What is a confidentiality clause?
Looking for a sample confidentiality clause?
What is the legal significance of a confidentiality provision in contracts?
In this article, we will break down the notion of “confidentiality clause” so you know all there is to know about it!
We will look at what is a confidentiality clause, its legal definition and meaning, the types of confidentiality clauses, NDA elements, look at sample confidentiality clauses, examples and more.
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Table of Contents
What is confidentiality clause
A confidentiality clause, also referred to as a non-disclosure clause, is a contractual provision outlining legally binding obligations to keep certain information confidential.
The confidentiality clause will generally include the following elements:
- The scope of what is considered to be confidential information
- The purpose for which the confidential information is being disclosed
- How the receiving party of the information should make use of the confidential information
- An obligation on a party or all parties not to disclose the information to third parties
Essentially, when a contracting party agrees to the terms of a confidentiality clause, it is agreeing to keep the information it receives from the other party as a commercial secret.
Secrecy obligations can be negotiated as part of a commercial contract or as a standalone agreement.
When businesses or individuals enter into a standalone confidentiality agreement, we’ll generally refer to such agreement as an NDA (non-disclosure agreement) although the term is broadly used in business.
A confidentiality clause can be used in many situations and context, such as:
- In court settlement agreements
- In commercial transactions
- In mergers and acquisitions (M&A)
- In the context of due diligence
- To explore business opportunities
- In employer and employee relationships
- Between shareholders and co-founders of a startup
- In partnerships and joint vendors
- Service agreements
- License agreements
- Consulting agreements
- Development and co-innovation agreements
The list can go on and on.
At the end of the day, when you intend to share privileged information, internal, confidential, sensitive, non-public, valuable, secret or restricted information, you may want to protect your information by legally binding the receiving party to non-disclosure and secrecy obligations.
Confidentiality clause definition
A confidentiality clause can be defined as a contractual provision where the parties agree to qualify certain data, information, material or documents as confidential and restrict their use and disclosure.
The objective of a confidentiality clause is to protect:
- Company trade secrets
- Proprietary information
- Internal reports and assessments
- Business intelligence
- Business data
- Competitive insights
- Methodologies or company-specific processes
- Documents, material or specific elements
Types of confidentiality clauses
There are two types of non-disclosure provisions:
- Unilateral non-disclosure agreement (UNDA)
- Mutual non-disclosure agreement (MNDA)
A unilateral NDA is a one-way confidentiality obligation where one party will be bound to confidentiality obligations in favour of another.
Under this type of agreement, the duty of confidentiality is owed by one party to the other.
A mutual NDA is a two-sided confidential obligation where both parties are bound by confidentiality obligations in favour of another.
In this setup, both parties have a bilateral duty to protect the information they receive from one another to the same degree as they would ordinarily protect their own business information.
Confidentiality clause vs confidentiality agreement
In business, the term confidentiality agreement is broadly used to refer to any type of obligation, clause, provision or agreement related to confidentiality.
Even though these terms are used interchangeably, there is a difference between a confidentiality clause and a confidentiality agreement.
A confidentiality clause is a contractual provision relating to the protection of information whereas a confidentiality agreement is an agreement between the parties as to confidentiality.
The confidentiality clause is drafted to express the content of the confidentiality agreement of the parties in a contract.
Non-disclosure agreement elements
What are the elements required in a confidentiality agreement?
To better help you negotiate your confidentiality obligations, here is a list of the required elements to put in place a solid confidentiality agreement:
- Identify the parties to be legally bound by the confidential information clause (parties)
- Define what information, data, material or document will be considered confidential (scope)
- For what purpose can the confidential information be used (purpose)
- Who is authorized to access or use the confidential information, such as the company, its employees, affiliates, consultants or other (Individuals with a need-to-know)
- What are the exceptions or carve outs to the confidentiality obligations (exceptions)
- What happens if a party is compelled by law to disclose confidential information (legal disclosure)
- For how long should the obligation last (term)
- In what circumstances can the parties terminate the confidentiality obligation (termination for cause or termination for convenience)
- How should the confidential information be returned or destroyed when the purpose is achieved (return)
- What is the governing law applicable to the confidentiality clause (choice of law)
- What are the possible remedies in case a party violates their obligation (remedies)
Confidentiality clause in contracts
Confidentiality clauses can be used in many different types of agreements or on a standalone basis.
You can have confidentiality provisions:
- In a settlement agreement
- In an employment agreement
- In commercial contracts
- In a service agreement
- In an MOU
- In shareholder agreements
- In a proposal or offer
- In a consulting agreement for consultants
- In a standalone non-disclosure agreement
Confidentiality language is found in most contracts and represents a standard requirement for many to enter into a contract.
When doing business, inherently, you may be required to share commercially sensitive information and you must take reasonable measures in protecting your information.
Confidentiality clause sample
To get a better sense of how confidentiality clauses appear in contracts or in commercial agreements, let’s look at a couple of confidentiality clause samples.
Non-disclosure clause sample 1: Employment agreement
Neither during the term of the employment agreement nor upon termination thereof may the Employee inform any third party in any form, directly or indirectly, of any particulars concerning or related to the business conducted by the Employer or its affiliated companies related to i) any confidential information or know-how of which the Employee became aware in the performance of the work or during the term of this employment contract, or b) any technical, financial and business information and models, names of potential clients or partners, proposed transactions, reports, plans, market prognosis, computer software, databases, data, technical knowledge or other confidential proprietary information concerning the Employer’s business, regardless of whether such information includes any reference to its confidential nature or ownership and regardless of how the Employee learned of the particulars.
Other than for the benefit of the Employer within the scope of the normal work, the Employee may also not copy, compile, publish, merge, assemble or process information, products or systems of the Employer or disassemble, reproduce or decompile the source code of the computer software that is included in those products or systems or otherwise available on the Employer’s premises or attempt to deduce the source code of such software in any other manner.
The Employee represents that he has not disclosed and agrees that he will not disclose the existence of this Agreement or any of the terms or conditions of this Agreement to anyone other than his attorney, his spouse, and his tax or financial advisor, or as may be required pursuant to legal process.
Non-disclosure clause sample 2: Service agreement
Confidentiality. Any information and materials disclosed by or on behalf of the party (the Disclosing Party”) to the other party (the “Receiving Party”) in connection with this Agreement that is reasonably considered to be confidential (“Confidential Information”) should be kept in confidence and used by the Receiving Party only for the purpose of this Agreement. Unless required by court order, law or regulation, the Receiving Party agrees not to disclose the Disclosing Party’s Confidential Information to third parties except as necessary for the performance of this Agreement and under an agreement by which the third party is to be bound by the obligations of this confidentiality clause and except that the Service Provider may disclose Confidential Information to third party manufacturers, potential investors, potential partners or acquirers under an agreement by which such third party is to be bound by the obligations of this confidentiality clause. The confidentiality obligation under this section shall continue for five years thereafter from the disclosure of such Confidential Information.
Non-disclosure clause sample 3: License agreement
General. During the term of the present Agreement, the Parties shall ensure that Confidential Information shall not be disclosed to any person or entity. Each Party agrees to protect the confidentiality of the Confidential Information of the other and the Confidential Information of Client in the same manner that it protects the confidentiality of its own proprietary and confidential information of like kind but in no event shall either Party exercise less than reasonable care in protecting such Confidential Information. Access to the Confidential Information shall be restricted to those of Service Provider’s and Client’s personnel on a need-to-know basis and engaged in a use permitted hereby. The Confidential Information may not be copied or reproduced without the Discloser’s prior written consent.
Return of Confidential Information. All Confidential Information made available hereunder, including copies thereof, shall be returned or destroyed upon the first to occur of (a) completion of the Services or (b) request by the Discloser. Service Provider may retain, however, subject to the terms of this Section, copies of the Confidential Information required for compliance with its quality assurance requirements.
Non-Confidential Information. Nothing in this Agreement shall prohibit or limit either Party’s use of information (including, but not limited to, ideas, concepts, know-how, techniques, and methodologies) (i) previously known to it without obligation of confidence, (ii) independently developed by it, (iii) acquired by it from a third party which is not, to its knowledge, under an obligation of confidence with respect to such information, or (iv) which is or becomes publicly available through no breach of this Agreement.
Disclosure by Law. If either Party receives a subpoena or other validly issued administrative or judicial process requesting Confidential Information of the other Party, it shall provide prompt notice to the other of such receipt. The Party receiving the subpoena shall thereafter be entitled to comply with such subpoena or legal process to that extent permitted by law.
Binding Effects. The Parties obligations under this Section shall be binding and shall survive the expiration or termination of this Agreement for a period of three (3) years.
Confidentiality clause FAQ
What is a confidentiality clause in a contract
A confidentiality clause in a contract is a legal obligation imposed on one or all parties to keep certain information it receives during the course of the execution of the contract as a secret.
A confidentiality obligation is very important to protect your company’s internal information, trade secret or sensitive data.
Depending on the nature and complexity of the contract, you can either go for a simple confidentiality clause or something quite extensive (and anything in between).
In some cases, you want a confidentiality clause for documents and in other cases for business methodologies or processes.
It’s important to consider the nature of information, data, documents or material you will be required to communicate to another party in the performance of your contract so you can better assess the simplicity or extensiveness of your confidentiality provision.
What is the importance of confidentiality in contracts
In most business dealings and contracts, the confidentiality obligation is crucial.
Most contracts have a standard confidentiality clause where a generic confidentiality obligation is called out.
Although many non-disclosure clauses are presented as boilerplate language or clauses in contracts, it’s important to take good care in assessing its scope and specifics of the obligation.
How do you write a confidentiality clause
To write an effective confidentiality clause, you should ensure you cover the following elements:
- Identify what information you intend to protect
- Who is an authorized recipient of the information
- What can the recipient do with the information it receives
- For how long can the recipient use the confidential information
- Once the purpose is achieved, how will the recipient return or destroy the information
- What are the reasonable remedies in the case of an infringement (such as injunctive relief, liquidated damages, indemnification for claims)
What are the different provisions of a non-disclosure agreement
In a standard non-disclosure agreement or NDA, you will typically find the following provisions:
- Definition clause
- Purpose of the NDA
- Obligation to protect the confidential information
- Exceptions to the obligation
- Disclosure clause (or legal disclosure clause)
- No warranty clause
- Return of material clause
- Termination clause
- Remedies clause
- NDA term
- Survival clause
- Relationships clause
- Severability clause
- Integration clause
- Waiver clause
- Choice of law clause
- Forum selection clause
- Signature block
What is a mutual confidentiality clause
A mutual confidentiality clause is when the obligation to keep the disclosed information secret applies to both parties to the contract.
In other words, it’s a “mutual” or “bilateral” obligation.
A mutual NDA or mutual confidentiality provision can be contrasted with a unilateral confidentiality clause.
In a unilateral confidentiality clause, the duty to protect the secrecy of the disclosed information will apply to one party and not the other.
In other words, one party will have a legal duty to protect the confidentiality of the information it receives from the other while the other party does not have the same duty.
What is a confidentiality clause example
There are many types of confidential clause examples we can consider.
To give you the most representative example, we’ve selected a typical confidentiality clause example that can appear in a software license agreement or subscription services agreement (SaaS agreement).
Here is a confidentiality clause example in a license agreement:
Confidentiality. As used herein, “Confidential Information” means all confidential information disclosed by or otherwise obtained from a party (“Disclosing Party”) to or by the other Party (“Receiving Party”), whether orally, visually or in writing, that is designated as confidential or that reasonably should be understood to be confidential given the nature of the information and the circumstances of disclosure. The Receiving Party shall use the same degree of care that it uses to protect the confidentiality of its own confidential information of like kind (but in no event less than reasonable care) not to disclose or use any Confidential Information of the Disclosing Party for any purpose outside the scope of this Agreement, and limit access to Confidential Information of the Disclosing Party to those of its employees, contractors and agents who need such access for purposes consistent with this Agreement and who have signed confidentiality agreements with the Receiving Party containing protections no less stringent than those herein.
What is a disclosure clause
A disclosure clause (required disclosure clause or mandatory disclosure clause) outlines in what circumstances a party is authorized or may disclose confidential information to another.
Typically, a disclosure clause is included in an NDA to ensure that if a party receives a subpoena duces tecum, motion to compel or is legally compelled to disclose information in accordance with the law or regulation, the parties agree on the disclosure mechanics.
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