Understanding NDAs in India

What is a Non-Disclosure Agreement?

Non-Disclosure Agreement (NDA) is a legally enforceable contract between at least two parties that protects confidential information and restricts that information from being disclosed to others. A NDA is also known as a confidentiality agreement.
Non-disclosure agreements prevent the disclosure of confidential information to third parties. In business contexts, a NDA may be entered into by two parties to protect proprietary information, trade secrets, client lists and contact details, marketing and sales plans, financial data, product information and intellectual property. This is important for businesses in India as it helps to protect their competitive edge and preserve their intangible assets.
The NDA may cover proprietary information, confidential information and trade secrets, but these terms should always be well defined in the NDA as these may mean different things under Indian law .
Even if a NDA does not specifically identify the information that is deemed confidential, the law may nonetheless assume certain information is confidential by virtue of its nature. In India, a judge will look at the substance of a particular communication and determine whether it can be considered proprietary or confidential. As such, business owners should ensure that a NDA includes detailed descriptions of confidential information so that the court understands which information is proprietary and is entitled to protection.
A NDA should be governed by the laws of India and include the appropriate jurisdiction clause. The judge will look at the jurisdiction clause to determine whether he or she can enforce a NDA. Judges in India usually honour jurisdiction clauses and will enforce valid clauses.
There are several types of NDAs that may be created, including mutual, one-way, and multilateral.

Essential Components of an NDA in India

A non-disclosure agreement in India generally contains six key elements: (i) definition of confidential information, (ii) confidentiality obligations, (iii) terms of confidentiality, (iv) exceptions, (v) breach and the relief and indemnity provisions available for breach, and (vi) restriction on further disclosure of information.
Definition of Confidential Information
An NDA must specify the nature of the information to be kept confidential. These may include, amongst other things, finances, trade secrets, technical data or other know-how, pricing or other similar information. The parties may also include a list of specific documents falling within the definition of confidential information. Any such definition would need to be construed strictly, therefore, each party must exercise care in defining what is to be held confidential and what is not. If the NDA does not expressly list certain information in the definition of confidential information, but the information is expressly stated as confidential in any other document that is part of the NDA, then the definition of confidential information may include such information. Information that is public knowledge, has been independently developed or acquired by the receiving party, known to the receiving party at the time of disclosure or is subject to a legal right of disclosure, could also be excluded from the definition of confidential information. In addition, the NDA may specify information that is otherwise protected by law such as personal data or health information.
Confidentiality Obligations
An NDA must set out the obligations that the receiving party has to (i) keep the confidential information strictly confidential, (ii) safeguard it with a reasonable degree of care, (iii) use it only for the purposes of the NDA, and (iv) not disclose it at any time or in any manner to any third party (including an affiliate) without the prior written consent of the disclosing party, unless the NDA expressly permits otherwise.
Even where a party has agreed to be bound by strict confidentiality, it is still important for the disclosing party to ensure that the receiving party has taken sufficient steps to protect the confidentiality of the information that has been disclosed. In this regard, a disclosing party may request that the receiving party employs more stringent measures to protect the confidential information (i.e., in circumstances where the information is considered very sensitive and requires more stringent security measures) or that the receiving party submits to ongoing compliance reviews to ensure continual confidentiality of such information until the term of the NDA expires. Depending on the type or sensitivity of the information, a disclosing party may wish to request additional confidentiality provisions (which are outside the set of six key elements) or may wish to consider a separate non-disclosure letter incorporating same. Such additional confidentiality provisions may include restrictions on the receiving party from making copies of the confidential information, not allowing it to leave the premises of the disclosing party, and prohibiting access to it by unauthorized personnel. The receiving party may also be required to have all employees, representatives and agents that have access to the confidential information agree to be bound by confidentiality obligations. In this regard, the disclosing party may wish to ensure that its NDA does not release any of its employees from their obligations of confidentiality, as they will remain contractually bound to maintain confidentiality even after the disclosing party is no longer bound by the NDA (i.e., after expiration/termination of the NDA).
Exceptions
Once the NDA is signed, it becomes unlawful for the disclosing party to disclose the confidential information of the receiving party to outsiders, except in limited circumstances, where (i) the disclosing party is required to disclose the confidential information pursuant to applicable law or court order, (ii) the disclosure is made after receiving prior consent from the receiving party, (iii) the information has already become public, or (iv) the information is disclosed without reference to the identity of the disclosing party.
Breach and Relief and Indemnity Provisions
Parties generally incorporate clauses in their NDAs that make the receiving party liable for any breach of the confidentiality obligations, or for any unauthorized disclosure of confidential information. Therefore, if a receiving party is found to be in breach of the NDA, the breaching party may be liable for any losses or damages caused to the disclosing party. Where relief is not available in damages, a disclosing party may seek injunctive relief or other equitable remedies against the receiving party for the unauthorized use of its confidential information. It should be noted that injunctions are discretionary and that a disclosing party must demonstrate that it has a real prospect of success on the merits and that an award of damages would not be an adequate remedy. Therefore, injunctive relief is granted only where monetary damages are insufficient to cover the harm suffered by the disclosing party or where there may be irreparable harm caused to the disclosing party as a result of the other party’s breach. To deter breaches, a disclosing party may wish to provide for minimum liquidated damages for any breach of the NDA.
Although it is common for parties to include indemnity clauses in their NDAs to reinforce the receiving party’s obligation to keep the confidential information confidential, it is not mandatory for the parties to incorporate such clauses in their NDAs because they are specifically governed by the Contract Act and, therefore, are generally enforceable without the need to resort to provisions in the NDA.

Types of NDAs Commonly Utilized in India

The breadth and scope of NDAs can fluctuate based on the parties’ requirements and the level of confidentiality involved. Nevertheless, there are various types of NDAs in India, including (1) unilateral confidentiality agreements; (2) bilateral NDAs; (3) multilateral NDAs; (4) confidential disclosure agreements; (5) non-compete NDAs; (6) verbal NDAs; and (7) per se strict confidentiality agreements. As stated earlier, the above types can be combined or made hybrid as per the parties’ requirements. The parties can also agree to not have a single NDA at all and still maintain confidentiality between them by modifying any type of the different types of NDAs below.
Unilateral NDAs are used when one party is disclosing confidential information and the other party receiving it has to protect the former’s interest. Unilateral NDAs are also known as one-way NDAs and are most commonly used in business exchanges. They are most common where an entrepreneur asks an industry veteran for business advice or honesty in investment. These can also be used in the employment context where the employer may want a prospective employee to sign a NDA with respect to ideas, plans, inventions, methods, processes, trade secrets, works of authorship or other similar types of information. A unilateral NDAs may consist of a obligation of confidentiality (not to disclose) and an obligation of non-use (not to use for a competing purpose). A unilateral NDA may survive throughout the relationship of the parties and can set out limitations as to how long the protection lasts.
Bilateral NDAs may be used in situations where both parties may act as an investor. Where two companies are collaborating and a need arises to share confidential information, they will enter into a mutual NDA. A bilateral NDA will generally consist of obligations not to disclose and limitations on how long the information is protected (including the manner and extent of the permitted use). It may also have an optional obligation of notification on receipt of unsolicited information. A bilateral NDA generally has an H older Clause i.e. a clause that sets out the recourse for breach of NDA which is generally in the form of a notice and undertaking to pay damages, should a third-party ever leak the sensitive information.
Multilateral NDAs are similar to bilateral NDAs but may involve many parties at the same time. Multilateral NDAs may involve an additional layer of protection particularly where the parties may wish to exchange information and want to safeguard their respective confidential information. Such NDAs can encompass obligations not to disclose and limitations on how long the information is protected (including the manner and extent of permitted use).
Confidential Disclosure Agreements are also a kind of unilateral NDA. They act as a shield for sharing confidential information and do not include a covenant not to compete. Prospective investors may ask for one in their initial risk assessment process before potentially franchising a business, making a loan, investing in a new product or by requesting a tour prior to buying a franchise.
In certain circumstances separate NDAs are entered into to restrict disclosure of confidentiality post-termination of the agreement. Further, non-compete NDAs are used in the employment context to prevent employees from working for competitors, suppliers or an organization’s customers post-employment.
Verbal NDAs may exist in certain informal situations. A verbal NDA may have the same impact as a written one. In a corporate setting, a verbal NDA can be found in a conversation relating to contractual clauses entered into by a company. Verbal NDAs can also be found in employment contexts when a prospective employee is not aware of his/her signing an NDA.
Finally, some contracts may refer to per se strict confidentiality. Strict confidentiality means contractually obligating certain confidential information and subjecting its treatment to the same standards than confidential information. However, these terms can also be used to create a distinction between the treatment of confidential information which may or may not be legally binding. The treatment of per se strict confidentiality does not contain a save as clause which requires the parties to first evaluate whether the information is confidential before subjecting it to a criterion that requires set standards.

Legally Binding Nature of NDAs in India

In India, as in many other jurisdictions, the law governing non-disclosure agreements (NDAs) is primarily grounded in contract law. The Indian Contract Act, 1872 (Contract Act) provides the legal framework for the formation, performance, and enforcement of contracts, and serves as the basis for NDAs in India.
From a legal standpoint, an NDA may be regarded as a contract between two or more parties wherein at least one party confers confidential information to the other party for a particular purpose, with at least one party restricting the use of that information to that purpose. Section 74 of the Contract Act, which governs the concept of pre-estimated damages, popularly known as liquidated damages, requires a plaintiff to demonstrate that damages are difficult to quantify or estimate at the time of the contract’s formation. The Supreme Court of India has held that the primary objective of Section 74 of the Contract Act is to uphold freedom of contract, and therefore, the parties to an agreement are free to mutually agree on a pre-estimation of loss/damages. In other words, the parties can contractually stipulate their agreement on the compensation for breach of a particular condition. However, it must be proven to a court that both the parties intended a compensation amount that was reasonable and not unconscionable, as held by the Delhi High Court in M/s Bikanervala Foods Pvt. Ltd. v. S.V. Enterprises & Ors. and explained below.
The Supreme Court of India and various High Courts have held that an NDA may be enforced if its terms are not deemed to be contrary to public policy or morals and, in certain cases, if the terms of the NDA are reasonable. The Madras High Court in Gopal Krishna Ojha v. Amex Group Holdings Ltd. held that the terms of the NDA in question were unenforceable as they rendered the employee contract of employment in the instant case vague, indefinite, unreasonable and opposed to public policy.
Moreover, Section 74 of the Indian Evidence Act, 1972 establishes the procedure to be followed in seeking enforcement of liquidated damages (agreed by the parties in NDAs). Specifically, it requires the plaintiff who parties seek to enforce the NDA to prove the loss or damage it has sustained by such breach. Section 73 of the Contract Act allows a party to recover such amount, whether fixed by the parties in the contract or not, as it may be reasonable to deem adequate. For the courts to award or enforce the imposition of liquidated damages, the plaintiff must establish both elements – general damages (Section 73) and liquidated damages (Section 74) are cumulative and exclusive.
The Supreme Court of India in Indian Oil Corporation Ltd. v. Amrit Oil Ltd. and Union of India v. Raman Iron Foundry has held that, only where the circumstances so warrant, the court may award a lesser sum than the sum so named in the contract, treating it as unliquidated damages.
It is important to note that an NDA could be rendered voidable under Section 19 (Constitutional Powers, invalidity of an agreement) and 24 (Agreement, void, Where consideration and objects are unlawful) of the Contract Act if it is found that:
(a) there was fraud or misrepresentation by the defendant;
(b) the defendant exercised undue influence or coercion over the complainant, or vice versa;
(c) the consideration or object of the agreement was unlawful; or
(d) the complaint against the defendant was founded upon a mistaken fact, or simply unreasonable.
In addition to the above, besides seeking the specific performance of an NDA, a plaintiff may also seek an injunction restraining the defendant from any action that would violate the terms or object of the NDA. The Indian judiciary has consistently granted injunctions to enforce confidentiality in NDAs. For example, the Delhi High Court in Reliance Big Entertainment Ltd. v. Super Cassettes Industries Pvt. Ltd. issued an interim injunction restraining the defendants from publishing, distributing, or broadcasting the complainant’s copyrighted and confidential material.
Further, Sections 28 and 30 of the Contract Act, 1872 allow the parties to agree to an arbitration clause (without treating the arbitration clause itself as opposed to public policy), which will be based on the answers to the arbitral tribunal’s specific inquiries and which must be in compliance with the Contracting States (Arbitration and Conciliation) Act, 2016, i.e. the Indian Arbitration Act (as amended by the Arbitration and Conciliation (Amendment) Act 2015).

Composing an Effective NDA in India

To be effective, an NDA must be meticulously drafted. As a first step, the contract must precisely identify the parties. Unlike other agreements which may, in the Indian context, permit a broad description of the parties, the NDA must clearly set out the full name of the contracting party and its designation under the relevant legislation, where applicable. Where either the disclosing or the receiving party is a corporation, it should be identified by its name, and designating it as "Corporation" or "Private Limited" or "Limited Liability Company" is not necessarily sufficient to establish that entity’s exact identity.
In addition to identifying the parties, the NDA must have a legal purpose. The law in India permits the use of a standard form of NDA in furtherance of a legal business purpose. It is therefore important to state the purpose for which confidential information is being shared.
Another key element of the NDA is the clause setting forth what is to be treated as confidential information. It will also set out the obligation of the parties to maintain the confidentiality of the confidential information. Confidential information should be carefully described. While of course, the agreement will set out categories of confidential information it is also useful to include examples of confidential information. It may be useful to add that confidential information disclosed orally should also be treated as confidential provided it is identified as such at the time of disclosure and is recorded in writing within a certain specified period.
The NDA should also impose limitations on the use and disclosure of confidential information that it requires to be protected . It should detail the obligations of the party receiving the confidential information. For example, it may restrict the use of confidential information to the intended purpose of the contract, or it may limit its use to a particular department within the company on a "need-to-know basis." It may also require the use of reasonable care to protect the information from unauthorized use or disclosure, and outline the procedures for safeguarding such information. The obligations imposed on the other party must flow from the purpose of the non-disclosure.
Further, the NDA should contain a list of excluded categories of confidential information. For instance, it should clarify that the receiving party will be free to use or disclose confidential information if it is already known to the receiving party at the time of disclosure or it was developed independently by the receiving party. It may also provide that the information will not be treated as confidential information if it is publicly available or if it is approved for release in writing by the company.
It is useful to have a dispute resolution clause in the NDA, including a provision to prevent IP infringements, if applicable. The NDA should also have a non-circumvention clause. In addition to the period of validity of the NDA, and the remedies in the event of a breach, the NDA can also specify the governing law and jurisdiction, and an expectation of equitable relief.
As stated earlier, NDAs must be carefully drafted. For a number of reasons, it is useful to make sure that the NDA is watertight. We recommend that the draft NDA be subjected to adequate internal review prior to its signature. This will help avoid legal disputes in the future.

Avoiding Common Pitfalls in NDAs

One of the most common mistakes is using copyright language and reverting the ownership and related rights to the disclosing party. In many cases, as signing parties cannot transfer any asset which has not yet been created, it may result in prolonged disputes. Therefore, the ownership of the language and the related rights for any such work created in future, which has not been previously agreed, needs to be carved out. The NDA must clearly mention that the work done with the purpose of doing so shall be the sole and exclusive property of the NDA signatory; and thus clear the clouds of rights on future work.
An NDA must always define its scope. The scope of disclosure must be limited to the minimum extent reasonably required. Earlier, in the Alibaba case, it was found that the company had sued a former employee, hiring an aggressive law firm offering NDAs as part of its service, who had disclosed information of four related entities, when the scope of the NDA clearly covered only the primary company doing business through its four subsidiary companies. Therefore, keeping the NDA precise and restrictively defining the scope of information exchange may save the party from future lawsuits.
It is essential to define the term of confidentiality. Both parties should know when the obligation of confidentiality will cease. The NDA must specify the duration of the confidentiality obligation. For example, there are two options on how to go about this: Some people may feel that it is smart not to record the start date in the NDA so that if any exposure, such as a leak of information, comes to light at the end of the contract period, they can say that the NDA agreement would be in effect till the date of such use of information; however, this is flawed as it could now become a matter of dispute. To avoid such confusion, both parties must agree on the date as the contract date.
The NDA must also include clauses on limitations of liability. In most cases, this clause may be non-negotiable depending on the relationship between the parties. Nevertheless, despite this, both parties should be aware of the limitations of liability for the damage caused by the breach of confidentiality.
An NDA is generally forced upon employees as part of their employment agreement. This deprives the employees of bargaining power or ‘bargaining chips’. Therefore, companies must make sure that they honour the rights of an employee’s bargaining power where required.

Latest Developments and Case Law in NDAs

The use of NDAs has surged as the Indian economy and startup culture have expanded. The twin forces of globalization and technology have prompted even micro businesses or home-grown multinational corporations to require their employees, clients, vendors, or other stakeholders to enter into non-disclosure agreements in respect of commercially sensitive information.
One of the more infamous NDA cases in India relates to a 2013 case involving the Mumbai-based Air Hostess Academy that sued viral prankster Tanmay Bhat, for revealing his designation and his salary on social media. Even though Tanmay Bhat claimed that he was making a global statement about the salary structure of the company through a humorous post, the company initiated a criminal action for injunction and damages against him.
In a more recent NDA case, in October 2016, the Delhi High Court accepted the argument that an arbitrator cannot grant an ad-interim injunction restraining any party from publishing the confidential information available with it. Further, the court granted an ad-interim injunction prohibiting the shareholding stock brokers of Bank of America from interfering and colluding with their nominee directors of Indusind, and the nominee directors to act independently of the stock brokers in respect of shares of Indusind allotted to the applicants by Bank of America Securities LLC in a devision of a business undertaking. It was held that the applicants have rights in equity to relief by way of ad-interim injunction as it was held that the principles of equity are in India to promote justice to the party who will suffer a greater injustice if the injunction is not granted as compared to the other party.
International jurisdiction statutes can be pressed into service to ensure that an injunction granted by an Indian court will be enforceable in foreign jurisdictions. The English Commercial Court recently granted an injunction and specific disclosure against (and in favor of) the parties to a Chinese joint venture agreement for breach of confidentiality, breaches of contract and other claims. Unless it is overturned on appeal, the judgment of Mr Justice Dextra in Drax Holdings Luxembourg SARL v Statoil ASA and Statoil Fuel & Retail ASA [2018] EWHC 171 (Comm) will provide practitioners with important new guidance on the appropriate principles governing the granting of such injunctions and disclosure orders by the English courts in relation to joint venture documentation, both at the interim and final hearing stages.
NDAs are increasingly becoming vital for businesses. For sure, as the Indian economy & business evolves over time, the relevance of NDAs shall prove critical to ensure that no harm is caused due to improper disclosure.

Conclusion: The Future of NDAs in India

As India continues to emerge as a global business center, the use of non-disclosure agreements (NDAs) is likely to see significant growth. As more Indian companies expand their operations beyond national borders, the need to protect intellectual property will only increase. NDAs provide one means to obtain that protection.
At the same time, increasing globalization will bring into India new international legal standards that may influence the future development of NDAs. U.S. companies are primarily driven by the threat of litigation as a means to deter individuals from breaching confidentiality agreements. However, as noted above, the Indian legal system is ill-equipped to handle many violations, which is why many Indian companies opt for criminal NDAs. However, Indian courts and companies may be influenced by national laws such as the Defend Trade Secrets Act which allow for U.S.-style remedies to breach of confidence issues . The speedy and more efficient remedies provided for in this Act may gain traction in India as India continues to establish itself as a high-tech manufacturing and business center.
It is also possible that new technology will influence the form of NDAs in India. With more companies moving toward cloud computing or other electronic platforms for sharing information, the form and transmission of information in electronic form will require NDAs that are adapted to such situations.
Notably, even as several changes loom over the NDA landscape in India, there are signs that Indian courts themselves are beginning to recognize the changing landscape. The Delhi High Court recently ruled that if an employee violates an NDA clause, the employer is not required to prove that the disclosing of information is a trade secret in order to seek injunctive relief. This indicates that Indian courts, while following the measure of protecting trade secrets in the NLIKNA, may also adapt to the broader dangers of unauthorized use or disclosure of confidential information.