In the current times, most startups aim at implementing innovative business ideas, new technologies, and, most probably, unicity. Whereas registering, financing, and making a startup work usually imply a plethora of things to complete, one must not oversee the legalities of it. Innovation and the uniqueness of an idea represent, from a legal standpoint, a valuable asset. For certain startups, such as the tech ones, it is probably the most important element of the business and the most financially rewarding one.

In legal terms, this business idea or concept represents the intellectual property. For streamlining income, the intellectual property would need to be commercialized, but to benefit from a legal hedge at the same time. In negotiation rounds, discussions with financiers, suppliers, employees, or in dealings with potential business partners, the business idea, and the information associated with it may be disclosed. An unprotected disclosure considerably diminishes the competitive advantage of that startup and its future standing. Consequently, one of the ways a startup owner can protect this asset is by entering an NDA before divulging the business idea or data associated with it (such as customer lists, plans, know-how, strategy, etc.).

WHAT IS AN NDA?

An NDA also called a confidentiality agreement, represents a binding legal document by which parties determine the circulation of information deemed confidential between themselves and limit the disclosure of this information to third parties. In practice, the domain of NDAs includes not only intellectual property but also referring to other types of “information” (related to the business idea at issue) that parties classify as confidential.

The purpose of entering an NDA is nevertheless to protect the provider of confidential information, generally called the disclosing party, and to determine the circulation regime of that information (who can use it, under which conditions, and for which purpose). Thus, it is recommendable that NDAs identify the information deemed confidential and assess specifically the purposes for which this information may be used.

NDA’s may be unilateral or “one-sided”, where only one party discloses confidential information, but also mutual, where all parties to that NDA disclose confidential information.

Finally, being a contract, an NDA needs to meet all elements of the validity of a contract, such as consideration, consent, object, etc., therefore is subject to the UAE general contract law. However, the content of an NDA may raise certain enforceability problems, which are briefly looked into in the below section.

HOW TO WRITE ENFORCEABLE NDAs?

We have observed in practice in several instances that NDAs entered by various stakeholders are formulated widely, covering all sorts of information without proper taxonomy, as well as no disclosure or territorial limitations. It is unlikely that such NDA would be enforceable in courts in UAE, and we may easily extend this to arbitration proceedings as well.

Desirably, a well-drafted and enforceable NDA would need to cover and specify de minimis the below elements:

  • A clear definition of what comprises confidential information. It is possible that, in various business dealings, not all information circulated between the parties to be confidential. It may easily happen that certain information to be available already in the public domain (such as company data available on that company website or made available by the regulators, such as the business license numbers). In UAE, there are certain types of information expressly classified as “non-confidential” by the effect of the general principles of law. This is the case of information that is known by the receiving party of such information independently of any disclosure and involvement of the disclosing party. As such, a potential claim of a breach concerning the type of information would be futile.
  • The rights and obligations of the receiving party should be expressly stated. For recommendation purposes, the NDA should state the procedure of usage, stocking, and releasing any confidential information provided to the receiving party (for instance, which employees to the receiving party may have access to the confidential data, under which conditions and clearances, etc) and the time frame of such release;
  • An NDA should be issued for a specified duration, understood as the period when the receiving party is deemed to maintain and preserve the confidential information. It is a generally known practice in UAE that NDA’s are issued for 2 to 5 years for various business partners. As well, for employees, the non-disclosure obligations subsist during the employment contract and can be extended after the termination of that employment contract, under various restrictive covenants.
  • Depending on the nature of the transactions and authorized disclosure it refers to, an NDA may also contain a territorial limit. However, in rare cases, we have seen such a clause inserted in NDAs, probably because the parties try to maximize their legal hedge and attempt to make these NDAs applicable anywhere, at any time.
  • Finally, it is important to insert an appropriate jurisdiction clause in NDAs. Depending on certain variables and on the nature of the disclosure and of the transaction (domestic or with cross-border implications), parties may consider including arbitration clauses in the NDAs. For enforcement purposes, they may benefit from the protection mechanisms created by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which may constitute an advantage to the traditional litigation in courts.

Conclusively, an NDA may offer the legal hedge or protection of a business idea and the assets associated with it as long as it is not too broad, unreasonable, and onerous. These elements should be carefully considered in order not to work to the detriment of an unwary disclosing party.

 

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Importance of Non-Disclosure Agreements (NDA) for Startups was last modified: December 22nd, 2020 by Dr. Laura Voda

Dr. Laura Voda

Senior Associate