What is an NDA? Non-disclosure agreements for UK businesses and what they cannot protect

What is an NDA, and how do you make sure yours actually protects you? A non-disclosure agreement is a contract that stops someone sharing the sensitive information you give them. Celebrities use them to keep private matters private; businesses use them before every serious conversation about a deal. The key to making one work is simple: sign it before you disclose anything, and keep the purpose narrow.

What is a non-disclosure agreement?

An NDA is also known as a confidentiality agreement. It is a legally binding contract that stops a third party from sharing any sensitive information that you have shared with them. The person receiving the information agrees, in return for receiving it, to keep it confidential and to use it only for the agreed purpose.

I always advise clients to have an NDA in place that protects their information before they share it with someone else. Once information is out, you cannot get it back, so the protection has to come first.

When should you use an NDA?

NDAs are used in talks about joint ventures, in business acquisitions, and even in employment matters. In each case one party has to show the other something sensitive, whether that is financial information, customer details, know-how or plans, in order for the conversation to go anywhere. The NDA lets you do that while keeping the information secret between the parties that need to know, on a need-to-know basis.

When drafting NDAs for clients, I always define the purpose of disclosure in a very narrow way. The purpose of disclosure is the reason the information is being shared, for example "to evaluate a possible purchase of the company". Defining it narrowly limits the way in which the sensitive information can be used. The narrower the purpose, the fewer people will have a legitimate reason to see the information, and the less the recipient can do with it. A wide purpose, by contrast, gives the other side room to use what you have told them in ways you never intended.

What can't an NDA protect?

An NDA is powerful but not unlimited. Three main kinds of information cannot be protected by one.

• Information already in the public domain. If the information is already publicly available, an NDA cannot make it confidential.
• Information that is legally required to be disclosed. If, for example, a court requires information to be passed to it, the NDA cannot prevent that disclosure.
• Information disclosed before the NDA was signed. Anything you shared before the agreement was in place is not covered by it.

That last point is very important. NDAs should not be used retrospectively. If you plan on sharing sensitive information with any third party, you should have an NDA in place as soon as possible, and certainly before the first disclosure. In my experience the most common NDA problem is not a badly drafted clause but a well-drafted agreement signed a week after the information was handed over.

Next steps

Before you share anything sensitive with a prospective buyer, partner, investor or employee, get an NDA signed, and define the purpose of disclosure as narrowly as the conversation allows. Keep a record of what you disclose and when. If you are being asked to sign someone else's NDA, check the purpose and the carve-outs before you do. A commercial solicitor can draft an NDA tailored to the deal you are discussing.