In the commercial world, confidentiality can be essential. Whether you’re developing a new product, sharing financial data with a potential investor, or planning to acquire another company, there are plenty of circumstances in which sensitive information must stay out of the public domain.
This is where Non-Disclosure Agreements – commonly known as NDAs – come into play.
What is an NDA?
An NDA is a legally binding contract that prevents the disclosure of confidential information. The content of an NDA can be tailored to suit the specific circumstances, but it should clearly define:
- What information is considered confidential and therefore covered by the contract.
- Who can and cannot receive the information, with permitted disclosures specified, such as to legal advisors, accountants, or regulatory authorities.
- A reasonable duration.
- What consequences will follow if the terms are breached.
NDAs can be one-way, where one party shares information with another, or mutual, where two parties share information with each other. The agreement ensures that any party that receives sensitive information agrees to keep it confidential.
Are NDAs enforceable?
Yes, if an NDA is properly drafted and serves a legitimate business interest, it is enforceable under Scots law. However, NDAs are not absolute. The court can refuse to enforce an NDA if it goes beyond what is necessary to protect that interest, contradicts public policy, or is used to conceal illegal activity.
Additionally, an NDA is not enforceable if it attempts to restrict the following rights:
- Reporting criminal activity to law enforcement.
- Providing evidence during court or tribunal proceedings.
- Discussing matters with the signatory’s own legal advisers.
- Making protected disclosures under whistleblowing legislation.
Under the provisions in the Employment Rights Bill currently going through Parliament, an NDA will be void if used to prevent employees from reporting unlawful conduct, including harassment or discrimination. Clauses attempting to silence victims or witnesses of abhorrent behaviour will be unenforceable. These changes will allow NDAs to remain a legitimate tool for protecting genuine commercial confidentiality, but prevent them from being weaponised to cover up wrongdoings or intimidate individuals into silence.
Does an NDA need to be witnessed?
Under Scots law, standard commercial NDAs can be legally valid without the need for a witness. However, if the agreement involves particularly sensitive information, high financial stakes, or complex obligations, it may be prudent to have signatures witnessed or to use an advanced electronic signature that provides a robust audit trail.
If the validity of the agreement is later challenged, having a witness to verify the signature can provide crucial evidence.
How long is an NDA valid for?
There’s no standard time limit for an NDA. It’s a matter of negotiation between parties, and the duration should be clearly specified in the NDA documentation.
Some NDAs impose a fixed term, where the confidentiality obligation lasts for a specific period from the date of signing, commonly between two and five years. This is most suited for contexts where the protected information may become outdated or lose its competitive value over time. Others may last until a particular event occurs, such as the completion of a project or the end of a business relationship.
It is possible for an NDA to impose an infinite duration, such as instances where the information encompasses a genuine trade secret that will not diminish in value. However, indefinite NDAs can be harder to enforce as it must be provable that these extreme measures are reasonable and proportionate to the circumstances.
When to use an NDA
NDAs should be used thoughtfully and purposely, not as a blanket response to every commercial interaction. Here are some examples of when an NDA might be appropriate.
- General sharing of confidential information: Any situation where commercially sensitive information is being shared with external parties (sharing financial information with accountants, discussing expansion plans with property agents, etc.).
- Mergers & acquisitions: To prevent the prospective buyer from sharing the target company’s sensitive information (supplier contracts, operational information, etc.) with others, or leveraging it for a competitive advantage if negotiations fall through.
- Investor discussions: If the investor decides not to proceed, an NDA can prevent company intelligence gained through discussions (growth projections, strategic plans, etc.) from being used to invest in a competitor or launch a rival venture.
- Product innovation: An NDA can protect proprietary designs, technical specifications, or innovative processes when working with external companies (consultants, designers, etc.).
- Employee departures: Impose an NDA to prevent both parties from discussing private details (reason for departure, compensation terms, etc.) when a senior employee or director leaves the company. Such agreements must comply with employment law.
A solicitor’s role in NDAs
Solicitors typically don’t sign separate NDAs when taking on a new client, as they must follow professional privilege and client confidentiality rules, as well as data protection legislation that governs how personal and business information should be handled. Additionally, a Terms of Engagement (ToE) letter must be issued when commencing work, which explicitly confirms the solicitor’s client-confidentiality obligations.
When drafting or advising on NDAs, solicitors have professional obligations that go beyond just following the client’s instructions, and may even override client confidentiality, depending on the circumstances. They cannot assist in creating an NDA for improper reasons, like obstructing justice, concealing criminal activity, silencing victims, or hiding regulatory breaches.
Getting it right
Before entering into an NDA or asking another party to sign one, always seek professional legal advice. A well-crafted NDA should be clear, proportionate, and limited to only protecting legitimate business interests. A poorly drafted NDA may be unenforceable, while an overly restrictive one may be unlawful.
John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
