What a confidentiality agreement is
A confidentiality agreement, more commonly called a non-disclosure agreement or NDA, is a contract in which one party hands over information it wants kept secret on the condition that the recipient uses it only for an agreed purpose and does not pass it on. In a mutual NDA, both sides exchange information and both take on the same obligations. The two terms describe the same document, and which one a business uses is usually just a matter of habit.
Australian small businesses rely on these agreements constantly. You might send pricing lists and customer data to a prospective distributor, show product drawings to a manufacturer, put your financial forecasts in front of an investor, or let a contractor work inside your operation. Each of those moments creates a risk that information will be used for something other than the deal you had in mind. The NDA is the document that tries to manage that risk, by defining what is covered, what the recipient may do with it, and what happens if it leaks.
It is worth being precise about what the document can and cannot do before you sign one. An NDA creates contractual obligations, but the law that actually protects confidential information is older and broader than any contract. This article covers the three elements the law looks for before information is protected as confidential, the clauses that decide whether an NDA will hold up, a worked example of a business sharing information under an NDA, the misconceptions that commonly defeat enforcement, and where a lawyer's input changes the outcome.
The three elements of protected confidence
Australian courts protect confidential information through two routes. The first is contract: if a signed NDA says the recipient must keep information secret, breaching that promise is a breach of contract. The second is equity, the body of principles the courts developed to stop people from unconscionably using information they received in confidence, whether or not a document was signed.
The classic statement of when information is protected was given by Megarry J in Coco v A N Clark (Engineers) Ltd [1969] RPC 41, and it is regularly applied in Australia, for example in Leica Geosystems Pty Ltd v Koudstaal [2012] FCA 1337. Three things must be established:
- Confidential nature: the information must actually be confidential, meaning private in character and not common knowledge.
- Obligation of confidence: the information must have been communicated in circumstances importing an obligation of confidence.
- Unauthorised use to detriment: there must be an unauthorised use, actual or threatened, of the information to the detriment of the party who communicated it.
The first element is the one most often misunderstood. Information is not protected simply because someone writes "confidential" on it. The material itself must have the necessary quality of confidence, which in practice means it is not public knowledge and not readily ascertainable by competitors. Customer lists, pricing structures, manufacturing processes, source code, financial forecasts and unpublished designs can all qualify. Information that is already in the public domain, or that the recipient knew before the disclosure, generally cannot be protected no matter what the document says. This is why the definition of confidential information inside the agreement matters so much, and it is examined in more detail below.
The second element asks about the circumstances of the disclosure. The obligation of confidence can be express, which is what an NDA achieves, or it can be implied from the situation: handing over drawings in a meeting that everyone understood to be confidential can import the obligation even without a signed document. In Australia the equitable action for breach of confidence exists independently of contract, as Gummow J explained in Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) [1987] FCA 433. An NDA makes the obligation explicit and far easier to prove, but it is not the only source of it.
The third element ties the other two together. The disclosing party must show that the recipient used, or threatened to use, the information without authorisation, and that this caused or threatened detriment. The "permitted purpose" clause in an NDA is what defines authorised use. Use for any other purpose, such as developing a competing product, is a breach.
The clauses that decide whether an NDA holds up
Most confidentiality agreements contain the same family of provisions, and the differences between them, not the title of the document, determine whether the agreement is worth the paper it is printed on:
- Definition of confidential information: the core clause, which identifies what is protected. The best definitions describe the information by reference to the deal, for example "the product drawings, supplier list and price schedule provided in connection with the proposed distribution agreement". Vague definitions that cover "all information" are difficult to enforce because the recipient can argue they did not know what was caught.
- Exceptions: the carve-outs that stop the agreement from being unreasonable, typically information that is or becomes public, information the recipient already knew, and information independently developed or received from a third party.
- Permitted purpose: the specific use the recipient may make of the information, which defines what counts as unauthorised use later.
- Control of access: who within the recipient's organisation may see the information, and how the recipient accounts for who has been given access.
- Return and destruction: what happens to documents, drawings and electronic copies when the deal ends or the agreement terminates.
- Duration: how long the obligations last. As discussed below, "forever" is not necessarily stronger.
- Employee and contractor undertakings: a promise by the recipient that its people who see the information will be bound to keep it secret.
- Remedies and miscellaneous terms: indemnities for loss caused by a breach, the governing law and jurisdiction, and how the agreement can be varied.
Confidential information also sits outside the registered intellectual property system. Unlike patents, trade marks and designs, there is no register for trade secrets, and no application or fee is needed for protection to exist. That makes the contract and the surrounding conduct the primary tools for protecting it.
A worked example: the kitchen gadget manufacturer
A Brunswick-based manufacturer has developed a foldaway ironing board that mounts inside a kitchen cabinet, a genuine improvement on what is on the market. Before committing to a national distribution deal, a large distributor asks to see the technical drawings, the supplier list and the price schedule so it can assess margins. The manufacturer agrees, and both sides sign a mutual NDA. The permitted purpose is defined as "evaluating a potential distribution agreement", and the manufacturer's sales manager and the distributor's sales manager both sign individual undertakings.
The distributor's sales manager forwards the drawings and price schedule to a friend who runs a competing importer, who begins selling a near-identical product sourced from the same supplier. The manufacturer now wants the product off the market and compensation for the sales it has lost.
Working through the three elements, the manufacturer has a strong case. The drawings and price schedule were developed in-house and were not public, so they had the necessary quality of confidence. They were handed over under a signed NDA, so the obligation of confidence was express. Using them to set up a competing product was outside the permitted purpose, to the manufacturer's direct detriment. The manufacturer can sue for breach of contract, and in equity for breach of confidence, seeking an injunction to stop the competing product and either damages or an account of the profits the competitor made from the misuse.
Now vary the facts. Suppose the manufacturer had already displayed a working prototype at a public trade fair, without restriction, six months before signing the NDA. The drawings that were shown are now in the public domain, and the first element becomes difficult. The NDA cannot revive protection for information that has already entered the public domain, and a clause that tries to keep it secret anyway may itself be unenforceable. That is not a theoretical concern, as the misconceptions below explain.
Misconceptions that cost businesses
Four misunderstandings recur when businesses rely on confidentiality agreements:
- "Signing an NDA makes my information confidential": This is the most expensive misunderstanding. The information must itself have the necessary quality of confidence. An NDA cannot turn public knowledge, industry-standard techniques or information the recipient already possessed into trade secrets. If the substance of what you are disclosing is already out there, the agreement gives you very little, and the effort spent on drafting it would be better spent on the underlying secrecy of the information.
- "An NDA protects my information forever": In equity, the obligation of confidence ends when the information enters the public domain. More importantly, trying to contract around that can backfire. In Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, the High Court considered confidentiality agreements that restrained the recipient from using information even after it had been disclosed to the public through the inventor's own patent applications. The Court held that a restraint on use that continued after the information entered the public domain was an unreasonable restraint of trade and unenforceable. The lesson is that a perpetual secrecy clause is not a stronger clause; it can be a void one.
- "Without an NDA I have no protection": Not true, because equity protects information imparted in circumstances importing an obligation of confidence even where nothing was signed, as Corrs Pavey shows. But the practical position is weaker: the disclosing party has to prove the circumstances, the understanding of both sides and the limits of the purpose, rather than pointing to a signed definition. The NDA converts a factual argument into a contractual one.
- "An NDA is a non-compete in disguise": Confidentiality agreements protect information, not competition. A clause that operates as a restraint on trade faces the restraint of trade doctrine and will be scrutinised, as Maggbury demonstrates. If a business genuinely needs a non-compete, for example from a departing employee or a vendor in a sale, that is a separate clause with its own rules and its own limits.
Where a lawyer helps
For a small business, the value of legal input on a confidentiality agreement shows up at three points. The first is drafting. A practitioner will read the actual deal, identify what genuinely needs protecting rather than copying a template, and write a definition of confidential information with exceptions and a permitted purpose that will survive scrutiny. That includes practical details such as how information should be labelled, who can see it, and what must happen to it when the relationship ends.
The second is reviewing an incoming NDA. Businesses are regularly asked to sign the other side's document, and the risks run the other way: agreeing to keep "all information" confidential when much of it is not secret, accepting obligations that last indefinitely, or promising to indemnify the disclosing party for losses that were never the recipient's fault. A review identifies the promises the business would actually be making.
The third is enforcement. When information has leaked, speed matters because once it is published the damage is largely done. A practitioner can move quickly for an interim injunction to stop further use, and can advise on the choice between damages and an account of profits. Because the obligation of confidence exists in equity independently of the contract, there may be remedies available even where the contractual claim fails, for example where the NDA itself is found to be unenforceable. A lawyer can also assess whether the information genuinely had the necessary quality of confidence before litigation is started, which is the question that decides whether the case is worth running at all.
The question to ask before you sign
Before you sign an NDA, whether you are giving information or receiving it, the question worth asking is not whether the document is long enough or professionally formatted. It is this: what happens to my information the day it stops being secret? If the answer is clear, because the definition, the exceptions, the duration and the return obligations all point the same way, you have a workable agreement. If the answer is "I don't know", the drafting is not doing its job, and that is the moment a lawyer's review pays for itself.