Protecting Confidential Information in Pre-Contract Negotiations

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It is common place in pre-contractual negotiations for a party to request certain information from another party prior to making any commitment. The nature of the information requested can often be sensitive and, in many cases, critical to the performance and viability of the disclosing party’s business. Some examples of where this type of disclosure is required are during a purchaser’s due diligence enquiries prior to entering a business or share sale contract or preparation and submission of tender responses. The types of information requested include financial documents, manufacturing processes and other trade secrets, marketing and strategic planning information.

The information has considerable value to the disclosing party and is often collected and formulated over a significant period of time. A disclosure to, and the use of such information by the other party, who would typically compete with the disclosing party in the market place, has the potential to be extremely damaging.

It is therefore important to takes steps to ensure the confidential information of your business is well protected prior to making any disclosures. This is typically done by having the party who will receive the sensitive information enter into a non-disclosure agreement. The agreement should obviously include restrictions on the recipient profiting from the information and on the use, disclosure and copying of specific information, or classes of information. It should also ensure that ownership of any disclosed information remains with the disclosing party and provide for a return or destruction of the information after negotiations have concluded, particularly where a binding contract does not eventuate.

The agreement should also include:

  • An indemnity in favour of the disclosing party covering any damage incurred as a result of the disclosure of the information to the recipient; and
  • An express acknowledgement that general damages may be an inadequate remedy for breach of the agreement. This makes successful injunctive action more likely.

When making a disclosure, for the sake of clarity if the specific documents are not listed in the non-disclosure agreement, you should clearly mark the document as confidential to ensure there is no possibility of the recipient being confused as to the nature of the documents. You might even disclose it under a cover letter which points out the information is being disclosed pursuant to non-disclosure agreement dated XX/XX/XX.

If you would like further information or assistance in protecting the confidential information of your business or any other aspect of your commercial transactions please contact Tim Osborn.

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