Confidentiality agreements, often referred to as NDAs (non-disclosure agreements), are most often entered into in cases where confidential information is disclosed to potential contractors. Disclosure of any valuable information always carries with it a certain risk of potential abuse, but there is usually no escape from disclosure. In such cases, a confidentiality agreement for the duration of the negotiation is usually concluded before the main contract(s) is (are) concluded, which generally provides for a basic obligation to indemnify the party in breach of the agreement. In other words, a party to a contract who discloses information to third parties which should not have been disclosed under the contract must compensate for the damage caused.
Should a Confidentiality Agreement Be Included in the Main Contract or Signed Separately?
A confidentiality agreement can be signed as a separate contract or included within another contract, such as a lease, service, employment, or any other agreement. Typically, a confidentiality clause within the contract states that the contract itself and all agreements contained within it are confidential.
If the confidentiality provision is well-defined in the main contract and both parties have provided adequate confirmations, a separate agreement is not necessary. However, if confidentiality obligations are intended to extend personally to employees of the company, separate agreements should be signed with them.
What is Confidential Information?
Business secrets and confidential information are not synonymous. Board and supervisory board members are legally obliged to maintain business secrets.
The concept of business secrets is defined in the Competition Act as information related to a company's business activities, the disclosure of which could harm the company's interests. Examples include the technical composition or formula of a product, production methods and processes, techniques used in production, salary and compensation plans, customer data, sales strategies, etc.
Confidential information, on the other hand, has no formal legal definition but should meet certain criteria. Firstly, the information must be genuinely confidential, meaning it must not be publicly known. Secondly, the disclosing party must have a justified reason (including a legal basis) for treating the information as confidential (e.g., information related to a joint project, such as ideas, drafts, etc.). The information must be defined as clearly and specifically as possible. An agreement that declares all information exchanged between the parties as confidential may be unreasonably restrictive for the receiving party.
How to Ensure Confidentiality is Maintained?
The most effective way to ensure compliance with confidentiality obligations is to impose a contractual penalty for breaches. A contractual penalty is a fixed amount payable by the breaching party to the other party, intended to incentivize compliance. A contractual penalty simplifies the process of claiming damages, as it eliminates the need to prove the occurrence or extent of the loss. Additionally, the injured party has the right to claim further damages beyond what is covered by the contractual penalty.
The amount of the contractual penalty should reflect the value of the protected information, such as the potential of the idea’s implementation, whether it is limited to a single market or has global market potential, and the stage of development. The penalty should not be unreasonably high.
Confidentiality Obligation Term
Whether agreed in the main contract or a separate confidentiality agreement, the term of the confidentiality obligation depends on the parties’ agreement. When agreeing on the confidentiality period, the same principles for defining the information should be followed: the information must remain genuinely confidential throughout the agreed period and the disclosing party must have a justified interest in maintaining its confidentiality for the entire duration.
