A confidentiality agreement, often called a non-disclosure agreement (NDA), is a legal contract that prevents one or more parties from sharing certain private information with others. In India, NDAs are commonly used to safeguard sensitive business details, like trade secrets, intellectual property, financial records or customer lists. Confidentiality agreements are especially important in industries such as pharmaceuticals, technology, and space, where unique information is a valuable asset. NDAs are used during partnerships, employment, or business deals to ensure confidential information stays protected.
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Laws That Govern Confidentiality Agreements in India
Several laws in India regulate confidentiality agreements, with the Indian Contract Act, 1872, being the major one. Laws like the Information Technology Act, 2000 and the Right to Information Act, 2005 also play an important role in protecting confidential information. Here's a breakdown of the essential laws:
1. Indian Contract Act, 1872
Indian Contract Act is the primary law which governs confidentiality agreements. Section 27 of the Act says that agreements stopping someone from working in their profession or business are not valid, except in cases like selling a business's goodwill. While non-compete clauses (which stop someone from working in a similar job after leaving a company) are often not allowed under Section 27, confidentiality clauses are treated differently. Courts have supported NDAs that protect a company’s trade secrets or sensitive information, as long as they don’t unfairly limit someone’s ability to work.
For example, in the case Niranjan Shankar Golikari v The Century Spinning And Mfg. Co., the Supreme Court ruled that restrictions during employment are okay because they protect the employer’s private information without blocking someone’s ability to earn a living.
2. Right to Information Act, 2005
Section 8(1)(d) of this Act says that information about commercial secrets, trade secrets, or intellectual property doesn’t have to be shared unless it’s in the public’s interest. This supports confidentiality agreements by protecting confidential information but also reminds us that there needs to be a balance between secrecy and public access.
4. Information Technology Act, 2000
The IT Act protects digital information. Section 65 punishes anyone who tampers with computer data, like trade secrets stored electronically. Section 72 sets penalties for breaching confidentiality of electronic records, with up to 2 years in jail or a fine of up to ₹1,00,000. This is important for NDAs that involve digital data, as seen in cases like Lalit Kumar Modi Vs. Board of Control for Cricket in India.
5. Other Important Points
The term “confidential information” isn't defined explicitly in any of the Acts but the judiciary has interpreted and defined it's meaning along with the international agreements like the TRIPS Agreement (Article 39), which describes trade secrets as information that is secret, valuable, and protected with reasonable efforts.
NDAs must follow the Indian Stamp Act, which requires them to be stamped to be legally valid. The stamp duty varies by state.
While registering an NDA under the Registration Act, 1908, isn’t required, doing so can make the agreement more trustworthy in court.
Are Confidentiality Agreements Enforceable in India?
NDAs can be enforced in India if they are fair and protect genuine business interests. However, courts carefully review them, especially because of Section 27 of the Indian Contract Act, 1872. Here are some key court cases that explain how NDAs are enforced:
During Employment: In Niranjan Shankar Golikari v The Century Spinning And Mfg. Co., the Supreme Court said that restrictions during employment are fine because they protect the employer’s confidential information without stopping someone from working.
After Employment: In V.F.S. Global Services Ltd. v. Mr. Suprit Roy, the Bombay High Court ruled that restrictions after employment, like preventing someone from starting a similar business for two years, are not valid under Section 27.
After a Contract Ends: In BLB Institute of Financial Markets Ltd. v Ramakar Jha, the High Court said that restrictions that continue after a contract ends are not valid, referencing another case, Percept D’Markr (India) Pvt. Ltd v Zaheer Khan.
Trade Secrets: The Delhi High Court has said that restrictions on using trade secrets during or after employment don’t count as blocking someone’s ability to work under Section 27, so they can be enforced in some cases.
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Tips for Creating a Strong Confidentiality Agreement in India
To make sure a Non-Disclosure-Agreement is enforceable and follows Indian laws, keep these points in mind when drafting it:
1. Be Clear and Specific
Clearly explain what “Confidential Information” means, such as trade secrets, business plans, or customer lists.
State the purpose of sharing the information and limit its use to that purpose only.
2. Keep Restrictions Reasonable
Avoid overly strict rules, especially after employment, as they could be considered invalid under Section 27.
For employees, focus on protecting specific confidential information instead of stopping them from working in the same industry.
3. Set a Time Limit
Clearly state how long the confidentiality rules last. This could be for a reasonable time after the agreement ends or as long as the information stays a trade secret.
4. Follow Stamping and Registration Rules
NDAs must be stamped according to the Indian Stamp Act to be legally valid. The stamp duty depends on the state.
While registration isn’t required, it can make the NDA more credible in court.
5. Plan for Breaches
Include options for what happens if someone breaks the NDA, like court orders to stop further leaks, financial compensation, or recovering profits made from the breach.
Courts may issue orders to prevent further disclosure, as seen in cases like Escorts Const. Equipment Ltd. v/s Action Const. Equipment P. Ltd.
6. Protect Electronic Data
For NDAs involving digital records, make sure to follow the Information Technology Act, 2000, and its rules on data protection.
7. Get Professional Help
Work with a lawyer to customize the NDA to your specific needs and ensure it follows Indian laws.
Read to learn more about Drafting Commercial Contracts
Summary
Confidentiality agreements are essential for protecting sensitive information in India, backed by the Indian Contract Act, 1872. Section 27 limits some restrictions but courts generally support confidentiality agreements that are fair and protect legitimate business needs. Other laws, like the Information Technology Act, 2000 and Right to Information Act, 2005, add extra protection for digital data and commercial secrets. To make a confidentiality agreement enforceable, it should be carefully written, stamped, and tailored to your needs, ideally with help from a legal expert.
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Confidentiality Agreements: FAQs
Q1. What is in a confidentiality agreement?
A confidentiality agreement includes definitions of confidential information (e.g., trade secrets, business plans), the purpose of disclosure, restrictions on sharing or using the information, duration of obligations, remedies for breaches (e.g., injunctions, damages), and compliance with laws like the Indian Contract Act, 1872.
Q2. What is an example of a confidentiality contract?
An example is a Non-Disclosure Agreement (NDA) between a tech company and an employee, prohibiting the employee from sharing proprietary software code or client data with third parties during and after employment, compliant with the Indian Contract Act, 1872.
Q3. What is the difference between NDA and DPA?
An NDA (Non-Disclosure Agreement) prevents sharing confidential information with third parties. A DPA (Data Processing Agreement) governs how personal data is processed, shared, and protected, typically under data protection laws like GDPR or India’s IT Rules, 2011, focusing on privacy compliance.
Q4. What are three reasons why a confidentiality agreement is important?
It protects sensitive business information (e.g., trade secrets, client lists), prevents unauthorized disclosure during collaborations or employment and provides legal remedies (e.g., injunctions, damages) if breached.
Q5. What are the three types of NDA?
Unilateral NDA: One party agrees not to disclose the other’s confidential information (e.g., employee-employer). Bilateral NDA: Both parties agree to protect each other’s confidential information (e.g., business partnerships). Multilateral NDA: Multiple parties agree to protect shared confidential information (e.g., joint ventures).
