Non-disclosure agreements (NDAs) are legal contracts used to protect confidential information shared between parties. In some cases, certain information may be excluded from the scope of the NDA. Other clauses in the NDA may also have exceptions. All these together are commonly referred to as carveouts. Essentially, carveouts are provisions that limit the scope of an obligation. A brief synopsis of carve outs in an NDA are set out below, divided into carveouts for confidential information and carve outs for other clauses in an NDA.
A). Standard carveouts in defining confidential information
- Publicly available information: This carveout is a standard provision in NDAs that excludes any information that is already in the public domain or becomes public knowledge through no fault of the recipient from information falling under the classification of confidential information. It is important because it acknowledges that the recipient cannot required to take special measures to keep as confidential, information that is already widely known or easily accessible.
- Previously known information: This carveout allows the recipient to use or disclose any information that they already knew before the NDA was signed. This carveout is particularly relevant in cases where the recipient has prior experience or knowledge in the same industry as the disclosing party, as it acknowledges that the recipient may have already had access to the information or may have acquired it independently of the disclosing party.
- Information received from a third party: This carveout permits the recipient to use or disclose information that they received from a third party who was not subject to a confidentiality obligation to their knowledge. This carveout is significant because it recognizes that the recipient may have obtained the information from a source other than the disclosing party, and that it would be unreasonable to prevent the recipient from using or disclosing such information.
- Information created independently: This carveout permits the recipient to use or disclose information which they developed independently without use of the confidential information. This carveout is important because it allows the recipient to freely use information or documentation which it creates through its independent research.
- Required by law: This carveout permits the recipient to disclose information if they are required to do so by law, regulation, court order, or government agency. It is an essential provision because it acknowledges that the recipient may be legally obligated to disclose the information, and that failure to do so would result in a breach of the law. Other rules that may be captured in this carve out include rules of a stock exchange, discovery requests and requests from self-regulatory authorities.
- Permitted disclosures: This carveout allows the recipient to use or disclose the information to certain authorized individuals or entities, such as legal or financial advisors, directors, employees, contractors, affiliates, etc., who need to know the information to carry out their duties without the prior consent of the discloser. It is important because it recognizes that certain individuals or entities may need access to the information to perform their duties or services, and that such access is necessary for the proper functioning of the transaction or project. From the perspective of the recipient, it is more beneficial for the list of permitted disclosees to be as wide as possible whereas the discloser would seek to restrict this list.
- Carveouts for other standard clauses in an NDA
I) Non-solicitation clause
A non-solicitation clause is a contractual provision that prohibits a counterparty from soliciting or enticing the customers, clients, or employees of the other party to the contract for a specified period of time. There are however some common carve outs or exceptions which are typically included in a non-solicitation clause, some of which are set out below:
- Passive solicitation: This carveout allows the counterparty to accept business from former clients or customers or employ employees who approach them without any solicitation.
- General advertising: This carveout permits the counterparty to engage in general advertising that are not specifically targeted at the other party’s employees. It is advisable to ensure that employees who are referred by a placement agency are also covered under the carve out.
- Consent: This carveout allows the counterparty to solicit former clients, customers or employees with the prior written consent of the other party.
- Termination: this carveout is applied in relation to employees as opposed to customers, suppliers or clients. It allows the counterparty to employee a former employee of the other party. In some cases, a cooling off period of between 6 to 12 months is given between the time the employee was terminated and the time the counterparty is allowed to employ such former employee.
II) No-contact clause
In an NDA, a no-contact clause is used to prohibit a recipient from contacting customers, suppliers, clients, employees etc., of the disclosing party for a specific period, usually the term of the NDA. This prevents inadvertent disclosure of the proposed transactions to parties who are not meant to be aware of the proposed transaction, at least for the time being.
The carveouts for a no-contact clause include contacts in the ordinary course of business and consistent with past practice and contacting for the purpose of conducting market due diligence in which the proposed transaction and the disclosing party is not referred to.
III) Information disposal clause
The requirement to return or destroy confidential information is an important aspect of confidentiality agreements. It is designed to protect the interests of the company and to prevent the disclosure or misuse of confidential information by counterparties after the purpose for which the information was provided has ended. Usually an NDA will contain a trigger for return or disposal of confidential information provided which should preferably be upon written request. However, the recipient should ensure that it is able to retain confidential information or copies thereof for the following purposes:
- Where required by law, regulation or other governmental authority to retain confidential information.
- Where is it required to retain confidential information in accordance with its internal document retention policy requirements.
- The recipient should also not be required to return or destroy confidential information retained pursuant to automatic archiving or back up systems or disaster recovery systems.
- In some cases, the recipient may also seek to retain confidential information for litigation purposes.
The foregoing carveouts are not exhaustive, and the specific provisions included in an NDA may vary depending on the nature of the relationship between the parties, the type of information being disclosed, and the specific circumstances of the disclosure. When negotiating an NDA, the parties should carefully consider the carveouts that are included in the agreement to ensure that the NDA effectively protects their confidential information while still allowing the recipient to carry out their duties or services. The disclosing party would seek to make sure that the carveouts are limited in scope and that they do not allow the recipient to use or disclose their confidential information in a manner that would be detrimental to their business or interests.
The recipient, on the other hand, would ensure that the carveouts are broad enough to allow them to carry out their duties or services, while still complying with their confidentiality obligations and a proper balance needs to be struck between these competing interests. It is also important to consider how long the carveouts will last. In conclusion, carveouts are an important aspect of NDAs and the specific carve outs included in an NDA may vary depending on the specific circumstances of the disclosure and the relationship between the parties. It is important for the parties to carefully consider the carveouts included in the agreement and to define them clearly and specifically to avoid any confusion or disputes in the future.
