What's a Confidentiality Agreement?

Many situations exist that involve confidential information or data someone desires to keep private. Estate planning, health care, business and even marriage may involve some expectation of confidentiality, and these are only a few potential examples.

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A confidentiality agreement is an important tool in making those expectations enforceable.

Specifically, a confidentiality agreement is a contract between two entities that holds both parties responsible for not disclosing certain information to others or to people who don't need to know it.

Some people refer to a confidentiality agreement as an NDA, or non-disclosure agreement. However, technically, these are usually considered two different things, with NDAs being a subset of confidentiality agreements.

Strong confidentiality agreements — contracts more likely to hold up legally when there's a need to enforce them — must include certain components. Some information that might be advisable to include in a confidentiality agreement can include but may not be limited to:

• The parties involved: The agreement should list, specifically, the parties to the contract, including names, addresses and contact details.
• Who must hold information confidential: A unilateral confidentiality agreement requires only one party to agree to hold information confidential. Nondisclosure agreements are an example of this type of contract. A bilateral confidentiality agreement requires that both parties agree to hold information confidential. Either way, the contract must spell out these details.
• What information is considered confidential: You can't simply have an employee sign an NDA or ask a business partner to sign a confidentiality agreement and attempt to claim that any and all information involved in that relationship is confidential. The contract must define the categories and types of data that fall under this protection.
• Terms for the agreement: How long should the information be held in confidence? It's common for employment NDAs, for example, to specify a term that ends a few years after the employment contract does. However, the exact nature of the confidential information plays a role in the terms that may be appropriate.
• Consequences for breach of contract: This might include payment of fines or damages, the potential termination of an employee or business contract or other consequences.

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When and Why Are Confidentiality Agreements Used?

Confidentiality agreement and non-disclosure agreement contracts are used anytime one or more parties want to enter into a relationship of some kind while protecting data. Some confidentiality agreement examples include:

• NDAs with employment contracts: Employers may require that new hires sign non-disclosure agreements stating they won't share proprietary business secrets or other data. Information that might be protected by an NDA can include but isn't limited to product formulas, client lists and proprietary process steps.
• Agreements with business partners or vendors: When a business outsources any of its processes or works with software and technology vendors, it may need to disclose confidential information to those partners. The partners may be required to sign a confidentiality agreement before the business agrees to any sort of further contract.
• During M&A activity: Confidentiality agreements are typically signed by the individuals involved when preparing for or vetting an opportunity for a merger and acquisition. This protects data from getting out if the business transaction falls through and helps ensure corporate leadership has time to convey the M&A information appropriately to employees and customers if it doesn't.

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What Can Happen If You Break a Confidentiality Agreement?

The consequences for breaching such agreements are usually included in the contract. They typically include an ability for the other party to sue the breaching party for damages or terminate the contract early.