A confidentiality clause is present in almost every agreement, so it makes sense to learn how to draft it.
Let me give you an example of its relevance. Foxconn makes processors for Apple. Imagine that Foxconn has a contract to manufacture processors for its iPhones and Macbook devices.
6 months before the iPhone 15 is launched, Foxconn has the contract to make a special processor by a certain launch date.
What is the information it is likely to have about Apple products?
The design of the product, its new innovations and features, the launch date, etc. Apple may want to announce the launch at a specific time, to create a certain element of surprise when it launches the product to generate a buzz about it, etc.
What happens if any of this information is leaked before the planned date?
It could take away the surprise element for customers, give competitors an advantage – they will know what Apple plans to launch and the features that it will have. They can plan a product launch and even work on launching something similar or superior by that date.
This is what Apple did when an employee breached the confidentiality clause in their agreements:
When parties are starting negotiations to explore whether they can arrive at an agreement on a deal, they may execute a non-disclosure agreement, which contains clauses pertaining to confidentiality.
The deal may or may not go through, but maintaining confidentiality is very important, because any leaks could give their competitors an advantage and compromise the business interest of a party.
Now, did you understand why confidentiality agreements are signed?
This is the “commercial intent”. You should know the commercial intent of every clause in different types of contracts so that you can draft and negotiate well. Without knowing the commercial intent behind a contract, you cannot draft or negotiate a contract.
Sometimes not just a clause but you will draft an entire confidentiality agreement.
Can you give examples of situations where you should sign a confidentiality agreement?
Let’s start the drafting.
Elements of a confidentiality clause
#1 Impose the obligation to keep information confidential
Each party agrees to protect any Confidential Information about the other party from any disclosure and not to use it in any way except for the purposes of this agreement.
Each party shall ensure that any Confidential Information is only disclosed to such employees or consultants for whom it is necessary to perform its obligations under this Agreement. Each party will execute a confidentiality agreement with such employees or consultants that imposes similar restrictions.
Each party shall implement operational procedures to protect the Confidential Information from unauthorised use or access.
#2 Define confidential information and specify what is not confidential
“Confidential Information” means all proprietary, technical or business information pertaining to the business of either of the parties, and includes knowledge about the business, financial condition, products, future or potential products, trading methods, algorithms, trade secrets, customers, suppliers, etc.
#3 Specify the duration for which confidentiality obligation persists
The obligation to maintain confidentiality shall survive for 3 years from the time of disclosure or after the expiry/ termination of the agreement, whichever is later.
#4 Consequences of disclosure of confidential information must be mentioned
In case of breach or unauthorised disclosure, the affected party shall have the right to claim any damages suffered, and also approach courts for injunctions to prevent further disclosure.
#5 Exceptions to confidentiality must be specified
Confidentiality obligations do not apply to the following situations:
- any information already known to the party prior to the deal,
- information which has already become public,
- has been obtained through written consent,
- Information which has been independently developed,
- Information which is required to be disclosed pursuant to an order of a court or government agency.
Does it make sense? Quite simple really!
By the way, the confidentiality clause is very similar in international contracts all over the world.
Let us go through the clause in the contract between a US and a Canadian party, here.
Now, let me show you the clause from a contract where one of the parties is from Israel, here.
As you can see, they are largely similar!
What is the point?
The point is that you do not have to restrict yourself to Indian contracts. You can do international contracts as well and tap into the global market, which is USD 800 billion, out of which the US legal market is almost 400 billion USD.
Even the UK is 60 billion USD.
This only enhances your prospects in the Indian market.