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October 2023

Understanding Non-Disclosure Agreements (NDAs): Part 3

Non-Disclosure Agreements (NDAs) play a pivotal role in safeguarding sensitive information between parties. These legal documents define the duties and obligations that each party must uphold to protect the confidentiality of shared information. If you want to learn about the significance of NDAs in pre-contract negotiations, follow this link.

In this blog, we will explore the essential responsibilities of the parties involved in an NDA and the consequences of breaching these obligations. Additionally, we will examine judicial precedents concerning NDAs, highlighting landmark cases that have shaped the legal landscape surrounding confidentiality agreements. Understanding the duties, remedies and judicial interpretations of NDAs will empower individuals and organisations to proactively safeguard their confidential information. Let’s delve into the crucial aspects of NDAs and their implications in various contexts.

What are the duties and obligations of the parties entering an NDA?

Parties in an NDA pledge to:

  1. Protect the other’s confidential information to the same degree of standard as each party protects their own confidential information.
  2. Disclose confidential information only to the persons authorised in that regard on a need-to-know basis.
  3. Use confidential information only in accordance with the defined purpose.

Promptly inform the disclosing party of any breach and/or accidental disclosure and take immediate steps to retrieve and protect such confidential information.

The breach of aforesaid duties and obligations leads to legal consequences.

What are the remedies available in case of an NDA breach?

Clauses pertaining to legal remedies and consequences for breach, such as termination, injunctions and indemnification, should be included in the NDA. The injunctive relief seeks to restrain the defaulting party from continuing any acts or omissions that may continue to cause loss or damage to the aggrieved party. The preventive reliefs are governed by section 38 (prohibitory injunction) of the Specific Relief Act of 1963 and under Order 39 Rule 1 and 2 (interim prohibitory injunction) of the Code of Civil Procedure of 1908.

A breach of the NDA may also result in substantial losses, hence clauses containing a grant of monetary compensation in the form of fines may also be incorporated in the NDA. The aggrieved party can also file a suit for recovery of any damage caused under sections 73 and 74 of the 1872 Indian Contract Act. The indemnity and damages clause will ensure reimbursement of any fees or expenditures incurred by the aggrieved party as a result of the breach (including legal costs).

The aggrieved party may also take recourse to the concerned provisions:

  • The Indian Penal Code such as section 403 (dishonest misappropriation of property) and sections 405 and 408 (criminal breach of trust)
  • The Information Technology Act, 2000 such as section 43A (compensation for failure to protect confidential personal data or information at the corporate level) and section 72A (punishment for disclosure of information in breach of lawful contract)
  • The Copyright Act, 1957 such as section 55 (civil remedies for infringement of copyright) and section 63 (offence of infringement of copyright).

What are the judicial precedents concerning an NDA?

Indian courts have time and again taken cognizance of breaches of obligations of confidentiality and have protected its disclosures under NDAs, in a catena of judgements. Let’s look at some cases:

  1. Confidentiality under employment contract/agreement
    The best way of protecting confidentiality under employment contracts is by way of introducing a non-compete clause in the employment contract/agreement, thereby preventing an employee (the receiving party) from sharing any confidential information of the employer (the disclosing party) with their competitors, during the term of employment as well as post-termination of employment for a reasonable period.

    1. Niranjan Shankar Golikari V/s. The Century Spinning & Manufacturing Co. Ltd. wherein the Hon’ble Supreme Court upheld certain clauses of employment contract, restricting an employee for a certain period post termination of employment, from joining a competitor company, as valid. It was also held that negative covenants operative during the period of contract do not amount to restraint of trade under section 27 of the Contract Act.
    2. The judgment in Niranjan Gollikari (Supra) was upheld by the Hon’ble Madras High Court in FL Smidth Pvt. Ltd. V/s. Secan Invescast (India) Pvt. Ltd. upholding that a negative covenant in an employment contract, restricting an employee during the period of employment from engaging in work similar or substantially similar to the one carried on by the employee, was reasonable and necessary for the protection of the company’s interests. Accordingly, such restraint shall not be for trade and/or public policy.
  2. Confidentiality under the Right to Information Act, 2005
    The tenders submitted to government bodies (receiving party) generally contain non-disclosure clauses for the protection of confidential information in the form of technical and financial information shared by the private parties (disclosing party) submitted along with tenders. On several occasions, these government bodies received applications under the Right to Information (RTI) Act seeking disclosure of such confidential information after the tenders were scrapped. Although on one hand the information sought under said RTI applications may be categorised as a ‘public document’, it may still require to pass through the test of “commercial confidence” and third-party information under section 11.

    1. Bharat Sanchar Nigam Ltd. Vs. Chander Sekhar.
      In the present case, the NDA extended the obligation of confidentiality beyond the date of opening of tenders, but only for two years from the date of disclosure or to the completion of business purposes, whichever was later. However, with the scrapping of tenders, further business purposes were abandoned and the two years had also elapsed from the date of information submission. Thus, the said agreement did not come in the way of the appellant disclosing information. However, disclosure of such information which would be part of the evaluation process would still require a third-party information procedure under section 11 of the Act to be followed. Thus, besides the bid price, there might still be information in the bid which might have been discussed in the evaluation process of the commercial confidence and any trade secret or intellectual property of the bidders whose bids were evaluated will need to be protected.
  3. Confidentiality under the Arbitration and Conciliation Act
    Before 2019, confidentiality was confined to conciliation proceedings conducted under section 75 of the Arbitration and Conciliation Act, 1996. However, due to the well-established premise that confidentiality is at the heart of arbitration, a need was felt to legally enforce it.Accordingly, in 2017 a high-level committee chaired by Justice B.N Srikrishna recommended introducing a distinct confidentiality clause within the Arbitration Act . The said recommendation was acted upon in the year 2019 with the addition of section 42A in the act, which provides that parties, arbitrators and the arbitral institution must retain confidentiality unless “necessary for implementation and enforcement of award”.

    However, the said provision fails to account for the instances where the parties may seek judicial intervention for purposes other than implementation and enforcement of the award, such as for the grant of interim reliefs under section 9 of the act. Accordingly, to date, neither the statutory framework nor the judicial precedents in India have sought to address the juxtaposition between the concepts of confidentiality and the principle of open justice to be followed by the courts concerning arbitration matters.

Given the above, it is highly recommended that all corporates and organisations be proactive in securing their confidential information, by way of executing an NDA, which is an efficient document that creates legally binding obligations between parties to keep the information confidential and provides exhaustive remedies in case breach.

References:

https://www.barandbench.com/columns/breach-of-confidentiality-maintenance-covenants-amid-covid-19-concerns-and-remedies
https://www.hg.org/legal-articles/what-are-non-disclosure-agreements-in-india-55516
https://vaishalibhagwat.com/publications/non-disclosure-agreements/
https://www.investopedia.com/terms/n/nda.asp

Disclaimer: The information, statements and opinions contained in this content are of a general nature only and do not take into account your individual circumstances including any laws, policies, procedures or practices you or your employer or businesses may have or be subject to. Although the statements of fact on this page have been obtained from and are based upon sources that L&T EduTech believes to be reliable, it does not guarantee their accuracy or completeness.

ADITI CHAVAN
Author

With over 15 years of experience as a legal professional, Aditi holds a strong academic foundation with Bachelor’s degrees in Science (BSc) and Law (LLB). She furthered her legal education with a Master’s degree in Constitutional Law (LLM) and specialised in areas like Intellectual Property Rights (IPR), Alternate Dispute Resolution (ADR) and Arbitration laws.

During her career, Aditi handled diverse litigation and non-litigation matters for clients in FMCG, Pharma, IT and more. For 11 years, she served as Assistant General Manager (Legal) for the Kalpataru Group, overseeing all legal issues related to their Real Estate Division. In July 2022, Aditi joined L&T Construction as a Senior Manager (Legal), where she provides independent legal counsel to the company, particularly concerning projects in the Western Region.