An Overview of Non-Disclosure Agreements in India

What Is a Non-Disclosure Agreement?

Non-Disclosure Agreement ("NDA") is a contract between two parties to safeguard any confidential information that’s being shared between the two. In other words, if one party shares certain information with another, the second party is agreeing not to share that information with a third party. The agreement specifically will discuss what information needs to be protected, for how long the NDA is to be effective for, and under what circumstances can the protected information be disclosed to a third party .
A NDA is sometimes referred to as a secrecy agreement or confidentiality agreement. A NDA is commonly used to protect all the proprietary information and prevent the reverse engineering of it. It can cover every element of a business such as trade secrets, account numbers, statements, proprietary data, information concerning customers or suppliers, computer software or hardware, contracts, sales and marketing information, etc.

Essential Terms of an NDA in India

The various elements that are important to include in a Non-Disclosure Agreement in India are:
Parties: The first element of a Non-Disclosure Agreement (NDA) is the identity of the parties to the contract. Make sure to spell out both party and entity names, and only enter into an agreement with a legal entity.
Definition of confidential information: It is important to have a broad confidentiality provision in your NDA so as not to inadvertently narrow your ability to claim exclusivity over what you have disclosed under the terms.
Obligation of confidentiality: What are the obligations of each party when it comes to the information that was disclosed? Should be fairly standard, but make sure the obligations are set out clearly in your NDA.
Exclusions: Some exclusions for a non-disclosure obligation might be:
Duration: A non-disclosure obligation does not last forever. Some jurisdictions may prevent you from having a non-complete or non-disclosure obligation for longer than a specified period of time. If either of the parties is a government entity, you are additionally subject to the government’s statutory obligations.

The Legal Framework Governing NDAs in India

India does not have a dedicated law applicable to Non-Disclosure Agreements (NDAs). India’s common laws and judicial precedents provide for legal protection of confidential information. This involves a cohesive regulatory framework, under which a range of Indian laws apply to the protection of confidential information.
The laws governing the protection of confidential information in India are: The provision as to the treatment of confidential information under Indian Contract Act, 1872, essentially gives legal sanctity to an NDA. A contractual obligation requiring a party to keep certain business information confidential is enforceable if it’s not violative of public policy; it does not involve any criminal offence; or it does not, by the nature of the act, be opposed to public interest. There should, however, not be any existing statutory obligation or a contractual obligation prohibiting disclosure. A disclosure which is prohibited under a contract, but is permitted under law, will not be deemed to be violative of public policy.
Therefore, under this contractual provision, the Confidentiality Obligation ("CO") of a party is determined by the NDA which is entered into between the parties, and it can be enforced in a court of law.
The Indian Penal Code, 1860 ("IPC"), provides that a private communication made in the course of business, or any other matter which is expressly prohibited by law to be disclosed, is a "secret", and a disclosure that is the result of force, blackmail or bribery, is a crime under Section 503. There is, however, no provision for a civil action under IPC. Further, the definition of "confidential information" under IPC does not include information disclosed in a breach of a contract, or akin to an NDA. Therefore, IPC will not apply in such cases.
The Information Technology Act, 2000 provides for the protection of computer data and systems. One of its aims is to prevent any unauthorised use or disclosure of electronic data. These provisions do not, however, apply to a contract or NDA, or even to a confidentiality obligation arising from a contract.
The Right to Information Act, 2005 creates a general right for citizens to obtain information from public authorities. This, however, does not operate to require a public authority to disclose any information that is not required to be disclosed under the relevant Act. It also does not apply to information disclosure that would be a breach of confidentiality that is protected under the Indian Contract Act, 1872, or disclosures that are prohibited by law. Further, the law exempts information that is prohibited from disclosure under the Official Secrets Act, 1923.
Confidential information is accorded protection under the Copyright Act, 1957 as trade secrets and knowhow. The courts have granted injunctions restraining my employees who are privy to any trade secret or knowhow, from revealing the same to the world at large. This protection extends to certain acts that may be committed against an entity’s confidential information, such as reviving, communicating or using the relevant trade secret or information contrary to the terms of a contract or NDA, or an obligation to maintain secrecy. This protection, however, is available only if the information has been expressly claimed to be confidential and has enjoyed such a status. Therefore, commercial contracts and NDAs, which specifically state that the information is deemed to be confidential, would be fully protected.
Protection of confidential information is typically the first line of defence which a party alleges to prevent the counterparty from disclosing the same. However, this may sometimes turn into a tool to stalk the counterparty into not competing or engaging in business with others. This has recently been discussed by the Supreme Court of India in the case of Niranjan Shankar Golikari vs Century Spinning & Manufacturing Co Ltd. The Supreme Court observed that a party who has sensitive and confidential information, that is required by a competitor, may grant the same by entering into a contract with such competitor to maintain secrecy with respect to the information provided. In such cases, an employer cannot prevent the use of confidential information by a former employee.

Types of Non-Disclosure Agreements

Different Types of Non-Disclosure Agreements
In India, there are two forms of NDAs that are typically used: unilateral and mutual NDAs. While there are slight differences between the two, both are legally explicit contracts, and the same general rules that govern contracts also apply.
As previously mentioned, a unilateral NDA is typically used when only one party is desired to keep things private. That is, if a solo business owner simply wants to keep information private from the rest of world, he or she will use a unilateral NDA with another party to ensure his or her trade secrets and confidential information are not shared.
On the other hand, a mutual NDA is when both parties want to keep things private. Mutual NDAs are often the preferred option for companies in India because it mutually protects business owners and employees alike. Therefore, at the start of any new undertaking, the business owner will typically enter into a mutual NDA with the employee in order to maintain the confidentiality of company records.

How to Draft a Proper NDA in India

An NDA is generally entered into between the parties after they have signed a preliminary contract, called a Memorandum of Understanding/Letter of Intent (MoU), intending to protect the confidential information of the business and ensure that the other party upholds confidentiality prior to entering into a definitive agreement. It is a good business practice to contemporaneously sign the NDA with the MoU, so that the confidentiality obligations survive the termination or expiry of the NDA, and can be invoked in the future if necessary.
In order to ensure that the NDA is valid and enforceable under Indian law, it is necessary first to define with precision the confidential information required to be protected under the agreement. For this, depending on each transaction, it may be useful to create separate definitions for personal information, trade secrets, and information relating to intellectual property and sensitive business data such as records relating to customers, suppliers, finances, prices etc .
While drafting, the parties must keep in mind the following concerns: To ensure a more effective legal remedy, the parties should further consider including the following provisions in the NDA: When referring to damages in the above provisions, it is important to provide for both agreed damages based on the breach of the NDA as well as any damages in tort under the principles of common law. For instance, section 73 of the Indian Contract Act, 1872 states that: In India, most courts believe that section 74 is exhaustive, so that no recovery is available in tort, unless it is specifically provided for in the agreement. Finally, while all of the above are useful and important considerations to make in order to ensure confidentiality in a contract, Indian courts have not been shy to enforce both non-disparagement and indemnification clauses in NDAs in order to prevent harm to a business if a former employee passes on confidential information to a current employer. For example, in Lawson India Private Limited v Sarvesh Chand Kaur, 2015 SCC OnLine Del 2586, an ex-employee was restrained from disclosing confidential information about his previous employer and providing services to a competitor.

Enforcement and Breach of Non-Disclosure Agreements

Enforcement and Breach of NDAs in India
In the event that a party breaches the terms of an NDA, recourse can be taken by the aggrieved party in a number of ways. The first step may involve the sending of a legal notice to the defaulting party that may include a demand of damages, and/or a request to cease the breach along with a threat to initiate legal proceedings if the said demands are not complied with. As is clear from the above, such a notice is a mere formality. The aggrieved party may also initiate civil action through a suit for an injunction in a competent court of law or make an application for injunctive relief. It may be mentioned here that, along with taking recourse under civil law, a person may be liable to be penalised under the relevant provisions enacted under criminal law. The aggrieved party may also file a suit for damages – compensatory and/or punitive in nature. Different remedies can be claimed under a breach of an NDA and they are as follows:
In the case of Enfield India Ltd v. Hindustan Motors Ltd (1968), it was held that in case of an anticipatory breach of contract, the aggrieved party has to give the obligor formal notice of performance and a reasonable time to comply.
In case of breach of a negative covenant like a non-compete or a no-poach clause, breach is generally considered to be a continuing breach. Such concepts are generally evaluated with the help of the doctrine of restraint of trade in consequence of which the ensuing results of the two differ. Traditionally, the doctrine limited a person to only his profession or vocation but the latter day tests include the nature of the restriction, the area covered, the period of time during which the restriction is to remain effective, etc.
Recently, the issue of the temporal limitation has been recognized as a defence in the case of Calcutta Financial Corporation v. N. Narasimham [1994] 1 Scale 128].
The principle of quantum meriut would apply to the claim for compensation for loss. The aggrieved party would be entitled to general and special but no liquidated damages. Punitive or exemplary damages are not generally awarded. However, punitive damages may be granted if particularly found essential.

Common Applications of NDAs in India

Non-Disclosure Agreements are most often deployed in the commercial context between parties with a vested interest in maintaining the confidentiality of their information. The common use cases for NDAs in India relate to the entry into of business deals, the employment of individuals and the formation of a joint venture.
Confidentiality obligations between parties are commonly negotiated as part of a Memorandum of Understanding or Letter of Intent. These agreements are relatively informal and either side may still wish to change their mind at any time. Although a common misconception is that NDAs are only entered into prior to parties becoming legally bound by a contract, it is common for parties to include NDA terms in an MoU, LOI or a more formal contract.
NDAs are also commonly used to protect sensitive business information where a person is employed by a business entity. This is most relevant in the technology sector where an employer wishes to continue to safeguard its know-how.
The use of NDAs for this purpose is most often tied in with the employment of key management personnel and greater protection may be afforded to the employer (the disclosing party) if the employee fails to comply with confidentiality obligations under their employment contract. This is because beneficial ownership of information which does not fall under the contractual terms of the employment contract could be averted where it can be shown that the employee was privy to the information as a necessary consequence of his job function. This assumes a high level of trust and confidence between the employee and employer.
Situations where NDAs are used are likely to change going forward. For example, as FDI laws continue to develop in India, the frequency and manner in which NDAs are used in business combinations will evolve to ensure that any conditions associated with the enforcement of these agreements are complied with and that the minimum requirements of valid NDAs under Indian law are met.
As the use of NDAs increases, practitioners should be mindful that there are a number of Indian laws which would apply to non-disclosure obligations and their enforcement.

Pros and Cons of NDAs

NDAs are a common tool in India for protecting sensitive business information and client confidentiality. They offer several advantages to businesses, but also come with certain limitations and enforcement challenges.
Advantages

1. Protection of Business Secrets

The primary advantage of NDAs is that they protect an organisation’s most important secrets, namely the confidential information and trade secrets that keep a business going. Consider the example of a successful business that has grown to the point where its founders, who invented the business model, want to exit. Without NDAs in place with key employees, their exiting to a competitor with this knowledge can derail efforts to develop the business. Or consider an IT company in India that employees skilled professionals from all over India and the world. All this company’s clients have a confidentiality obligation regarding any information they learn about the company’s business or clients as part of their work. Failure to enforce these terms could result in the company’s sensitive client information being disclosed to its key competitors.

2. Fast and Inexpensive

NDAs are private contracts that parties agree upon, which means that no judicial scrutiny is needed (other than under the IPC and the Indian Contract Act, of course). As a result, they can be drafted quickly and at lower cost than other mechanisms for protecting trade secrets.

3. Damages

The party that breaches an NDA may be liable for damages. This may help a business recover losses that result from a disclosure of its confidential information. Individuals may also be criminally liable for dishonest use of a trade secret, under Section 27 of the Indian Trade Secret Act, 2013 (a.k.a., the Indian Copyright Act).
Limitations and Enforcement Challenges

1. The Privity Rule

Privity of contract is an essential doctrine in the common law legal system. As a result, only the parties to the NDA are bound by the terms therein. As an example , if a company uses a global NDAs with its subsidiaries and the dispute is adjudicated in India, only the Indian subsidiary may be liable and not the global parent. If the parent were to sue the Indian subsidiary, that NDA would be considered a separate contract: ie., two separate parties entering into a contract to which the privity rule applies, i.e., requires the parent to be part of that NDA in order to seek to enforce it in India courts.

2. Trade Secret Standards

Because Trade Secret case law is still emerging in India, judicial enforcement is often inconsistent. Different courts may apply different standards to trade secret information given that it currently constitutes a mixed bag of common law and statutory precedents. Even if the Indian Courts were to uphold a claim under the traditional common law requirements, an NDA’s effectiveness depends on how much the court respects those requirements. For example, a certain court may require public access to NDA terms, or at least relevant terms during litigation, which would clearly undermine the NDA’s purpose. Even if the judge does not have these reservations about scrutinizing the NDA’s terms, unintentional disclosures of secrets may occur in the course of the proceedings. NDAs cannot stop these instances from occurring.

3. Cultural Attitudes

In India’s culture, litigation and courts are considered a last resort. NDAs are regarded simply as a piece of paper but are not taken seriously by large segments of the Indian population. They are not viewed as enforceable contracts with potential legal consequences for violating them. Moreover, in family centered communities, an individual or family is likely to be protective of one of its own, even if it means breaking an NDA. Such cultural attitudes may not be strong in the corporate sector. Indians who distrust foreign legal systems or have been in litigation for a long time may forget about the NDA terms and will sometimes resort to extra legal measures (such as threatening or actually causing harm to the parties).