What is a Non Disclosure Agreement?
An NDA is a Non-Disclosure Agreement intended to keep confidential information secret between parties. There are many ways to define confidential information, however, one of the broadest definitions covers all information you do not want others to know. Information that is publically available, such as a press release about a new product or service, would not be considered confidential. But, if the press release does not yet exist you may want to have an NDA in place with those who will be involved in the drafting process so that details of the press release remain secret .
The importance of a Non-Disclosure Agreement is that it allows you to be transparent and honest with parties involved in your business without fear that information will be disbursed to the public. NDAs help you get the ball rolling without the fear of someone else using this information to their advantage, or to the detriment of your business or reputation. These agreements are commonly used when asking parties to review your idea or proposal, to determine whether they will move forward. An NDA allows you to communicate freely and effectively with parties who also wish to do the same.
Basic Elements of a Canadian Non-Disclosure Agreement
An NDA agreement is a legally binding contract which requires persons or parties to keep details and information which are shared with one another strictly confidential. As a legal contract, the NDA agreement in Canada include the parties involved, definitions for confidential information, obligations, duration and some exclusions.
A legal NDA agreement in Canada should include:
A clear indication of who the parties to the agreement are
Definition of what is considered confidential information
Statement of who has the benefit of the confidential information
Obligations of the party who receives the confidential information
Duration of the obligation to keep information confidential
Conditions to the termination of the confidential obligations
Exclusions from the confidential obligations.
Non Disclosure Agreement vs. Confidentiality Agreement
NDA vs Confidentiality Agreement in Canada
Non-disclosure agreements (NDAs) and confidentiality agreements are similar in that they both seek to protect confidential information. However, an NDA is most often used in the context of a transaction where someone will be exposed to a company’s trade secrets and it is important to legally bind them to not share or use that confidential information for their benefit. A confidentiality agreement is more often used in an idea/business pitch scenario where information is exposed to a potential buyer and purchase negotiations do not begin until a confidentiality agreement is executed. An NDA may also be used in that scenario but more as an attempt to make the business owner feel more secure that their idea will not be taken from them. Often a confidentiality agreement will suffice to ensure this. Confidentiality agreements will also be used within organizations in employment situations, between directors and shareholders, as well as between joint venture partners.
NDAs are typically used in more sophisticated business transactions with larger companies. Confidentiality agreements are used in both personal and business dealings.
When Should You Use an NDA in Canada
Non-Disclosure Agreements (NDAs) are used throughout many industries and professions in Canada. In most cases, an NDA is entered into by businesses that are entering into a business relationship with one another and need to share confidential information. Confidentiality is needed when a company is sharing commercial information, proprietary information or sensitive information.
Other times, NDAs are used in the employment relationship between an employer and a new employee. Many companies today require their employees to sign an NDA as part of their employment contract. Employees are usually privy to company confidential information, trade secrets and customer lists, and many employers are concerned that the employee may improperly disclose or make use of this information for a purpose other than for the employer. In these cases, if the employee discloses or uses the confidential information improperly, the employer would have an action against the employee for breach of the NDA.
Certain industries where NDAs are commonly used are in the information technology industry, the research and development industry, the aerospace and defence industry, and the financial services industry.
Legal Aspects of NDAs in Canada
Receiving business information or trade secrets from clients or business partners often requires the exchange and protection of sensitive business information. The Non-Disclosure Agreement ("NDA") has become the common tool to pursue this goal, but its enforceability under Canadian law may be a matter of debate. Are such NDAs tenable or enforceable in Canada and, if so, to what extent? In the past 20 years, American style NDAs have been frequently used in Canada. However, these American style NDAs often do not take into account important Canadian nuances.
Canadian courts have generally accepted that confidentiality obligations are enforceable, subject to carefully crafted contractual provisions. They will look to the language of the contract and the surrounding circumstances of the particular case. Rigo and Cie. v Collins [1952] 1 D.L.R. 244 establishes that, in order to be enforceable, confidentiality provisions must be reasonable, not against public policy, in writing, not for an indefinite period of time, and must not seek to protect "mere irremediable loss". Mere irremediable loss has been interpreted by Supreme Court of Canada to mean that "it must be reasonably possible to value the information in monetary terms".
A significant challenge for NDAs is that they are often governed by U.S. law, despite both companies being Canadian. For those who do not live in the universe of Canadian business law, Canadian principles often come as a shock. Under the Competition Act, a "trade secret" is a type of "confidential information", which must have (i) actual or potential economic value, (ii) be the subject of reasonable efforts to maintain its secrecy , and (iii) not be publicly available. "Confidential information" is defined as "confidential information in any form, whether tangible or intangible": Competition Act, RSC 1985, c.19, s. 1.2. It is therefore possible that an NDA may be deemed to be unenforceable in whole or in part because of public policy.
These legal requirements come into play once a party has breached its NDA and has misappropriated confidential information. Victorian Order of Nurses v Clarke Group Inc., 122 6AC 164 establishes the principle that the "trade secret" must have:
Canadian law does not appear to distinguish between confidential and non-confidential information, such as publicly available information. Nor is there a distinction drawn between commercially sensitive and non-sensitive information. A question arises, therefore, as to whether the NDA can specify those categories of confidential information, or whether it must provide a full definition of confidential information. Enforceability of NDAs often turns on clear definitions, especially where they relate to confidential information. NDAs that do not address the issue of reasonable efforts to maintain secrecy are also likely to be found to be unenforceable.
NDAs in Canada should also address issues of jurisdiction and forum selection in order to prevent the situation of an invalid NDA or the need to litigate in an uncertain or potentially adversarial jurisdiction. Can you seek both injunctive relief and damages in Canada? The restrictions on the ability to turn to the courts for injunctive relief must be weighed against the benefits of changing the rules for litigation in the U.S. versus in Canada.
Tailoring NDAs to Fit Your Canadian Business
For Canadian businesses subject to the statutory non-competition and non-solicitation constraints of the CBCA, the local laws of incorporation apply. If the business is incorporated in one province and its employees work in another, or if the business is a federal corporation and its employees work in different provinces, legal issues may arise around which law applies to each employee. This is because Canadian provinces have their own laws of non-competition and non-solicitation. These differences among the provinces often lead employers to consider whether it is necessary and whether it is possible to ensure that the same terms of an NDA will apply across the entire Canadian business.
The choice to start from scratch with an entirely new form or to modify an existing form often depends upon the extent of the changes that are necessary to comply. In other words, if a few lines or clauses may be modified, it may be more practical to customize an existing agreement. If substantial modifications to a covered agreement are required, a new blanket NDA may be drafted to replace it. If the business operates in a number of provinces or at least in a number of locales with differing mandatory law rules, specific consideration should be given to whether geographic restrictions are appropriate and can be enforced.
Some businesses choose to provide simply one NDA form to an employee without offering a choice as to the applicable law. Provided there is a real and responsible connection between the business and the selected jurisdiction, and the provision is written plainly, courts in practice do not shy away from jurisdictional issues. We have seen, however, circumstances where employers have been advised that the terms of a NDA are unenforceable in their own jurisdiction but may be enforced for other jurisdictions if they include a choice of law clause designating a permissive jurisdiction. In these situations, the employer may need to choose one hard-line position, either that the document is void for uncertainty or that it is enforceable for those jurisdictions for which it is valid. It may not be possible to "cherry-pick" the good provisions that are valid and leave out the bad provisions.
Two cases are examples of how Canadian employers should consider enforcing their NDA form. In Bowens v. Pinder (2002) 62 O.R. (3d) 81 (C.A.), the Ontario Court of Appeal held that a letter agreement invalidated an employment contract that had a term providing for a non-competition provision governed by the laws of Alberta. While the employer was based in Alberta, the employee did not move there, nor did he perform any services exclusively in that province. Notably, Alberta law is much more restrictive on non-competition provisions than Ontario law. The court held that the agreement violated the common law rule against "double-dipping". It is unlikely that a court in Alberta would have considered this document, presumably, under its own laws. In Condos v. Press-Scot Holdings (2003) 223 D.L.R. (4th) 343, the Court of Appeal dismissed an appeal of a decision that NDA provisions were unenforceable on the basis that they included covenants giving the employer rights to compete with the former employees to a wider extent than allowed within the same province. In both Calgary and Vancouver, incorporating operates under different non-compete and non-solicitation provisions than elsewhere. Again, consideration should be given to whether the documents, taken as a whole, would be enforceable in the jurisdiction where the business is incorporated, and whether that would result in different results.
While NDAs can serve as an important tool for preventing and remedying disclosing of confidential information, they are not exclusionary. Neither trade secrets legislation nor general, common law doctrines of confidentiality will displace employees’ obligations to their employers. Thus, Canadian employers should consider including NDAs in their agreements that contain strong non-disclosure and non-competition provisions that will act as complements to their existing rights for protecting their business while preserving their right to enforce those rights. NDAs should be heavily tailored to the industries and businesses they are intended to protect. Each NDA should be drafted with the specific business of the employer in mind. To that end, when drafting, Canadian businesses should consider:
Common Non Disclosure Agreement Mistakes
Just because they are commonly used, does not mean non-disclosure agreements are "boilerplate" and shouldn’t be given the same care and attention as other contracts. One common mistake made by companies entering into non-disclosure agreements is providing too much information to the other party. If the purpose of an NDA is to have an open exchange of information, that is one thing. But, if a party knows it has confidential information it wishes to protect, it should be careful about what information gets shared under the NDA.
Another common mistake is too much "overlap" between NDAs. While NDAs do address some overlap with other agreements, there is also some unnecessary overlap. For example, the contents of an NDA can also overlap with copyright assignment provisions in an intellectual property (IP) agreement. Or, in certain circumstances, NDAs and employment agreements can overlap. For example, the return of confidential information provision in an NDA may be similar to an employee’s obligations relating to confidential information in an employment agreement. The NDA, itself, can even take on the same format and language as an employment agreement.
One particular area of overlap worth examining is the sometimes risk of unenforceability due to a lack of specific limits on an NDA’s "confidential information" and "what if anything has been publicly disclosed". It is well settled law that confidentiality agreements must be restrictive in their terms. The law is quite clear on this point. If an NDA is deemed too broad, the court won’t enforce it. Therefore, making sure the "confidential information" is defined as narrowly as possible is a must. Similarly, if the contract tries to limit indefinitely "anything which has been publicly disclosed", an application for injunctive relief in order to prevent disclosure of confidential information could be denied. After all, information which has been publicly disclosed can hardly be considered confidential. This means that non-disclosure agreements need to be revisited more frequently, especially in the context of legal developments related to confidentiality, IP protection, and information privacy.
A solution could be that the NDA includes a schedule as part of the agreement whereby some or all of the information is provided in writing so as to (i) satisfy the requirement that the information have been expressly labelled confidential as a precondition to being considered confidential for the purpose of the NDA, and (ii) provide some specificity surrounding what is confidential, thereby limiting the scope of such confidential information. The bottom line is that, even though NDAs are commonly entered into between companies in Canada, parties need to carefully consider the terms of the NDA. The NDA is only as good as its terms allow it to be and courts are generally not well disposed to enforcing NDAs which would upset the balance of fair competition in the market.
Resolving NDA Disputes in Canada
When a dispute arises in the confidential relationship, the parties may attempt to resolve the matter through negotiation and discussion. However, it is also possible that litigation will be unavoidable.
Litigation
Lawsuits involving NDAs can become complex and ongoing, especially when a long time has passed since the contract was signed or when the NDA concerns information with a long shelf life, such as a patent, for example. The Civil Code of Quebec also sets out the damages that may be awarded in a breach of contract situation, and the parties cannot waive this in advance. The compensation cannot exceed the amount specified in the contract or the actual damages suffered, whether caused by the fault of the defendant or the fault of a third party, and must be compensated even if the injured party could not be held liable. Where a dispute involves the interpretation of an NDA or a determination of the scope of application of the contract, it is important to have a lawyer with experience in these matters . It is not advisable to attempt to enter into a contract without the help of a professional.
Alternative Dispute Resolution
Internationally, the parties to a dispute may wish to use alternative methods such as mediation or arbitration, but Quebec law and Canadian federal law do not require the parties to use alternative dispute resolution before going to court. The parties may agree in advance to use alternative dispute resolution. However, international arbitration is a very different procedure than mediation. Mediation is a process whereby a third party neutral is asked to help resolve the conflict, while arbitration is a quasi-judicial process where one or more arbitrators render a decision that is final and not subject to appeal, unless one of the parties alleges one of the few very specific grounds for appeal. The rules of procedure to follow in dispute resolution can be set out in the contract in advance. These rules may include contesting the terms of the NDA before the courts or using other dispute resolution mechanisms.