Home Mutual Funds Confidentiality Agreement: Definition, Purpose, and Elements

Confidentiality Agreement: Definition, Purpose, and Elements

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What Is a Confidentiality Agreement?

A confidentiality agreement is a legal agreement that binds one or more parties to non-disclosure of confidential or proprietary information. A confidentiality agreement is often used in situations wherein sensitive corporate information or proprietary knowledge is not to be made available to the general public or to competitors. A non-disclosure agreement (NDA) is a particular type of confidentiality agreement.

A confidentiality agreement may be contrasted with a waiver of confidentiality, whereby parties involved give up guarantees of confidentiality.

Violating a confidentiality agreement can subject that party to potential fines or other legal and reputational repercussions.

How a Confidentiality Agreement Works

A confidentiality agreement is a standard written agreement that is used to protect the owner of an invention or idea for a new business. It is also an important document between two companies that are contemplating a merger or a commercial transaction that must be withheld from public knowledge.

In the workplace, any individual who has access to sensitive information (an employee or a contractor for a firm) is often required to sign a confidentiality agreement to guard against the disclosure of competitive information that may harm the firm. The agreement is unilateral (one party signs), bilateral (both sign), or multilateral if many parties will have access to sensitive information.

Key Takeaways

  • A confidentiality agreement is a legal contract or clause that is used to protect the owner’s proprietary or sensitive information from disclosure by others.
  • Confidentiality agreements such as non-disclosure agreements (NDAs) are used to keep valuable ideas pertaining to new businesses, inventions, intellectual property, or proprietary processes from reaching the public or competitors.
  • Confidentiality is also required when dealing with deals such as mergers and acquisitions, which could lead to insider trading or market manipulation if revealed before it is made public.

Main Elements of a Confidentiality Agreement

Confidentiality agreements can be customized depending on the particulars of the situation, but certain boilerplate sections will often apply. The agreement will name the party or parties involved, the items subject to non-disclosure, the duration of the agreement and the obligations of the recipient(s) of confidential information.

The document will clarify that exclusions to the agreement include information that is:

  • Already known by the person or persons who are signing the agreement
  • Already in the public realm
  • Easily learned or could be learned independently outside the company that drafted the agreement

The agreement will also define instances of permissible disclosure (e.g., to law enforcement) and disclosure exceptions.

The “exclusions from confidential information” section excludes certain categories of information as nonconfidential, which protects the receiving party of this information from having to protect it in the future. The “obligation of the receiving party” section details what certain parties can do with the information provided by the disclosing party.

The “time periods involved” and “miscellaneous” sections use straightforward language to cover the term of the agreement and any other matters deemed important. Those matters may include details such as which state’s law to apply to the agreement and which party pays attorney fees in the case of a dispute.

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