CONTRACTS: A PRE-CONTRACTUAL NDA

(A) WHY ENTER INTO A PRE-CONTRACTUAL NDA? There is an area of English common law known (1) ….. the ‘Law of Confidence’ which protects confidential information that is disclosed (2) ….. one party to another in commercial situations. In many jurisdictions this duty is contained (3) ….. an article of the civil code. However, in the UK system, relying solely on this law to protect sensitive information could be a risk (4) ….. precontractual discussions. So, when the parties (5) ….. a potential contract want to protect the confidential information disclosed (6) ….. this early stage they often use the added protection of a Non-Disclosure Agreement (NDA) (7) ….. serious negotiations begin. This is an agreement entered (8) ….. by the parties at the start of discussions in which they agree what information is confidential, who may be allowed to know the confidential information and (9) ….. what circumstances. This is much more commercially sensible than being completely dependent (10) ….. the general principles of the Law of Confidence contained in the common law.

Think of a situation where two parties are in discussions that will lead to the acquisition of one company by another. The seller will not want certain people to learn about the sale of the business before the (1) ….. deal is concluded as this could have a (2) ….. effect on the business. If, for example, (3) ….. employees learn that the business is about to be sold they could start looking for work elsewhere. Customers could lose confidence. If the contract involves the sale or acquisition of a Public Limited Company and information becomes (4) ….. this may result in allegations of the crime of insider dealing if shares are traded soon after. Therefore, for various reasons, an NDA makes good (5) ….. sense. An NDA will often contain a clause that prevents the parties from disclosing the fact that the NDA exists.

(B) BACK-TO-BACK NDAs AND NON-CIRCUMVENTION AGREEMENTS A Back-to-Back NDA is necessary when the recipient of confidential information needs to share that information with certain third parties. This would typically be the recipient’s key employees, board of directors or possible investors. The way to allow this is to put a clause in the NDA which requires the recipient of the confidential information to enter into a further NDA with any third party to whom it is commercially necessary to disclose that information. In contract law a Non-Circumvention Agreement is either an agreement in its own right or a clause in an NDA that protects a disclosing party against the receiving party circumventing the disclosing party by ‘going behind its back’. In other words, the agreement is intended to prevent the receiving party from doing something that will have an unwanted, negative effect on the disclosing party without the disclosing party knowing about it.

(C) IS AN NDA A ‘TOOTHLESS’ AGREEMENT? Lawyers often say that NDAs are ‘toothless’ agreements, meaning that they are often entered into but are very difficult to enforce. It can be tricky to prove that a breach has occurred, and, even then, how can the disclosing party measure the exact extent of any loss? That is probably why NDAs are rarely litigated in court. If court action goes ahead, an NDA will usually specify the remedy for breach and this will usually be damages. However, where damages will not be enough to solve the problem, the disclosing party may also seek a Prohibitory Injunction. This is a court order that forbids or halts certain conduct by one of the parties and is often called the right to ‘injunctive relief’. However, the court often regards a Prohibitory Injunction as a ‘last resort’ remedy and most lawyers will advise that obtaining one is quite a complex legal process.

(D) A LEADING CASE In the case of Dorchester v BNP Paribas (2013), Dorchester shared information with BNP Paribas about a profitable property development opportunity. The parties signed a “Non-Disclosure and Non-Circumvention Agreement”, the effect of which was that BNP Paribas agreed to ensure that any third party receiving the confidential information was legally bound by “similar non- disclosure and non-circumvention obligations”. However, when BNP Paribas approached a third party, IKEA, as a possible investor in the project, it failed to do this. IKEA then ‘circumvented’ Dorchester and made its own successful bid for the development land. Dorchester sued BNP Paribas for failing to ensure that IKEA kept the information confidential and failing to ensure that IKEA did not circumvent the original disclosing party. The Court of Appeal ruled in favour of Dorchester. This case is seen as an important lesson in putting back-to-back, non-disclosure and, where appropriate, non-circumvention obligations in place in precontractual negotiations.