Drafting and enforcing confidentiality agreements – what you need to know

Confidentiality agreements allow companies to prevent high-level or sensitive information from being released to competitors or the public. They are popular tools for companies who want to collaborate with external parties or explore mergers or acquisitions.

However, whilst they are popular, they are not a fool proof method of ensuring your information remains confidential when it comes to enforceability. They do have the following inherent limitations:

• Once information has been disclosed, it cannot be undisclosed
• Proving a breach of a confidentiality agreement can be very difficult
• The damage that follows from a breach may not be satisfactory
• Recipients of confidential information can indirectly use it to their advantage.

These weaknesses therefore place the onus on the party preparing the confidentiality agreement to ensure that the other party is one they can trust and that it is drafted as carefully as possible to prevent unintended consequences.

How do I know if a confidentiality agreement has been drafted correctly?

This question can be answered in two stages. The first is whether the legal requirements for a valid contract have been met, meaning the contract contains the following:

• An offer and acceptance
• Valid consideration and
• An intention to create legal relations.

The second stage relates directly to the confidential information. Any valid confidentiality agreement must set out:

• The information you wish to remain confidential
• The obligations each party has in respect of that information and
• How long those obligations last.

Often the validity and strength of the confidentiality agreement is tested once a breach, or anticipated breach, of the agreement has occurred. There are then two options available to the party seeking to enforce:

1. A court injunction
2. Damages.

The preferred first step is to obtain an injunction as this can preserve the function of the confidentiality agreement – urgency here is key. For instance, if Company A had it on good authority that Company B was about to provide a third party with its confidential information, if granted, an injunction could prevent that disclosure and preserve Company A’s information.

However, if Company B had already provided the third party with the confidential information, then an injunction would be able to halt further dissemination, but it would not undo what had already been disclosed.

If the confidentiality agreement has already been breached, recovering damages from the offending party can help to assuage the losses suffered.

For instance, if Company A suffers loss of profits due to Company B misusing confidential information, Company A could receive damages for the loss of profits. The downside of damages however is that it is often difficult to calculate the losses caused as a direct result of a breach of a confidentiality agreement.

The key here is in the drafting and ensuring that you have a watertight agreement to enforce.