Back to basics - non-disclosure agreements (NDAs)

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

NDA – is there a simpler way?

NDAs have become commonplace in global real estate, and are the first risk hurdle in the deal process. Yet their very mention inspires grumblings about protracted negotiations, drawn-out reviews and delayed deals. Is there a simpler way?

The initial cut of an NDA is often extremely and unrealistically favourable to the party that drafted it. This adds timing and cost implications that are disproportionate to the fairly simple concept of respect for the confidentiality of information exchanged during negotiations. The final document almost invariably reflects a fair and sensible compromise anyway, so why not start there?

INREV (the European industry body for non-listed real estate vehicles) has a standard form that is designed to bring the starting point closer to the final document, soothing headaches and cutting out costs. Prepared in consultation with a cross-section of the INREV membership, it starts at a position that should be acceptable to both the discloser and the recipient of confidential information in a real estate context.

This Back to basics briefing sets out key considerations for drafting or reviewing NDAs, and highlights the potential use of INREV's model document.

NDA negotiations – The key issues

Describing the purpose of the disclosure

An NDA should accurately describe the purpose for which the confidential information is being disclosed. Too broad a description would be particularly dangerous where the parties regularly do business together, as the same confidential information could be caught by subsequent NDAs but dealt with differently. This can cause an overlap where a subsequent NDA may be more onerous or the time periods may inadvertently be extended. Likewise, if the description is too narrow then the intended confidential information may not be covered. You should keep the scope both narrow in terms of a specific transaction or target, and broad in terms of the types of information and materials that are covered.

Contracting party and permitted release

Consider which entity within your organisation should sign the NDA. If you are the discloser, you may also want to consider the covenant strength of the contracting entity on behalf of the recipient in the event of a breach.

We would typically expect a recipient to be permitted to disclose the confidential information to a list of permitted disclosees. These often include other group entities, relevant personnel and other third party advisers or similar. It is not uncommon (and in our opinion reasonable) that such disclosure to these “permitted persons” should be on a “need to know” basis and be accompanied by their agreement to be bound by the terms of the NDA.

Disclosure to authorities

Situations may arise where a recipient may need to be able to release the confidential information (or parts of it) in certain circumstances. Here, a discloser will want to ensure such circumstances are not too broadly defined so as to potentially cut through the NDA.

A recipient should be allowed to release confidential information as required by laws or regulations and as required by any court or regulatory body. A discloser will typically want an obligation whereby the recipient must inform the discloser prior to or soon after any release of confidential information. The discloser may also want additional protection in the form of language that permits disclosure of only a bare minimum of confidential information, as well as an ability to contest any such disclosure. The costs of any contest should typically be borne by the recipient.

After use – return or destroy?

Confidential information must normally either be returned or destroyed within a period specified in the NDA. Recipients should remember that there is usually no obligation on the discloser to remind the recipient of this and of the fact that they could be in breach if they fail to return or destroy the information. We would suggest that the choice between returning or destroying the confidential information should be at the recipient’s discretion, subject to a right to retain a copy for corporate governance and audit purposes, and a carve-out for confidential information stored on computer back-up servers.

Include an indemnity?

This often seems to be the biggest sticking point in NDA negotiations. From speaking with clients it is clear that very few (if any) would be willing to give an indemnity in favour of the discloser for breach of an NDA. Despite this, indemnities do often appear in the first draft and seem to be a point of contention. Whether an indemnity is required needs to be considered in conjunction with various other aspects such as the nature of the confidential information, the implications of breach and the risk associated with the contracting party.

There are a number of potential advantages to being indemnified as the discloser, such as not necessarily being required to mitigate any loss, and the time periods for bringing a claim. However, the absence of an indemnity does not restrict a discloser’s ability to claim for damages (albeit with a need to mitigate any loss) or pursue other remedies such as injunctive relief. This is of course provided that the NDA is correctly drafted!

The INREV standard form does not include an indemnity but does permit other equitable relief.

A bespoke starting point for indirect real estate

INREV have prepared a “standard form” NDA which should be considered carefully in light of the key issues above, and tailored where required. Even if INREV’s model does require amendment to suit the specific deal, it certainly provides a useful starting point for a fair and reasonable document that will hopefully save time by avoiding lengthy and unnecessary negotiations.

The INREV NDA is available here.

Conclusion

The above covers some of the frequent queries or issues that we see with NDAs, but is by no means exhaustive. Please get in touch to discuss specific NDA issues, as and when they arise.