Non-Disclosure Agreements (“NDAs”) often receive short shrift. Business persons plunge into sensitive discussions with third parties without bothering to obtain contractual protection or Legal issues the same NDA in every case, as if one-size-fits-all.
Whether one intends to disclose confidential information to prospective employees, partners, subcontractors, or others, it’s almost always prudent to first obtain a signed NDA. That’s especially true when doing business in Asia, where local laws and practices may pose unique challenges.
Here are 10 tips to help ensure your NDAs will do the job in Asia.
1. Non-Disclosure. The heart of an NDA is language prohibiting the unauthorized use or disclosure of certain information. The drafter of the agreement should first find out what types of information may be disclosed by each party, because the discloser will want stronger protection, while the recipient will want fewer restrictions. The agreement may require the recipient to use at least the same degree of care that it would use to protect its own confidential information, but at least a reasonable degree of care. Usually, the confidentiality obligations should be mutual.
2. Other Prohibitions. Non-disclosure alone may be insufficient. Consider the customer who reveals critical designs and specifications to its Chinese manufacturer, only to find the manufacturer using that information to produce unauthorized goods that it sells to third parties – including the customer’s own customers. Or the joint venture in Taiwan that goes awry when key employees receive valuable trade secrets from the JV partner, then quit the venture to form a competing business. Or the potential corporate transaction that fails mid-way through due diligence and the counter-party then poaches your key employees.
First priority in controlling such risks should always be practical security measures, such as investigating potential partners, employees and subcontractors in advance; selecting them carefully; monitoring to ensure compliance; restricting dissemination of confidential information, by not disclosing core technologies, sharing sensitive information with only those with a legitimate need to know, using multiple suppliers so no one receives all of the critical information concerning a product, and so forth.
But one also may protect against such risks by adding to the NDA non-circumvention, non-competition and/or non-solicitation provisions, prohibiting the recipient from contacting the discloser’s customers, suppliers or other contacts directly, using the confidential information for the benefit of any party other than the discloser, or soliciting away the other party’s employees. Care should be taken not to draft such provisions too broadly, as they may then be deemed unenforceable (eg., in general the prohibition should not exceed two years from the date of disclosure).
3. Protected Matter. Before one can protect Confidential Information one must first define it. The NDA may define Confidential Information as anything that would “reasonably be deemed confidential,” it may give examples, such as “technical, financial and business information in oral, written, physical or electronic form,” or it may define it as anything marked “Confidential.”
The recipient will generally favor a marking requirement, while the discloser may reject such a requirement, because some employees or agents may fail to mark before disclosing and some information cannot easily be marked. As a compromise, one can state that Confidential Information must be marked as such, or identified as confidential in a subsequent writing. Regardless of whether an agreement requires it or not, it’s always good practice to mark all confidential documents as confidential, because then there can be no doubt as to their status.
And, it’s only reasonable to include the standard categories of unprotected information, including information available to the general public, previously known, independently developed or rightfully received by the recipient, through legal means.
4. Permitted Use. The NDA should state that Confidential Information may be used only for a particular purpose, such as exploring a possible business relationship, manufacturing a certain product for the disclosing party, or fulfilling certain terms of employment, and no other purpose. Of course, the terms of that relationship will be laid out in a separate agreement.
The NDA should clearly identify the recipient company and make clear that even disclosure to recipient’s subsidiaries or affiliates would be unlawful. It can require the recipient company to restrict access to only those persons who have a legitimate need to know and require each individual recipient to sign an equally restrictive NDA before gaining access to the information. Or, it can restrict access to only certain named persons and require the disclosing party’s prior written consent before any names are added to the list.
It’s also reasonable to include the standard permitted disclosures, such as to the recipient’s attorneys, accountants or employees who have a legitimate need to know, or in response to a court order. However, the legitimate need to know requirement should be explicit, prior notice should be required before disclosure under this section, and any third-party recipients should be required to agree to confidentiality obligations at least as strict as those stated in the NDA before they receive any confidential information.
5. Term. The NDA should specify a term for the entire agreement, because contracts with no stated term are generally deemed terminable at will. And it should state a term for the non-disclosure, non-circumvention, or other obligations, such as “for the Term of this Agreement and __ years thereafter.” To be enforceable in Asia, any non-competition and non-solicitation provisions should be drafted narrowly and should not exceed 2 years. The NDA should also state the recipient’s obligations upon termination, such as returning or destroying all items received from the disclosing party, as instructed by the discloser.
6. No Warranties/As-Is. While it has nothing to do with confidentiality, it may be prudent to state in the NDA that all information is disclosed “As is” and without warranties, express or implied. Such language may not ward off legitimate claims for fraud or concealment, but may give some protection against unmerited claims.
7. Remedies for Breach. If the NDA provides for injunctive relief in the event of a breach, that provision may be enforceable in some countries, but it won’t be in China. On the other hand, it’s often prudent, and enforceable in China, to include a liquidated damages provision. A liquidated damages (“LD”) provision is usually enforceable in Asia if the actual damages were difficult to ascertain when the parties entered in to the agreement, the LD amount seemed reasonable at that time, the LD amount still seems reasonable after a breach has occurred, and it is not described as a “penalty.” One may want to also insert language requiring the loser to pay the winning party’s attorney fees in the event of breach.
8. Dispute Resolution. It’s always good practice to nail down dispute resolution procedures in advance. If all parties are from China, it may be reasonable for the NDA to require litigation or arbitration in China, but most non-PRC parties prefer not to resolve disputes in China due to concerns about fairness and competence. Moreover, China’s leading arbitration institution, CIETAC, has been experiencing growing internal turmoil, causing some uncertainty about its ability to render prompt, just and enforceable awards.
Litigation outside of China should be avoided if enforcement might be required in China, because China’s courts will enforce judgments from only a handful of nations, subject to various conditions. For example, a court judgment from Hong Kong may be enforceable in China, provided it is a money judgment (not injunctive relief) issued by a particular court, and the Hong Kong court had exclusive jurisdiction. But, it’s fair to say most foreign court judgments are unenforceable in China.
Fortunately, foreign arbitration awards are generally enforceable in China, because most nations including the U.S., China, Hong Kong and Singapore are signatories to the New York Convention for the Recognition and Enforcement of Arbitral Awards. Taiwan is not a signatory, but arbitration awards from Taiwan are generally enforceable in other nations and vice versa.
Usually, the best option is arbitration in Hong Kong or Singapore, because both of those forums have good reputations for fair legal proceedings, competent attorneys, their awards are generally enforceable in China, proceedings may take place in English or Chinese (although the Award will need to be translated into the local language if it will be enforced in another country).
9. Boilerplate. The NDA should require both parties’ written consent for any modification or assignment. It can also go a step further and state that all transferees and assignees agree to be bound by the terms of the agreement.
A standard severability provision is critical, because several provisions described above could potentially be ruled invalid, depending on the court and the exact language, so at least the remainder of the agreement may be valid and enforceable.
For greatest odds of enforceability (especially in China), the NDA should be written in the local language. If a bilingual version will be created, in English and the local language, at least it should state that the English is for reference only. Some foreign attorneys may not want to hear that, but the agreement will be enforced not by them but by the local courts.
10. Don’t Forget, it’s Just a Piece of Paper. Finally, never put too much faith in the NDA. Once your company has shared its most sensitive designs, specifications, business strategies, financial data and other trade secrets and the recipient has taken them straight to your competitor, the legal system will rarely provide swift, efficient and satisfactory relief. That’s closing the barn door after the horse has departed.
First priority in protecting sensitive business information should always be the implementation of practical security measures to limit access to and dissemination of such information. However, once that has been accomplished, it’s a good idea to also obtain a suitable, signed NDA, just in case.
For assistance with business in Asia, please contact a Taiwan business lawyer