What Is a Non-Disclosure Agreement (NDA)?
An NDA is a contract in which one or more parties agree to maintain confidentiality over specific information shared between them.
For example:
- A company may require a new employee or freelancer to sign an NDA before gaining access to internal systems.
- Two businesses negotiating a joint venture may sign an NDA before sharing financial or technical data.
- Investors reviewing a startup’s pitch deck may request confidentiality protection.
Unlike other commercial contracts, an NDA focuses specifically on protecting confidential information rather than governing the full business relationship.
Types of NDAs
Generally, NDAs fall into two main categories:
Unilateral NDA (One-Way NDA)
Only one party discloses confidential information, and the receiving party agrees to keep it confidential.
Example:
A company hires a web agency to redesign its website. To prepare a quotation, the agency needs access to internal marketing data. The company requires the agency to sign an NDA to protect that information.
Mutual NDA (Bilateral NDA)
Both parties exchange confidential information and agree to protect each other’s data.
Example:
A manufacturer and supplier jointly develop a product and share technical processes. A mutual NDA ensures both parties protect the shared information.
Important Note
An NDA is not the same as a patent.
A patent protects technical inventions through statutory registration, while an NDA protects confidential information through contractual obligation.
Purpose of an NDA
NDAs are sometimes signed as a formality, but they serve a critical purpose when sensitive information must be disclosed externally.
NDAs are essential in situations such as:
- Hiring employees
- Engaging consultants or freelancers
- Negotiating with investors
- Exploring mergers and acquisitions (M&A)
- Joint ventures and partnerships
- Technology licensing discussions
They help prevent competitors from gaining access to strategic information.
Common Situations Where NDAs Are Used
NDAs are frequently used alongside:
- Letter of Intent (LOI)
- Consulting agreements
- Employment contracts
- Distribution agreements
- Supply agreements
- License agreements
- Technology transfer agreements
- Cooperation agreements
- Investor discussions
- Joint venture negotiations
- M&A or acquisition talks
In many employment contracts, confidentiality clauses are already included. However, standalone NDAs may still be advisable in high-risk industries
Key Components of a Strong NDA
1. Contracting Parties
Full legal names, company details, and addresses.
2. Definition of Confidential Information
Clear description of what information is protected (documents, data, software, trade secrets, etc.).
3. Purpose and Permitted Use
Specify how the information may be used and prohibit unauthorized disclosure.
4. Duration (Validity Period)
NDAs may be limited or unlimited in duration. Reasonable time limits are often advisable.
5. Contractual Penalty or Remedies
Set out consequences for breach, including:
- Contractual penalties
- Damages
- Injunctions
6. Return or Destruction of Information
Obligation to return or delete confidential materials after negotiations end.
7. Use of Information if No Contract Is Concluded
Clarify ownership of ideas developed during negotiations.
8. Severability Clause
Ensures the agreement remains valid even if one clause is unenforceable.
9. Burden of Proof
Specify how breaches will be proven in case of dispute.
Precise drafting is crucial to avoid future disputes.
Legal Limits of an NDA
An NDA cannot protect all types of information.
Confidentiality may not apply if:
- The information is already publicly known.
- Disclosure is required by law (e.g., court order, regulatory requirement).
- The clause unreasonably restricts professional freedom.
- It effectively becomes a disguised non-compete clause.
Courts may refuse to enforce overly broad or unfair NDAs.
Additionally, startups may find enforcement costly if litigation becomes necessary.
Penny Lim , Legal Consulting
Ms. Penny is responsible for identifying possible legal issues and implementing solutions in the areas of government regulation, customer protection, and fair employment. Legal Counsel. Ms. Penny can advise on legal issues such as government and business permits, review legal documents before signing them, and complete legal research as needed by the company
Need Assistance for NDA?
If your business regularly engages with employees, investors, partners, or consultants, having a standardized and professionally drafted NDA is essential.
Non-Disclosure Agreement (NDA) in Malaysia: Complete Guide for Businesses