What is a Confidentiality Agreement?

Confidentiality agreements are among the most common forms of agreements between businesses and their employees or partners. Nearly all employment or business deals involve sharing sensitive information of some kind. 

Confidentiality agreements exist to make sure that information isn’t shared outside of the relationship by defining what the information is, specifying how it may and may not be used and shared, and clarifying what will happen if it is shared inappropriately.

This is what you should know about confidentiality agreements: how they work, when you might need one, and how to put one together.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice.

What is a confidentiality agreement?

A confidentiality agreement is a legal document that regulates the way its signers must treat any private information specified therein.

In business, confidentiality agreements are most commonly used to protect information that could affect a deal, business effectiveness, or even an entire market if it were revealed widely. For example, businesses often make employees sign confidentiality agreements before disclosing proprietary information about their products or services, because if that information were disclosed publicly, the business would lose its competitive edge.

Most confidentiality agreements categorize the parties involved into one of two roles: they are either disclosing the information in question or receiving it. Typically, the disclosing party will draft the agreement for the receivers to sign. This form of confidentiality agreement will protect the disclosing party by specifying the legal action they will take in the event the receiving party discloses confidential information.

What’s the difference between a confidentiality agreement and a nondisclosure agreement?

Both confidentiality agreements and NDAs exist to identify and protect sensitive information during its exchange. The major difference between the two is that NDAs are typically used in agreements involving the one-way communication of sensitive information, whereas confidentiality agreements are used when a relationship necessitates that multiple parties share information with one another.

For example, when an organization hires an employee, they will often require the employee to sign an NDA before starting. This NDA defines the organizational information the employee is not allowed to disclose with outside parties. An NDA is suitable for this situation because all of the sensitive information is being communicated unilaterally: from the organization to the employee. 

On the other hand, when two businesses enter into a partnership that involves both parties exchanging proprietary information, they’ll use a confidentiality agreement. Confidentiality clauses are frequently included in agreements between original equipment manufacturers (OEMs) and their suppliers, for one. These agreements allow the OEM to give their supplier proprietary specifications about their product and allow the supplier to tell the OEM about their proprietary manufacturing methods.

When do I need a confidentiality agreement? 

You should use a confidentiality agreement whenever you want to explicitly define the information you do not wish to be publicly disclosed and specify how the parties you are disclosing to are allowed to use that information.

The documented and official specificity of confidentiality agreements helps reduce the risk of miscommunication and helps both parties understand exactly what their rights and obligations are within an agreement. Agreeing on these terms before a business transaction proceeds will expedite and simplify the process for everyone involved.

What should be included in a confidentiality agreement?

Your confidentiality agreement should include the following elements:

1. Scope definition: Clearly define the scope of the contract. Specify all parties involved and the information the agreement is being written to protect. You can include specific information in this section or broader categories of information (such as any customer data or proprietary information).

2. Outlining of exclusions: Include a section with examples of the types of information not covered by the agreement. This is information parties can disclose without violating the terms.

3. Definition of terms: Specify how the signing parties can and can not use the information you will be disclosing. Be as clear as possible about what will constitute a breach of contract here. You should also define when the agreement will end.

4. Definition of consequences: Specify what the consequences for breach of contract will be. This could include the end of the partnership and/or legal action.

How should I keep track of my confidentiality agreements?

It’s very important that you keep an accurate copy of the latest agreed-upon version of each of your confidentiality agreements, so you can reference them whenever the need arises.

Docusign IAM provides a centralized repository from which you can store, access, search, and manage all of your agreements instantly from any connected device.

Try Docusign for free for 30 days.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice. Laws frequently change and this information may not be current or accurate. Docusign disclaims all warranties of any kind with respect to this material including merchantability, fitness for a particular purpose, or accuracy. You should consult with a licensed attorney in your area for legal advice.