for is legal. Two parties cannot enter into a legally binding contract to do something illegal. While so-called “contract killings” are a staple in crime fiction, legally speaking, the term is an oxymoron.
Who are the parties to an NDA?
The parties to a typical contract are known in legal terms as the “offeror” and the “offeree.” Just as the terms imply, the offeror makes an offer for the offeree to either accept or reject. If a person visits an auto dealership seeking a new car, the dealership will likely offer them a specific car for a set price. In that circumstance, the dealership is the offeror, and the customer is the offeree.
An NDA is distinctly different from the usual contract because there’s no exchange of a product or service for money or anything else of value. The NDA is often a precondition to a subsequent contract in which there is an exchange — but not always.
The sole purpose of an NDA is to protect confidential information one party has from disclosure by a party with whom they must share the information. For this reason, the party with sensitive information to protect is called the disclosing party, and the party required to sign the NDA to get access to the information is known as the recipient or receiving party.
Two types of NDAs
Most of us learned early in life that the only sure way to keep a secret is to tell no one, but that’s often impractical in business. You simply can’t recruit talented employees — particularly at the executive level — without revealing the inner workings of your organization.
It’s not unusual in such recruiting situations for the company to require the candidates for the job to sign a non-mutual NDA, also known as a unilateral NDA. This is when one party is the disclosing party — in this case the business recruiting talent — and the candidates are the receiving parties. They are required to sign the NDA to advance in the recruiting process but without any assurance they will be hired.
It isn’t possible to properly negotiate a potential professional partnership or the merger of two businesses unless both parties reveal detailed information. These circumstances require a mutual NDA that binds both parties to confidentiality, regardless of the outcome of the negotiations.
Elements of an enforceable NDA
An effective and genuinely protective NDA requires considerable thought, but the process begins by determining who the parties involved are, and — more specifically — who will sign the agreement. It might be necessary to have several NDAs so that each member of a team negotiating a deal is restrained by its terms.
Carefully list all the information deemed confidential that the disclosing party will share with the receiving party. This task is more complicated still when writing a mutual NDA. Detail the scope of the agreement to clarify what’s confidential and what information is excluded from the NDA. For instance, the disclosing party might want to keep its current sales data confidential but have no qualms about the receiving party talking about sales from previous years.
Last, what is the term of the agreement? Make clear in the NDA how long the receiving party is bound by the confidentiality terms. Once you’ve determined all of this, use the JotForm NDA template to draw up a legally valid agreement.
While NDAs sometimes figure in salacious scandals, in reality, these are common legal instruments with a legitimate purpose in everyday business.