Non-Disclosure Agreements (NDAs) – some commonly forgotten risks
Summary (generated with support from AI tools):
- NDAs protect confidential information, but only formally. They do not prevent leaks in practice. Even under an NDA you should limit what you disclose.
- An NDA is an agreement like any other. The content governs, not the name of the document. Unusual clauses may still be enforceable, so every NDA must be reviewed carefully.
- If you and the other party work on similar or overlapping products or ideas, an NDA can create intellectual-property ownership risk.
- Breaching an NDA can have serious consequences. Strong internal controls are essential.
- NDAs are valuable tools, but not risk-free. Entering into an NDA should always be a conscious decision aligned with the purpose and sensitivity of the specific project.
The main purpose of a Non-Disclosure Agreement (NDA) is to protect confidential information, and it is often seen as a standard document to sign when you share confidential information. To a certain degree, this is also the case. However, in this article, I will highlight some commonly forgotten risks when signing an NDA.
The article focuses on NDAs that are signed to facilitate brainstorming. Without the protection of an NDA, businesses may be reluctant to disclose confidential information, thereby making it difficult to discuss shared opportunities. However, be aware that an NDA only provides formal protection. The NDA will not physically prevent the other party from leaking your confidential information. Therefore, you should carefully consider when to enter into an NDA relationship. And even after signing an NDA, you should be careful about the extent to which you share confidential information.
An NDA is an agreement, and like all agreements, the content of the NDA is what matters, not the heading of the document. If the NDA contains provisions that are not typically included in NDAs, you should still expect them to be enforceable. If, for example, the NDA prohibits you from competing with the contract party, you will probably have to respect this prohibition after signing the NDA. Pointing to the fact that the document is called an NDA and that the non-compete provision is not commonplace in such agreements, will probably not help you. Therefore, a draft NDA should be reviewed like any other agreement to ensure that it properly reflects the intentions of the parties.
If you and the other party work on similar or overlapping products or ideas, signing an NDA may create a potential risk to your company's ownership of intellectual property. NDAs frequently contain a regulation of ownership of shared confidential information, which is usually retained by the sharing party. And the definition of confidential information often includes derived information, making it broad. Thus, if the products or ideas you develop resemble what is received as confidential information from the other party under an NDA, it might be uncertain whether the product or idea belongs to you or to the other party. Therefore, you should be careful about signing an NDA if you are working on similar or overlapping products or ideas.
When signing an NDA, the focus is typically to protect the information that you share. However, honoring confidentiality obligations towards the other party is equally important. If you breach an NDA, the consequences may be significant. An NDA often contains no liability cap or exclusion of consequential loss. Thus, liability under an NDA may be unlimited. If you breach your obligations and this leads to a loss for the other party, the NDA may require that you cover their entire loss. Therefore, it is essential to have proper procedures in place internally to ensure that you abide by your obligations under the NDA.
NDAs are important tools for protecting confidential information. However, they are not risk-free. Entering into an NDA relationship should be a conscious choice, based on the purpose of the specific project and relationship.
You can learn more about my NDA training course on the Courses page, and about broader contract support under Commercial relationships and contracts.
For agreements like NDAs, I generally recommend a contract risk assessment before signing.