Avoid These 3 Common NDA Drafting Mistakes
It is difficult to think of a transaction that doesn’t begin with a confidentiality or non-disclosure agreement (NDA). Although various common law jurisdictions provide different degrees of protection and remedies when transactional parties decide to share commercially sensitive information, NDAs are pervasive and essential across most jurisdictions.
As ubiquitous as NDAs are, so too are common drafting errors that transcend jurisdictional differences. In this article, I discuss three common NDA drafting mistakes that are as frequent as they are easy to rectify.
License Rights and Restrictions
Across most common law jurisdictions, decades of highly developed law support the narrow interpretation of licensing rights, remedies and the judicial intolerance for the abuse and misuse of those rights. In the context of an NDA, at least one party provides another party with their confidential information to use for a very limited and particular purpose that is associated with the NDA.
And yet, inexplicably, far too many NDAs contain provisions expressly denying that a license is being created.
When the disclosing party agrees to the denial of a license, it surrenders the tremendous weight of law associated with restrictive licensing covenants, such as the non-exclusive nature of the disclosure, the permitted narrow purpose of use, the inability to copy or disclose to others, the limited use duration, and the non-assignability of such personal rights, to name a few. Instead of denying that a license exists, it may be far more accurate and beneficial for the discloser to expressly stipulate such limited use rights and restrictions as a license.
Consider this alternative for example, “This Agreement provides you with a personal, non-assignable and non-transferable, royalty-free, non-exclusive and restricted license to possess and use the Confidential Information in the Jurisdiction and for the License Term solely and strictly for the limited purpose (and subject to the terms and conditions) set out herein, and for no other use, exploitation, purpose or application whatsoever, including without any right of reprography, retention, or any disclosure or communication to any other person except as expressly set out herein.“
Standard of Care
Some jurisdictions have more respect than others for the standard and duty of care that a recipient must exert to protect and to keep confidential, such information. Again, NDAs too often miss the important opportunity to contractually resolve the potential uncertainty of any such duty of care, merely stating that the receiving party must apply the same standard of care to the other party’s confidential information as they provide to their own confidential information.
Therefore, rather than leaving that issue to the vagrancies of any particular jurisdiction’s common law, consider stipulating, in clear and unequivocal terms, exactly what the recipient’s duty of care will be. If one party proposes a standard of care that is consistent with the standards exerted by either party in the ordinary course of their business, you will need to know what those are before you agree, and not hypothesize about what they might be. Mere conjecture about such standards may result in abject disappointment.
You have many choices along a possibly forgiving or onerous continuum, but each NDA should reflect the commercial circumstances of the disclosure. Some commercial relationships like agency, partnership, situations of unequal bargaining power, or any relationship of inter-personal trust, will likely mitigate in favor of more onerous duties of care, e.g. the highest standards and best practices within the relevant industry, or perhaps in a manner that is consistent with the highest duty of care that is commensurate with the exceptionally sensitive nature of the trade secrets being disclosed. Some relationships, as discussed below, may even precipitate special remedies for a breach of the NDA.
Equitable Remedies
Despite the ubiquitous nature of the remedies clause that purport to provide injunctive or other equitable relief, it is arguable that such provisions, as drafted, are not enforceable in many jurisdictions. In many jurisdictions, the ability of a party to secure equitable relief lies solely within the purview and discretion of a Court of competent jurisdiction, and that such exclusive remedial authority cannot be usurped merely by contractual provisions between the parties.
For example, this is a typical remedy clause: “The Discloser shall have the right to secure injunctive relief against the recipient to either prevent or discontinue any breach of this Agreement.”
However, perhaps a more effective way to draft an NDA’s remedial provisions would be to address the facts upon which a Court would likely rely in such applications, such as stipulating:
- a commercial relationship and standard of care that may invoke the equitable jurisdiction of the Court, such as imposing a fiduciary duty of care. Agreeing that the confidential information shall be held in trust might sound like a good idea in this regard, but that may unintentionally result in transferring title in the confidential information to that recipient trustee;
- the acknowledgement that any breach of the NDA will result in irreparable and immediate harm for which damages alone cannot adequately compensate the injured party;
- that the recipient will not oppose or defend against an application by the discloser for equitable relief;
- that the agreement that such remedial provisions are fair and reasonable in the circumstances of the NDA; and
- that the parties would not have entered into the NDA but for their fundamental and material reliance on the terms and conditions of this remedial provision of the NDA.
NDAs are very often the contractual starting point for longer term and more diverse contractual relationships because they are heavily relied upon across all commercial and corporate transactions. Therefore, what better way to get commercial and corporate relationships off on the right foot than by spending the time and energy necessary to draft the inaugural NDA as well as possible.
