Confidentiality Agreements : Possible Pitfalls

13 October 2024 in Contract Lawyers | 5 min read | skip to FAQs

Confidentiality agreements, also known as non-disclosure agreements (NDAs) or secrecy agreements, are common in commercial dealings. Many business parties sign these agreements without careful review, unaware of their far reaching legal implications. This article explores the key aspects of confidentiality agreements, focusing on the obligations they impose, the protection of trade secrets and the legal complexities of perpetual confidentiality.

What is a Confidentiality Agreement?

A confidentiality agreement is a legal document often used to protect trade secrets and restrict the use of shared information to particular commercial purposes. These agreements are frequently used when evaluating the commercial viability of new inventions, safeguarding new technologies and ideas before commercialisation (especially in the IT and e-commerce sectors), or conducting due diligence in investments or takeovers. Confidentiality clauses are often paired with intellectual property protections like copyright, design rights, and patents.

The purpose of these agreements is to ensure that any information disclosed remains confidential and is not shared with third parties. The agreement generally outlines a specific period during which both parties are subject to confidentiality obligations.

Key Considerations when Drafting a Confidentiality Agreement

When drafting a confidentiality agreement, it is important to address the following issues to ensure comprehensive protection:

1. Definition of Confidential Information: Is the scope of ‘confidential information’ clearly defined? Does it only cover direct communications and documents, or does it also extend to information learned independently by one commercial party about another
2. Duration of Confidentiality: When does the confidentiality obligation end and does it survive the expiry or termination of the agreement?  Does the information lose its value before the specified period expires?
3. Scope of Obligation: Is the confidentiality obligation linked to a specific project or permitted purpose? Will the obligation hinder both parties’ ability to engage in future related work without breaching confidentiality? Is the obligation overly burdensome
4. Application and Enforcement: Who, beyond the named parties, is subject to the confidentiality obligation? What mechanisms ensure third parties who receive disclosures are bound by similar obligations.
5. Interaction with Other Agreements: How does the confidentiality clause interrelate to other agreements, privacy laws, or intellectual property rights between the parties?
6. Third-Party Rights: What happens if a third party requests access to confidential information under the right-to-information or freedom-of-information laws?

The Issue of Protecting Trade Secrets

Under Australian law, a ‘trade secret’ lacks a clear definition and is generally regarded as a form of confidential information. As Australia does not have a specific statutory regime for protecting trade secrets, various statutes impose obligations of confidence, allowing protection through breach of confidence claims.

For instance, directors and officers of companies are prohibited from using confidential information for personal gain or to cause detriment to companies under the Corporations Act 2001 (Cth). The Privacy Act 1988 (Cth) governs the handling of personal information and established principles relating to collection, storage, use of disclosure of personal information. Further, the Freedom of Information Act 1982(Cth) prevents disclosure of documents that would give rise to a breach of confidence claim.

In light of this legal landscape, a practical approach is to establish contractual protection for confidential information. Confidentiality of trade secrets is typically addressed in contracts between parties, making it enforceable. Parties in a commercial relationship can explicitly protect confidential information through terms in the contract or confidentiality agreement, establishing that the information is to be treated as secret. An express confidentiality term effectively defines the scope and duty of confidentiality and provides legal recourse in case of a breach.

Contractual Obligations of Confidentiality After Termination

If you have concerns about the disclosure of trade secrets, you may want to consider confidentiality clauses that extend the obligations beyond the end of the business relationship.

Confidentiality obligations under a contract can continue beyond the specified term and survive the termination of the agreement. If you are involved in a long-term project or if the information shared could benefit competing parties, ensure that the agreement lasts as long as necessary. This allows you to bind the other party to maintain confidentiality both during and beyond the contract term.

Perpetual Confidentiality

In some cases, parties may seek to impose perpetual confidentiality obligations to safeguard trade secret information. However, such terms may not always be appropriate or legally enforceable.

Many commercial parties desire perpetual protection for their valuable information and trade secrets. Their concern is that when confidentiality obligations have a fixed duration, once that term expires, the recipient is no longer obliged to keep the information confidential.

Enforceability of Perpetual Confidentiality Obligations

Some jurisdictions view confidentiality agreements with a perpetual duration as unreasonable restraints on trade, particularly if they apply to information that, while confidential, does not qualify as a trade secret under applicable law.

If a perpetual confidentiality agreement encompasses both trade secret and non-trade secret information, or restriction of the use of information that had entered the public domain, the enforcing party risks having the court find that the confidentiality clause is unenforceable, extinguishing protection for any disclosed information.

Case Study: Maggbury v Hafele Australia

In Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70 (‘Maggbury’) , the High Court upheld an earlier decision by the Queensland Court of Appeal to set aside an injunction preventing Hafele Australia from selling products based on information obtained under a confidentiality agreement. The agreement’s attempt to impose a perpetual restriction on Hafele’s use of information that had entered the public domain rendered it an unenforceable contractual restraint of trade. Notably, the information had been published in the patent application process.

The perpetual confidentiality clause in this agreement stated:

“12. It is a condition of this agreement that Hafele [Australia] will forever observe the obligations of confidence set out in this Agreement, unless released from such obligations in writing by the Inventor. Without limiting the generality of this condition, Hafele [Australia] agrees to continue to observe its obligations as to confidentiality:

1.          upon the signing of this agreement;

2.          while the Purpose is being carried out;

3.          after the Information is returned; or

4.          after Hafele [Australia] becomes liable to return the Information.”

The legal issue centred on whether a confidentiality agreement constitutes an unenforceable contractual restraint of trade, particularly when the restraint is expressed to be perpetual. This case highlights the challenges in enforcing confidentiality agreements that may represent unlawful restraints of trade. It is noteworthy that a restraint of trade is typically found to be unreasonable if it lasts too long, covers too large a geographic area, or encompasses overly broad activities.

Key Takeaways

Confidentiality agreements are essential in business transactions, offering vital protection for commercially sensitive information. However, drafting these agreements requires careful attention to avoid legal pitfalls, particularly regarding the duration of confidentiality obligations. As a result of the Maggbury decision, many confidentiality agreements may no longer be enforceable. As such, it is important that businesses seek advice to review and redraft confidentiality agreements to ensure the restrictions on information use are reasonable in terms of duration, scope and geography.

How can BSM Sydney Lawyers assist you?

The contract lawyers at Brander Smith McKnight Sydney Lawyers have extensive experience in business contract drafting and review. We ensure that confidentiality clauses are crafted to protect your commercial interests while maintaining legal validity. Whether you are seeking general commercial advice or looking to safeguard trade secrets from competitors our Sydney law firm is able to assist you. A well drafted contract with individualised and legally binding confidentiality terms will protect your trade secrets and prevent future disputes and potential commercial complications. Our senior contract lawyers provide a free 20-minute consultation to assess your individual situation.

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