NDA – a formality or a useful tool?

From this article you will learn:

• what an NDA is and what it protects
• why an NDA is signed
• whether it is worth using and what should be included in an NDA.

Non-disclosure agreement – NDA for short – is nothing more than a confidentiality agreement. It is a standard document commonly used by cooperating entrepreneurs. Writing down the terms of an agreement that obliges the parties to maintain secrecy and thus protects the confidentiality of information is often treated as a “necessary evil” accompanying the main agreement: just another document that needs to be signed. Is this a good approach? Let’s take a look at it together.

What is a Non-Disclosure Agreement?

A non-disclosure agreement specifies the scope of confidential information, the standards for protecting this sensitive data, and the sanctions for breach of confidentiality.

NDA regulates the rules for handling confidential information of a given entrepreneur and obliges the party signing the agreement to keep such data secret. Usually, an agreement to protect the confidentiality of information is concluded already at the stage of negotiations of future cooperation, but there are no formal obstacles to concluding it when signing the negotiated agreement or even already during cooperation. 

The conclusion of an NDA most often occurs in connection with commercial cooperation between entrepreneurs, but also when providing audit services or conducting due diligence. Increasingly, the conclusion of an NDA is not only a tool for protecting cooperating participants in economic transactions, but also a necessary condition for establishing cooperation.

Why conclude a confidentiality agreement?

Why conclude an NDA? The answer seems simple: to protect a business secret. So, let's consider what a "business secret" actually is. This concept is defined in the Act on Combating Unfair Competition (Journal of Laws of 2022, item 1233) as follows: 

(…) a business secret is understood as technical, technological, organisational information of an enterprise or other information of economic value, which as a whole or in a specific combination and set of their elements is not generally known to persons usually dealing with this type of information or is not easily accessible to such persons, provided that the person authorised to use or manage the information has taken, while exercising due diligence, steps to keep it confidential.

As can be seen above, the very definition of a business secret is quite general. Therefore, in practice, it is rather only a starting point for what the parties signing the NDA consider to be such a secret. In many cases, therefore, this definition is expanded and adapted to the individual needs of the parties to a specific NDA. Additionally, it results from the statutory definition that – in order for something to be recognised as a business secret and subject to protection under the Act on Combating Unfair Competition – the given entity must take actions aimed at protecting it. One manifestation of such actions is the conclusion of an appropriate NDA.

Firstly, the conclusion of such an agreement is in itself a proof of taking steps to protect business secrets, thanks to which the information covered by the agreement will also be subject to general legal protection resulting from the above-mentioned Act on Combating Unfair Competition.

Secondly, concluding an NDA will allow its parties to specify the areas of protection of specific information, the period of confidentiality obligation, or regulate the principles of liability in the event of breach, which significantly increases the guarantee of real protection of business secrets. Specifying such issues in the document not only helps companies avoid conflicts related to maintaining confidentiality, but also makes it easier to resolve those that have already arisen.

What should an NDA include?

• A precise definition of confidential information and what the company considers to be business secrets
  As mentioned earlier, while the Polish legislator sets a certain framework for what should be considered a business secret, this definition often turns out to be insufficient to include it without any clarification in the NDA. When concluding a confidentiality agreement, we must first specify what the parties consider confidential information. For example, the parties may consider technological information, financial information, information about their clients, information about the remuneration for services they provide, or information about technical security measures used to protect their business activities as confidential information.
   
• Indication of what you can and cannot do with confidential information
  It is not enough to simply specify what information is protected by the agreement. The parties should define the limits and permissible purposes of using confidential data. These will of course vary depending on the business needs for which the NDA is being concluded. For example, the purposes and limits of using confidential information should be defined differently in the case of commercial negotiations, and differently in the case of a business undergoing due diligence examination. 
   
• Duration of the agreement
  In practice, the duration of the NDA and the obligation to maintain confidentiality are set for at least as long as the business relationship in connection with which the agreement is concluded is to last – i.e. at least as long as the negotiations or provision of services between the parties are to last. Of course, the period for which the NDA is concluded is usually longer and it is generally recommended that it be a suitably long fixed period. In the case of an indefinite period, it is worth ensuring that a suitably long notice period is set.  
   
• Other important provisions, such as a contractual penalty
  What else should you remember when drawing up an NDA? It is mainly about specifying other issues concerning the protection of confidential information, which we consider important due to the relationship between the entities that they protect. Such issues may include:
  • methods of securing and standards of protecting confidential information (e.g. encryption, marking as confidential),
  • persons to whom disclosure of confidential information is permitted (e.g. only specific persons performing the service for which the other party is entrusted with confidential information),
  • methods of handling confidential information after the contract expires (e.g. specific method of return, destruction),
  • contractual penalties constituting the effects of violating the NDA,
  • issues of contractual liability.

The above elements of an NDA are its most typical content. Individual issues can be addressed in various ways and expanded depending on the individual needs resulting from the specific relationship that the NDA is to accompany. 

What to avoid in a confidentiality agreement?

Now that we know what to include in an NDA, it would be a good idea to point out what to avoid when writing one. Examples of practices to avoid include:

• Excessive generality of definition
  A good NDA is supposed to help the parties cooperate, not make it harder. Excessive generality often leads to a situation where the party does not know what actions (and with what information) it can take and what it cannot. Such a situation can result in a party simply not having certainty as to how it should act and how it can carry out cooperation or negotiations. Too broad or too general definition of confidential information can therefore reduce the effectiveness of cooperation or undermine the mutual trust of the parties - and yet the purpose of such an agreement is quite the opposite.
   
• Incompatibility of the NDA with the main cotract
  The fact that contractors use model contracts in business transactions is obvious and is not a bad thing. However, the individual relationship between contractors usually requires not only personalising the main contract that connects them, but also adapting the NDA to it. Using provisions that are inappropriate for the given circumstances will most often lead to ineffective protection of confidential information, or at least its weakening. 
   
• Creating unilateral provisions
  Remember that the purpose of an NDA is to protect confidential data shared as part of the cooperation between the parties resulting from the main agreement (or as part of negotiations) and is to enable effective cooperation between the parties. Expecting excessive protection by the sharing party or excessive lowering of the standard of protection by the other party will not be satisfactory for the parties and may constitute a barrier to the development of their business relations. For this reason, when writing an NDA, it is worth considering the areas requiring attention from the very beginning, and then defining and securing them appropriately. Effectively, but in a way acceptable to both parties.

Is it worth using an NDA?

We believe that this question should be answered firmly: yes. Why? Signing such an agreement:

• allows an entrepreneur to entrust information to another entity in a safe manner and on clear terms;
• allows companies to start cooperation with contractors (NDA is becoming a standard; reluctance to use and sign such an agreement can close potential channels of cooperation);
• allows for a significant acceleration of the start of potential cooperation through faster access to the resources of the other party;
• makes us, as entrepreneurs, more effectively protected against the actions of unfair competition.

Of course, there may be opposing voices, saying that enforcement (especially proving violations) of such an agreement is difficult, and it is concluded just for the record. However, let us remember that a properly written NDA guarantees real strengthening of the protection of specific, sensitive information related to conducting business activity, such as: know-how, customer base, valuation principles or company procedures. For this reason, it is not worth giving it up, and in the case when you are a party to whom such information is transferred - appropriately calculate the provisions that you intend to accept.  

If you need advice on an NDA, assistance in its construction or negotiation of its provisions, please contact our team of experienced specialists.