Under wraps: The secret life of Non-Disclosure Agreements

The humble NDA hit the headlines recently when it was reported that an extra on the forthcoming Batman film faces a $5m payout for revealing key casting details.

The unfortunate film-hand is said to have let slip to a local radio station that the Caped Crusader’s longstanding sidekick Robin will be played by a woman.

This was apparently a serious enough breach of the studio’s confidentiality terms to trigger the eye-watering financial sanction.

Leaving aside the question of whether the studio would be that upset about the alleged breach, given the free publicity generated for its movie, the story threw the spotlight on one of the law’s most common but least remarked-upon documents: the NDA.

Protecting the seller

Batman
This is the only stock image we had for Batman. He appears to be eating some mince pies, which makes this nicely festive

NDAs (short for Non-Disclosure Agreements) are a ubiquitous feature of the business world. Most commonly, they are used to protect a seller’s interests where the potential buyer needs to review sensitive commercial information: the obvious danger being that the buyer may use that information for purposes other than the proposed transaction, with devastating consequences for the seller’s business.

In such circumstances, the seller could potentially sue for breach of the equitable duty of confidence, but it would be risky to rely on this alone, and in practice, parties tend to enter into NDAs as a matter of course prior to commencing substantive negotiations.

NDAs thus have a two-fold aim: the party receiving the confidential information agrees to keep it secret and to use it for a limited purpose.

The perils of getting an NDA wrong were highlighted by the recent case of Dorchester v BNP Paribas. Dorchester wanted to raise finance to buy development land in East London, and asked BNP to find potential investors.

The parties signed an NDA preventing BNP from either disclosing the information Dorchester had gathered about the site, or using it to buy the site directly. BNP was also required to make third party investors sign a “back-to-back” NDA in similar terms.

In the event, BNP failed to obtain an NDA from the third party investor, which went on to buy the land itself, bypassing Dorchester.  Dorchester brought an action against BNP for breach of the NDA.

The action failed at first instance essentially because of the poor drafting of the NDA, which the judge found limited BNP’s responsibility for third party acts to the non-disclosure aspect of the NDA (and thus to exclude the requirement not to gazump Dorchester).

The Court of Appeal overturned this decision on the basis that the intention of the parties to prevent such circumvention was clear to a reasonable person.  However, the case demonstrates that it is as important to be precise in drafting an NDA as any other legal document, and that the consequences of bad drafting can be hugely costly.

Remedies

British film extras worried by the “Batman” story can breathe a sigh of relief: they would almost certainly never have to pay out $5m for an NDA breach, as the courts here would consider such an obligation to be a penalty clause. Under English law, the possible remedies for NDA breach include injunction (although in practice, once the breach has occurred, use of an injunction may amount to shutting the stable door after the horse has bolted), and damages. 

Perhaps most importantly, a well-drafted NDA gives businesses some peace of mind that their trade secrets will not be ripped off each time they enter commercial negotiations. As such, it is perhaps no exaggeration to say that NDAs are the grease keeps the economy motoring.

Nicholas Cullen is a trainee at Olswang.

Further reading