Do You Really Need an NDA? Key Scenarios That Demand One

Non-disclosure agreements (“NDA”) are legally binding agreements that prevent parties from disclosing specific information to third parties and are widely used in the business landscape to protect confidential information. The function of an NDA is to ensure information given by the party who discloses the information is kept confidential. There are two main categories of NDAs namely unilateral NDA and a mutual NDA. The former applies when only one party discloses confidential information, and the receiving party agrees to keep it confidential. On the other hand, the latter applies when all parties in a transaction, share confidential information with each other and agree to maintain the shared information as confidential. This article explores the importance of having confidentiality clauses and the key scenarios demanding an NDA.

The key scenarios that demand an NDA are as follows:

• Employer-Employee Relationship

Employees often have access to confidential business information, including but not limited to trade secrets, financial data, and customer lists. To prevent unauthorised disclosure of such information, employers usually require their employees to execute NDA to ensure the employees do not disclose proprietary information during or after their employment. This is especially important for high-ranking employees as they will gauge with the clients more thus, having access to the clients’ information. 

• Collaborations, Business Partnerships & Investors

When negotiating with potential business partners or investors, companies often disclose financial performance, business strategies, and trade secrets. An NDA ensures that this information is not shared with competitors or used against the disclosing party. Without an NDA, a potential business partner or investor could walk away while still retaining valuable business insights.

• New Clients & Service Providers

Organisations that onboard new clients or engage external service providers may gain access to sensitive information about the client’s business, such as financial records or proprietary processes. An NDA helps define what information must remain confidential, protecting both parties from unintended exposure and legal liability.

• Mergers & Acquisitions (M&A)

When selling or acquiring a business, sensitive financial and operational information must be shared with buyers, brokers, and advisors. An NDA prevents unauthorised disclosure of this information and ensures that negotiations remain confidential. This protects the business in case the deal does not go through.

• Vendors & Suppliers

Companies frequently work with vendors or manufacturers that require access to proprietary information such as product designs, pricing models, and production processes. NDAs ensure that third-party suppliers do not disclose or misuse this confidential information, safeguarding the company’s competitive advantage.

• Product Development & Licensing

Companies developing new products, technologies, or intellectual property must protect sensitive details from unauthorised sharing. NDAs prevent the other party from disclosing confidential information, ensuring the company retains control over its innovations.

A recent High Court case, Systemizer Technic Sdn. Bhd. v Tan Chee Heng & Affiliated Information Technology Services Sdn. Bhd. (AITS) [2024] CLJU 1989 underscores the crucial role of NDAs in protecting confidential business information. In this case, a former employee, Tan, was found to have breached his NDA and employment contract by misusing proprietary company data to solicit clients for his own IT company while still employed in his former IT company. The court ruled that the confidential information had the necessary quality of confidence, was shared under an obligation of confidentiality, and was used without authorisation to the detriment of the company. Tan and his company, AITS, were also found liable for conspiracy to injure and unlawful interference with trade and business. The court was in favour of Tan’s former employer, reinforcing the importance of NDAs in employment agreements. This case highlights why businesses must implement NDAs to safeguard confidential information from misuse by employees, partners, or competitors.

In essence, an NDA is an essential legal tool for safeguarding confidential information. Whether in corporate transactions, employment relationships, or business partnerships, NDAs help protect trade secrets, sensitive data, and intellectual property from unauthorised disclosure. By clearly defining the scope of confidentiality and legal consequences for breaches, NDAs foster trust between parties and mitigate potential risks. Ultimately, implementing a well-drafted NDA not only strengthens legal protection but also reinforces the integrity and security of business dealings.