Confidentiality agreements

Without an agreement there is vulnerability

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Confidentiality agreements

The need to protect confidential information arises on many occasions. What is constant is making sure what needs protecting is protected. Without a contractual agreement there is total vulnerability as there is no law of confidentiality protection to rely upon.

We act for a range of businesses from a range of sectors at stages of development from trading on intellectual property through to sale or acquisition of a business. Our work fits into different types of commercial agreements such as employment contracts, joint ventures and business sale and purchase agreements.

Risks in practice a confidentiality agreement can plug

Information and know how is increasingly valuable in today’s world. Hence, the need to keep information and know how is a commercial necessity.  Misuse is relatively easy these days.

There are a wide range of situations where a confidentiality agreement will protect the business interests.  We have set out below a few of the most commonly arising situations where we find our clients do not always realise the risk points:

Business sales

Aspects of your know-how, pricing and other business secrets will have to be divulged to prospective buyers.  How do you know the buyer is not fishing and will misuse your information for its own purposes and not complete on the business sale?

  • Without a confidentiality agreement the seller is entirely at risk with no legal framework to rely upon.

Employment contracts

Your employees and directors have access to a host of confidential details ranging from databases, future business plans, threats, finance and intellectual property.  Employees and directors do have a common law duty of confidentiality but it is very limited.  For that reason employment contracts should enhance the common law duties to protect the business.

When dealing with directors they are likely to be a greater risk and hence more stringent restraints should be considered.

Intellectual Property

Intellectual property owned by a business can be wide ranging depending upon the business.  Intellectual property assets can include software or database rights, algorithms, formulas, designs and ideas – the list is endless.   When dealing with intellectual property it is often necessary to deal with assignment of rights to the owner as well as the obligations of confidentiality.

  • The wide use of consultants increases the risk as consultants do not owe the employer the limited common law duties of confidentiality that employees owe.  Consultants do not have the fiduciary duties owed by directors.  These problems can only be overcome by express contractual agreement – this is something we deal with for you.

Commercial agreements

The opportunity to misuse confidential information, hence the need to address what is confidential to that business, arises under a wide range of commercial agreements we deal with.  We see the difficulties come to light only when the commercial agreement is terminated when the party who has lost out realises the agreement either did not exist or was inadequate.

Based on our experience, the most problematic commercial agreements include (but by no means is limited to):

  • Agents or distributors – will almost certainly need to have access to your confidential information and will need to agree to protect it.
  • Franchise agreements  we see difficulties arising when the franchise agreement is terminated and secrets about the franchisor are taken by the franchisee to the next venture.
  • Joint venture agreements – the pooling of knowledge and resources under any joint venture puts both parties potentially at risk without express contractual agreement on who owns the information and what the parties to the joint venture can do with the information.
  • Agreements involving technology – patent ideas, formulas and algorithms used in many applications such as robotics, Apps and artificial intelligence products rely on sharing confidential information which should not be left unguarded. The need to protect confidential information extends to licences as users have access to confidential information which can be copied very quickly and sold on outside of the licence.
    • You may for example have a potential patent, but if you do not have a non-disclosure agreement in place before you start discussing it you risk not gaining a patent at all.
  • Framework agreements – the obligations created for the prime contractor are not passed down to contractors without agreement.  Many of the prime contractors we deal with are involved with large government projects where confidentiality is particularly important.

Making a confidentiality agreement work in practice

There are many considerations which apply to confidentiality agreements – a template won’t cover these points.

It is not unusual to negotiate the terms of a a confidentiality agreement.  As a disclosing party you may want to push hard for personal commitments rather than just corporate.  As the receiving party you might refuse to give a full indemnity or want to limit liability in some form.

  • We have the experience to solve issues for either parties disclosing confidential information or those receiving confidential information and being pushed into contractual commitments which may not suit.

Starting point for any confidentiality agreement

Knowing exactly what you need to protect and how to protect it can be tricky.

Setting out the scope of the agreement and knowing exactly what is to be covered and how the release will be policed is complex and needs to be tailored to the type of negotiations to which you entering. The agreement needs to set out both yours and the other party’s obligations in regards to the confidential information you are disclosing.

Confidential information can easily cease to be confidential information because the non-disclosure agreement did not cover the particular means by which it was made public. If there is no such obligation in the agreement then the other party has not breached it.

Mechanics of disclosure and return of information

If you are the disclosing party i.e the person revealing the confidential information you need to ensure that any information disclosed and in the form in which it is disclosed ill be returned to you or destroyed upon your request without delay.

  • One solution is to require any recipient of confidential information to provide a warranty as to the destruction of information as in practice the disclosing party can never be certain.   With so much information in the cloud this can cause difficulties as it is not possible to delete information from the cloud especially if the platforms are shared.  An indemnity is often the only solution.

Third party access to confidential information

It is important to bear in mind always that once you disclose information, it may be seen by third parties, whether related parties or perhaps advisors.

  • One solution is to make provision in the confidentiality agreements that all potential recipients of information will be bound by the agreement.

Contractual rights

A common mistake is to believe that simply having standard agreement, signed by the appropriate counterparty, giving you contractual enforcement rights on breach, is sufficient protection.

Unfortunately, it is one thing having the right to sue and another demonstrating loss under strict contract law principles. Also, the damage may already have been done.

As a result, we always recommend looking at practical ways to reduce the risk that the confidentiality agreement will be breached in the first place.  We find that there are two main ways to do this, being :-

  1. Staged disclosure – you may be considering an important and potentially lucrative transaction in which it is imperative, to start the process and create trust and credibility in your product or service, to disclose some information. However, you may not need to disclose all the information. The less you disclose the better, and you may only need to disclose more information when the other party has given clear signs of commitment. You may be better off disclosing bit by bit at various stages which are linked to the other party moving to the next stage and showing commitment to you.
  2. Insist that people as well as organisations sign up to your confidentiality or non-disclosure agreement – often, the best way of ensuring the other party doesn’t breach an important contract is to ensure that he/she/they are personally liable on breach. Having a commitment from a corporate entity is possibly not nearly as effective as a deterrent.

Dealing with allegations of breach of confidentiality

It may be that the breach is such that the information has been dissipated and damage done to the extent that your only remedy is in damages. However, it may equally be a case that a breach has occurred where the damage can be limited by swift and decisive action – this would be in the form of an injunction.

Any application for an injunction, you need to move fast, have strong evidence and convince the court of the real threat to your business interests for which damages are not an adequate remedy. Injunctions are very expensive so it’s preferable to try and avoid this by having the right confidentiality agreement in the first place which has been carefully thought through.

  • If there is no confidentiality agreement in place covering the alleged breaches it is in practice very hard to obtain an injunction.  Hence, the threat used as a deterrent is unlikely to have teeth.

Breach of confidentiality by employees and directors

With employees and directors the breaches often come to light when the employee or director is already planning the next role.  One deterrent which can work is to write to the new employer putting them on notice of the confidentiality provisions.  The rationale is a future employer may not want to run the risk of inducing a breach of a confidentiality agreement.  We issue and prepare a great many of those letters.

Liquidated damages

A typical way to create a deterrent against breach with a confidentiality or non-disclosure agreement is to include a severe financial penalty for breach. The rationale for doing so is clear but be aware that such clauses are often not enforceable. There is a difference between liquidated damages, which are sometimes justifiable where a loss can be quantified with some certainty and is justifiable, as against a penalty clause, where typically, there is no relationship between the amount stated and the actual or foreseeable loss to the innocent party. In summary, great care should be taken when considering a liquidated damages clause.

Implied terms relating to confidential information

If there is no confidentiality agreement in place it may be possible to imply a term of confidentiality.  To succeed, the person whose information has been misused will need to demonstrate that there was a breach of confidence. This  requires demonstrating a number of elements including that there was an obligation of confidence created by general conversations or dealings – the burden is legally and factually difficult.

There is an implied obligation within employment and directorship agreements – the obligations are limited.  Implying obligations in commercial agreements is much harder without evidence to show what was intended.

Confidentiality agreements – recent cases

We aim to ensure that our clients’ businesses and ideas are protected and one of the ways to protect them is through a confidentiality agreement. We review and draft confidentiality agreements.

Recent instructions include:

  • Drafting a one way non disclosure agreement, where our client’s business was sharing information and the third party agreed not to leak this information.
  • Drafting and advising on specific confidentiality agreements required during a sale of intellectual property assets.
  • Drafting a confidentiality agreement where our client was disclosing financial information on another business.
  • Advising on a confidentiality agreement as part of an employment contract, as our client was concerned about an employee’s access to confidential data and information which was located on various devices which were difficult to track such as smartphones, laptops and devices.