As a new age entrepreneur, you might own invaluable intellectual property like an innovative product or process, or be privy to highly confidential information as a vendor to a large corporation. This means that the probability of encountering a confidentiality agreement at some stage is very high. If you can't tell a confidentiality agreement when it stares you in the face, it's probably a good time to read this. Take a quick look at what goes into one.

A confidentiality agreement, also called a non-disclosure agreement, is entered into between two parties with the objective of protecting secret or sensitive information. A confidentiality agreement could be between an employer and employee, two or more companies doing business such as a vendor and supplier or between two individuals. For the agreement to be valid in a court of law, it is necessary to have a written document which explicitly lays down the terms.

Define confidential information: for a confidentiality agreement to have teeth, it must clearly define all that which it seeks to protect. For example, a scientific organization might wish to protect their ongoing research and development, while a pharmaceuticals firm might want to keep a secret formula under wraps. Whatever be the case, it is vital that the confidentiality agreement clearly specify the scope of protection.

Likewise, the agreement will also list out what information is excluded from its scope of coverage. This is typically information that was already known, prior to entering the contract, or general information that can be construed as common knowledge.

Lay down the receiver's obligations: the confidentiality agreement will limit the boundaries of the receiver of the secret information. This means that the receiver, who is privy to the information by virtue of the relationship he has with the other party, may only use the knowledge for pre-agreed purposes. Apart from not breaching the contractual terms himself, he must not induce other parties to do so either.

Agree to a time frame: a confidentiality agreement is usually time bound, with the duration arrived at by mutual discussion. Sometimes, this time limit may be influenced by other considerations such as the validity of a product patent. Some companies might include a “non-compete” clause with their collaborators, or forbid an employee from working with a direct competitor for a certain number of years after resigning from their current job. Generally, the initiator of the agreement, who owns the confidential information, will want as long a time limit as possible, whereas the receiver will want exactly the opposite. In the United States most agreements cover a 2 to 5 year term.

Specify jurisdiction: all agreements will include a “what if” section that kicks in when a breach of contract takes place. Issues such as the applicable jurisdiction (which court will rule), option of arbitration etc. are discussed here.

While all of the above are initiated at the behest of the owner or discloser of the confidential information, the receiver, who is required to sign the confidentiality agreement, will naturally wish to protect his own interests. He may seek to limit his responsibility as per a “best effort” basis and will most certainly want to limit personal liability. The actual terms of the agreement will usually be reached through a process of negotiation and will depend on which party has the upper hand in the relationship.

The above discussion may have demystified the confidentiality agreement to some extent, but it's important to seek expert guidance before entering into one.