Drafting Points Critical Thoughts on Contract Drafting

Why NDAs Matter

Posted in Contract-Drafting Philosophy 101

This post builds upon my prior post on why quality contract drafting matters. Fellow law blogger Brian Rogers recently pointed me to a blog post by another law blogger, Paula Brillson: Disrupting the NDA. In her post, Paula puts forth the notion that non-disclosure agreements (“NDAs”) might not be as useful as we think they are. I generally agree with that sentiment. However, I’m not willing to go so far as to discount their value altogether. My feelings on the issue can be more or less extended to the import of contracts generally (which I’ll address in a later post). So perhaps my views are predetermined, lest I talk my way out of a job…

Nonetheless, let’s have a closer look at the usefulness of NDAs.

 

Why NDAs might be seen as frivolous

There are a few reasons why the value of NDAs might be called into question.

1) Some folks just don’t do NDAs. There are a decent chunk of financial investors and VC investors that, as a policy matter, simply will not sign NDAs, at least with respect to the disclosure of preliminary information. If you’ve got the leverage in a deal, you can do that.

2) Often breached unintentionally. I have been involved in many-a-transaction in which I or someone on the deal raises his or her head and says, “Hey: is there an NDA in place that prevents us/them from disclosing that information?” More often than not, any such disclosure just ends up not bubbling up to the surface, is ignored by the disclosing party, or becomes moot upon the consummation of the transaction (at least in the context of M&A transactions).

3) No substitute for good judgment. Paula is spot on that an NDA is no substitute for good judgment. If you’re nervous about sharing information, under the protection of an NDA or otherwise, consider not doing so.

 

But here’s why NDAs matter…

All of that being said, NDAs—like all contracts—do matter. Here’s why:

1) The impact of disclosure restrictions on the disclosing party.The decision whether or not to enter into an NDA and to thereafter disclose information under the protection of that NDA might in fact depend upon the existence of another NDA by which the disclosing party is already bound. For example, it is not uncommon for an NDA to permit disclosure of confidential information so long as that disclosure is being made pursuant to a written contract containing non-disclosure and non-use provisions that are substantially as (or no less) stringent than those included in that NDA.

2) Enforceability. Also, the NDA might actually be enforceable! If the receiving party discloses or uses confidential information in contravention of the NDA, then the disclosing party might in fact be able to obtain an injunction to at least stop the leak at its source. Or the disclosing party might be able to obtain damages. But many will argue (often with merit) that the damage has already been done and any remedy under the NDA will be insufficient.

3) An NDA is better than your ability to enforce it in court. So what the disclosing party really wants to do is prevent the disclosure or use of confidential information in the first place. Does an NDA accomplish that (or at least increase the chances that a recipient will not disclose or use information) more effectively than a hearty handshake? I think that it does. This is because an NDA, like all contracts, has value beyond a party’s ability to enforce it in court. In my contract-drafting presentations, I claim that, in the context of your contract counterparty deciding whether or not to breach a provision of a contract, that contract is as good as:

  • your counterparty’s perception that you will seek to and successfully enforce it in court; plus
  • your counterparty’s assessment of any damage to its reputation should you seek to and successfully enforce it in court; plus
  • any sense of moral obligation that your counterparty might have in performing its obligations under the contract.

Even in the big bad world of business, don’t discount this last point; there is no doubt a psychological component to entering into a written NDA. Studies have shown that people are more likely to adhere to beliefs and positions that they articulate in the written word than the spoken word (and certainly more so than if those beliefs or positions are kept sheltered in their minds).

In fact, in the next NDA that I draft, I’m thinking of emphasizing in bold font the sentence containing the core obligation:

The Receiving Party shall not directly or indirectly disclose and shall not directly or indirectly use any Confidential Information.

I would bet that, after coming face-to-face with the emphasized version of that sentence, the Receiving Party would at least have second thoughts about disclosing Confidential Information, even if it knew that the chances of it incurring damages or getting caught would be relatively low.

 

And so, with that being said:

If you’ve made it to the end of this post, shoot me an email (even a one-liner) with your thoughts!