Confidentiality agreements, which are often also referred to as the non-disclosure agreements (NDA) are mostly concluded if information containing trade secretes is disclosed to the potential contractual partners. Disclosing any valuable information always entails a certain risk of potential abuse, although at the same time it is generally impossible not to disclose information. In such cases, practice has shown that before going to the main contract(s) a confidentiality agreement is concluded for the period of negotiations, which generally foresees the main obligation of compensation of damages by the person who breached the contract. In other words, the party to the contract who disclosed to third persons information that should not have been disclosed according to the contract, must compensate the damages caused as a result.
Should a confidentiality agreement be concluded in the main contract or as a separate non-disclosure agreement? A confidentiality agreement may be concluded as an independent contract, but it may also be included in another contract, be it rental contract, contract of services, contract of employment or any other contract. The confidentiality clause regulated in another contract normally provides that the contract itself as well as any agreements therein are considered confidential.
If an agreement is sufficiently defined in a main contract and the confirmations of the parties to the contract are sufficient, it is not necessary to conclude a separate contract. However, if there is a goal to extend confidentiality personally to the employees of a company, separate agreements should be concluded with them.
What is confidential information?
The terms ‘business secret’ and ‘confidential information’ are not synonymous. The obligation to keep business secrets arises from the law for the members of the board and council of a company.
The definition of business secret is set out in the Competition Act and it is considered to be information regarding the business activities of an operator, the disclosure of which to third persons may damage the interests of the operator (e.g. technical set-up or recipe of a product, production methods and processes, techniques used therein, as well as salary and compensation plans or customer data, sales strategies etc).
On the other hand, confidential information has no definite definition, but there are certain characteristics it must meet. First, information defined as confidential must actually be confidential, i.e. it cannot be public knowledge. Furthermore, the person publishing the information must have a reason (including a reason arising from the law), why the information should be treated as confidential (e.g. information related to the development of a joint project, including ideas, plans etc). Information must be defined as accurately and specifically as possible. An agreement where absolutely all information exchanged between the parties is considered confidential, may be unjustifiably limiting for the recipient of the information.
How to ensure confidentiality?
The most efficient way to ensure that the confidentiality obligation is observed is to establish a contractual penalty for violations. A contractual penalty means the obligation of the party who violated the contract to pay an agreed sum of money to the injured party. The aim of this penalty is to influence the other party to fulfil their obligations. The contractual penalty simplifies obtaining a compensation for damages as when a claim for the contractual penalty is submitted, there is no need to prove that the damages have occurred or the amount of damages. Furthermore, as a result of the violation, the injured party has the right to request compensation of additional damages to the extent that was not covered with the contractual penalty.
The amount of the contractual penalty depends on the value of the protected benefit, i.e. what is the potential of realisation arising from the idea, was it directed only to one market or can be marketed worldwide, in what stage is the development etc. The contractual penalty should not be unreasonably big.
Term for keeping the secret
In case of confidentiality obligation included in the main contract or agreed on in a separate agreement, the term depends on the agreement between the parties. When agreeing on the term for the confidentiality obligation, the same principles should be observed as when defining the confidential information, i.e. confidential information must actually remain confidential (not become public) during the entire time agreed and the person disclosing the information must have legitimate interest for keeping the information confidential during the entire agreed term.
