Business Law

WHAT TO KNOW ABOUT THE CONFIDENTIALITY AGREEMENTS?

A “Confidentiality Agreement”, which is also known as “Non-Disclosure Agreement” is in its simplest form a contract between two or more parties where the subject of the agreement is a promise that information conveyed between them will be kept as a secret and will not be used for any purpose other than their mutual discussions.

These agreements can be mutual agreements, where both parties are obligated to maintain secrecy, or they can be unilateral agreements, where only the party receiving information from the other, becomes obligated to maintain secrecy.

Confidentiality Agreements are often entered into by parties following an initial meeting or correspondence, usually right before the parties are about to share more detailed information with each other that is important to them. Generally, it will be one of the parties’ standard template of Confidentiality Agreement and as these agreements are kept as short as possible in order to make them appear as simple and straightforward agreements, they will be signed without careful consideration of the terms of the document.

Confidentiality Agreements are frequently encountered in practice by commercial companies and although they are thought to contain standard provisions, they should be carefully reviewed before being signed, as in all agreements. Below are some key issues to take into consideration first, when reviewing a Confidentiality Agreement. Please note that this is not an all-inclusive list, but it is based on our experience regarding the issues that can often arise for this agreement type: 

“Mutual” or “Unilateral” Confidentiality Commitment

Confidentiality Agreements will often be drafted to regulate the disclosure of information from one party to the other. While this may reflect an agreeable situation for most of the confidentiality agreements, for example a potential investment in one party’s business by the counterparty, there will still be some form of mutual disclosure of sensitive information in most cases. For this reason, in most cases it will be prudent to ensure that the Confidentiality Agreement is also drafted to cover  mutual disclosure. Mutual confidentiality agreements are therefore useful to equally protect the confidential information conveyed by both parties.

“What is Considered as Confidential Information”

What is to be considered as confidential information should clearly and strictly be defined under the Confidentiality Agreement. This definition is usually a very comprehensive definition that includes all kinds of financial, legal, commercial information, contracts, business plans and policies announced between the parties verbally, in writing, electronically or otherwise. Of course, being comprehensive doesn’t mean that everything can be put in it like an omnibus bill.  When you are the party that discloses information, it would be more advantegous to use a definition that “includes everything”. On the contrary, if you are the receiving party, the definition must be read carefully and the items that are not related to the subject matter of the contract should be removed from the definition. 

“Agreement Term”

The Agreement should set a specific time limit regarding the term of the confidentiality obligation and confidentiality obligations not exceeding a period of three years is usually considered reasonable in practise. In certain cases, the confidentiality requirement may be for a longer period; especially  for information that is considered as a trade secret, such as  highly confidential know-how or customer pricing details. Therefore, confidentiality agreements that cover important trade secrets, (like the formula of the Biontec vaccine) would  call for an unlimited term of protection or a much longer term in order to guarantee the interests of the company, whereas 3 years would be more than enough for general information such as  anonymised sales figures of your company. Within this frame, the term should be determined according the nature of the information disclosed, as it can either be an ordinary confidential information or a trade secret. In case of a trade secret it is highly recommended to set an indefinite term for the contract.

“Penalty Clauses”

Not all, but some confidentiality agreements include penalty clauses that determine a pre-set penalty amount in case of a breach of the confidentiality obligation.  To add such a clause to the agreement can be advantageous to the disclosing party, as a penalty  removes the very serious and time-consuming difficulty of  proving the  amount of damages incurred during a possible legal dispute. On the contrary, it is not highly advisable to accept a pre-set payment obligation in advance, and give up your rights to contest any future damage claim, if you are the party receiving the confidential obligation.

“Non-Compete/ Exclusivity Clauses”

 Some disclosing parties try to add non-compete/exclusivity clauses to the confidentiality agreements, which are not actually the main subject of such agreements and which might limit the options of your company.  With such clauses, it may be regulated that you undertake additional commitments such as   not  to compete with the other party for a certain period of time, or to exclusively sell  your company’s product/ service, or transfer your technology and know-how to the other party of the contract. For this reason, the Confidentiality Agreement text should be carefully examined and it should be ensured that you do not make such additional commitments without realizing it.

 

Irem Soyman Alevok, Partner, Attorney at Law

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We are aware of legal expectations of corporates and business community in need of sustainable growth, development and stability, when they do business in a complicated and emerging jurisdiction.

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