Why Do I Need A Confidentiality Agreement?

Updated:  January 23, 2020

What is a Confidentiality Agreement?

The Confidentiality Agreement (also known as the Nondisclosure Agreement) is used when you want to share confidential information with a third party and have some level of confidence your information will remain confidential.

A confidentiality agreements is a legally binding agreement between two or more parties who agree to keep confidential and to not disclose certain information.  The parties can be businesses or individuals.  The agreement can be unilateral (I give you information and you keep it secret) or mutual (we provide confidential information to each other and we agree to keep secret each other’s information).

Another important, but less discussed, benefit of a confidentiality agreement is the restriction on use of your confidential information.  In addition to confidentiality, you also want to prevent the receiving person from using your information against you.  For example, if you are selling your business, you might share customer lists, pricing, and other valuable strategies to the potential buyer.  If the potential buyer does not purchase your business, you do not want it to steal your customers or use your pricing information to undercut your prices.

When Do I Need a Confidentiality Agreement?

Confidentiality agreements are used whenever you want to protect information you are going to share with another person or business.

  • When buying or selling a business, both the buyer and seller will share business and financial information they each want to remain confidential and not used to the other’s advantage.
  • When employees, independent contractors, and consultants will have access to particularly sensitive information about your business.
  • When settling claims or lawsuits, confidentiality is often a requirement of the settlement.
  • When protecting trade secrets, patents, sales and marketing plans, product designs, and much more.

You may think, “but I know this person who want to buy my business, she’s my good friend and I trust her”.  Well, if she decides not to buy your business and then uses your information to compete against you, not only has your friendship ended, but you also in a very difficult, if not impossible, position to sue for damages.

Similarly, your neighbor may be the perfect candidate to do some free-lance work for your company. Beware.  Without a confidentiality agreement (or provision in your independent contract agreement), your wonderful neighbor could walk away with a lot of confidential information about your business (not to mention also own the work product he/she developed, but that’s another legal matter).

So, I highly recommend you hire an attorney to draft your next confidentiality agreement so it is specific to your situation and needs.  This is to protect you and not simply a way for attorneys to earn fees. The reason is that a template confidentiality agreement you obtain from the internet will almost never address your particular situation, will inadequately protect your confidential information, and may not provide the remedies you want if your information is disclosed. Attorney-drafted confidentiality agreements are rather inexpensive to obtain (in relation to other attorney services) and it will be money well spent.

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