Confidentiality agreement vs NDA: main points and differences

A confidentiality agreement protects intellectual property or sensitive information. Some examples include trade secrets, specifications or details of a yet-to-be-launched new product, client lists and details, and propriety information like special production processes, unique patented designs, or secret formulae.

The way a confidentiality agreement protects these types of information is by binding one or more parties to keep the information secret. Should any of the participating parties share the information with competitors, the public, or the prying eyes of any other unauthorized parties, then they can be held liable.        

Confidentiality agreement vs NDA: what’s the difference?

When speaking of a confidentiality agreement vs. an NDA or non-disclosure agreement, they are similar but not the same. These terms are sometimes used interchangeably due to their close similarities, causing confusion.

NDAs may be considered a form of confidential agreement, as NDAs are legal contracts that establish a relationship of confidentiality between two parties. Here’s how they differ:

• Confidentiality agreements bind all the parties involved to keep sensitive information in confidence, and not to share or attempt to profit from said information. This can be considered as a “mutual NDA” – hence the confusion.
• Non-disclosure agreements create a confidential relationship between the parties who sign them; this is used in cases where vital information is communicated to another party. In this case, only one party is held responsible for keeping the information secret, hence this is considered as a “unilateral NDA”.   

Learn what’s the difference between a unilateral and a mutual NDA in this article.

Watch this video for a slightly different view on confidentiality agreements vs NDAs:

Our recent article presented a breach of confidentiality agreement that led to an employee’s dismissal. The Fair Work Commission has sided with the employee – read the article to find out more.

What can an NDA not be used for?

In general, an NDA cannot be used as a way of preventing involved parties from disclosing information that is of concern to the public.

An NDA cannot be used to prevent disclosing facts that would be important in preserving public safety or public health and/or provide more government transparency.

Since an NDA is a legal contract, it cannot be used to keep any illegal activity confidential.

What makes an NDA invalid?

An NDA can be challenged or invalidated by the courts if it’s drafted in a language that is irrational, unreasonably broad in scope or extremely burdensome. NDAs that are oppressive, overreaching in scope and seen as an attempt to protect irrelevant information can also meet challenges and be invalidated by courts. Other reasons for invalidating an NDA include:

• Wrong party listed in the NDA – Companies can use separate legal and trade names. To avoid this NDA-invalidating technicality, it’s important to list the parties by all the names they go by, along with their complete addresses.
• Confidential information made by the receiving party – If the receiving party created all the information, or the information was created by the receiving party before their collaboration, then the NDA is invalid.
• No jurisdiction – If the party drafting the NDA conducts business with an entity outside its borders, then the NDA may not necessarily be invalid, although it can be difficult or impossible to enforce.
• Signed by an unauthorized person – The NDA is invalid if it was signed by someone who has insufficient or no authority to bind the parties.

Is an NDA itself confidential?

It’s possible for an NDA itself to be confidential, but that depends on the NDA and its terms. To make the NDA itself confidential, the terms can define the NDA as part of the “confidential information”.

For example, the terms can include in its definition of confidential information, “the existence of this agreement and the terms contained in it”. Since the NDA itself is considered information that must be kept secret, the mere mention of its existence may constitute a breach. However, this cannot be taken as a definitive answer for making NDAs confidential themselves. Consult a licensed, experienced lawyer to provide greater insight.

Our article on non-disclosure agreements goes into more depth on NDAs – read it to find out more.

What is a confidentiality agreement also called?

Other terms for this include:

• Confidential Disclosure Agreement (CDA)
• Secrecy agreement
• Non-disclosure agreement
• NDA

These terms denote a legal contract between at least two parties, outlining which information they want or need to share for a variety of purposes. Some reasons for drafting a confidentiality agreement include evaluation for future collaboration, or negotiation for a merger or acquisition.

What is the difference between a confidentiality agreement and a MoU?

While people sometimes confuse confidentiality agreements with a Memorandum of Understanding or MoU, they are very different.

A MoU is not a concrete agreement, but merely an expression that there is an understanding between two parties. The MoU neither constitutes a binding contract nor does it compel the parties to get into any sort of relationship.

In a MoU, the two parties discuss the goals of their relationship, and the roles they can play as they make broad plans for a possible future venture together. Parties to a MoU can leave the arrangement at any time without any consequences.

On the other hand, a confidentiality agreement is a legally binding contract with consequences for parties that don’t comply with or commit a breach of the agreement.

Is a confidentiality agreement legally binding?

Yes. Confidentiality agreements are contracts, and therefore legally binding. A confidentiality agreement states that two parties cannot divulge, nor can they profit from confidential information, and violating this agreement has legal consequences.

Agreements like these are a form of civil contract. While breaking a confidentiality agreement isn’t considered a crime nor does it result in criminal liability, it can incur significant financial penalties.

Depending on the breach and the severity of the consequences, breaching a confidentiality agreement can also result in termination of employment, loss of business reputation, and loss of clients; all apart from having to pay damages and associated legal fees.

How do you make a confidentiality agreement legally binding?

You make it so by drafting it properly. Some confidentiality agreements cannot be legally enforced when they are vague, not in good faith, or lack the key elements. What are these key elements?

1. The agreement must have a clear definition of confidential information.
2. The obligations of the parties must be clearly stated.
3. Exclusions must be clearly stated.
4. The term period of the agreement must be clearly stated.
5. The consequences for breaching the confidentiality agreement must be clearly defined.

How long does a confidentiality agreement last?

A confidentiality agreement can last indefinitely, depending on the information subject to the agreement. Trade secrets, for example, remain confidential information unless discovered or legally acquired, then shared with the public. Until then, the confidentiality agreement remains in force indefinitely.

However, some US states may place limits on effective time periods, while others may do away with term limits completely. As periods of confidentiality can vary due to a variety of factors, it’s best to consult a lawyer in this regard.

Can a confidentiality agreement be verbal?

Yes, it is possible for two parties to establish a verbal agreement between them to keep information confidential. This confidential relationship may even be implied from the behavior of the two parties. However, there should still be a formal document with the two parties’ signatures to make it legally binding if any issues arise.

Final thoughts

Confidentiality agreements and NDAs can be useful tools for entities or individuals to protect information they deem sensitive or confidential. Before drafting a confidentiality agreement, consult a lawyer. Doing this can, in the long run, keep your company’s information secure and protect the organization from lawsuits.