NDA vs Confidentiality Agreement: Understanding the Difference

Most businesses, especially in certain industries, possess classified information. Many companies also share, receive, and exchange confidential information as part of their ordinary business transactions and relationships. To protect both the parties and the information being shared in these situations, organizations use one or both of two types of contracts: non-disclosure agreements (NDAs) and confidentiality agreements.

Confidentiality agreements are legal documents that require the parties to not share or profit from classified information. They are implemented whenever confidential business information or expertise should not be revealed to the public, third parties, or competitors.

One common type of confidentiality agreement is a non-disclosure agreement (NDA). If you work for a large organization, your legal team is probably very familiar with NDAs and has many of these contracts to manage.

An NDA is a legally enforceable contract that prohibits the unauthorized sharing of sensitive information and establishes a “confidential relationship” between the parties. A confidential relationship means that at least one party has a duty not to disclose the relevant knowledge without authorization.

In general, a non-disclosure agreement can be categorized as either a unilateral or mutual/bilateral NDA. In unilateral NDAs, only one party agrees not to disclose classified information. A mutual NDA means that both/all parties agree not to share any confidential information.

For this article, the term “NDA” equates to a unilateral NDA and the term “confidentiality agreement” equates to a mutual NDA.

Non-disclosure agreements and confidentiality agreements share many similarities. Most people assume they are the same and use the terms interchangeably. Both contracts have the same functions:

1. Identify sensitive information
2. Protect classified information

Nevertheless, while both NDAs and confidentiality agreements are very similar, it is important to understand their distinctive nuances. By understanding their differences, you will be able to determine which document will provide the best information protection for your business.

A confidentiality agreement binds all parties to keep secret information confidential, while an NDA upholds secrecy by creating a confidential relationship between the parties who sign it. In practical terms, this subtle distinction means that NDAs are better suited for situations involving a one-way communication of classified information.

On the other hand, confidentiality agreements are usually more suitable whenever two or more parties are working together on a project that requires the exchange of proprietary information.

For example, inventors frequently use non-disclosure agreements before applying for a patent. Because a public revelation of a patentable idea constitutes a waiver of patent rights in most jurisdictions, an NDA is a useful tool to preserve confidentiality for inventors until they file a patent application.

Many companies will also extend a non-disclosure agreement to prospective employees or contractors to ensure the privacy of their trade secrets or other proprietary information. Also known as an “employment NDA,” some examples include:

• Technology companies/startups: This industry uses NDAs to protect its proprietary software or algorithms.
• Manufacturers: This industry uses NDAs to protect its unique fabrication techniques.
• Marketing agencies: Employees are required to sign an NDA to prevent confidential data like client contact lists and service charges from being disclosed to competitors.

Confidentiality agreements are used for joint projects or other partnerships in which both parties need to share confidential data. For instance, an equipment manufacturer and a supplier could use a confidentiality agreement to govern their relationship. The contract would allow the manufacturer to give sensitive specifications to the supplier while allowing the vendor to reveal its classified manufacturing methods to the manufacturer.

Knowing whether to use an NDA or confidentiality agreement is critical to safeguarding your businesses’ classified information or intellectual property (IP).

Both non-disclosure agreements and confidentiality agreements can be used to prevent private information from becoming public knowledge. While both contracts are very similar, there are certain situations where using one is superior to the other.

When to use an NDA

An NDA is employed whenever there is a unilateral flow of information. Some examples of when an NDA would be used include:

• Products: For companies involved with the sale or licensing of products and technology, they must ensure that any disclosed data (technical, financial, etc.) is not shared with third parties.
• Employees: Because they can have access to confidential information, many employees are required to sign employment NDAs that prevent them from sharing a businesses’ proprietary data.
• Clients: Depending on the industry, your company may be exposed to a new client’s confidential information during the onboarding process. An NDA can protect your business from legal liability in these situations.
• Investors: Non-disclosure agreements are common when presenting information to potential investors.

When to use a confidentiality agreement

For situations when there is mutual sharing of privileged information, the parties should use a confidentiality agreement. These situations often necessitate a higher level of secrecy. Some examples of when confidentiality agreements would be used include:

• Mergers and acquisitions: When a business is sold, sensitive financial and operational information must be shared between the parties and with other intermediaries like brokers. Confidentiality agreements help protect this data until the merger or acquisition is completed.
• Negotiations: Whether it’s a negotiation between two partners or between an investor and a start-up company, the information shared during these talks needs to be protected.

Confidentiality agreements are also common when contracting with vendors, exploring joint ventures, and engaging in military agreements.

There is very little to distinguish a non-disclosure agreement from a confidentiality agreement because they share the same purpose. The main distinctions between an NDA and a confidentiality agreement are:

• The scenarios that necessitate their use
• Unilateral (NDA) vs mutual (confidentiality agreement)

Both contracts share many of the same components. Regardless of which one you select, checking that the key terms are clearly defined is critical to ensuring a smooth contract execution.

In most situations, using non-disclosure agreements together with confidentiality agreements is unnecessary. You should be able to choose the one that best fits the particular scenario and have your sensitive information protected.

Nevertheless, there are rare circumstances where both could be employed.

For certain agreements that cover large and complex transactions, you could include both non-disclosure and confidentiality agreements as separate clauses.

For example, one part of the transaction may require a unilateral transmission of confidential information, while the other phase necessitates a bilateral sharing of sensitive data. In this scenario, the two parties would include a non-disclosure clause for the first phase of the transaction, and a confidentiality clause for the second part.

Overall, NDAs and confidentiality agreements are very similar. Both contracts are used to identify classified information and protect it from being leaked to the public or unauthorized third parties.

In general, NDAs are used when there is a unilateral flow of classified data, while confidentiality agreements are designed to be used when two or more parties share proprietary information.

If your organization needs help when deciding to use an NDA vs confidentiality agreement, look no further than Ironclad and its powerful digital contracting platform which can automate your NDAs. Because these contracts can be incredibly time-consuming, our contract management software is designed to enable users to build and generate NDAs or confidentiality agreements easily and efficiently.

To learn more, request a demo today.