25.04.2024

The importance and content of the confidentiality agreement

Practical experience has shown that, although it may be perceived as an insignificant aspect whose relevance is limited to a simple entry in the multitude of contractual documents, confidentiality is a key element in any area of commercial practice. Contractual relationships between professionals, working with suppliers and distributors, protecting intellectual property rights, concluding transactions, obtaining bank financing and the like, although fundamentally different areas of practice, all require the same care and attention when it comes to confidentiality and the protection of sensitive information.

In complex contractual transactions, negotiation is a fundamental step. Beyond discussions on the legal form of the contract to be concluded, any negotiation involves an exchange of sensitive information, such as information on the value of the goods covered by the envisaged contract, information on the financial situation and creditworthiness of one of the parties, information on sales stocks, etc.

The situation becomes even more delicate when the contract that the parties seek to conclude falls into the broader category of M&A transactions, in which case the subject matter of the contract to be concluded has a major impact on the future of the companies involved. For example, if a company is to be bought, the terms of the deal and, more importantly, the price will be determined after a careful evaluation of the target company in all its aspects, in some cases the risks uncovered can be a real deal-breaker. Each such transaction is preceded by an X-ray of the target company through a due diligence process aimed at revealing to the acquiring company as much information and information as possible about the target company and its value, much of which is obviously confidential.

Regardless of the way in which the parties organize their negotiations and even if they choose not to protect confidential information by agreement, the provisions of art. 1184 C. C. will be applicable. Civ. according to which "When confidential information is communicated by one party in the course of negotiations, the other party is bound not to disclose it and not to use it for its own interests, regardless of whether or not the contract is concluded. Breach of this obligation renders the party at fault liable.". Thus, even in the absence of an express undertaking, the party to whom confidential information is disclosed is under a legal obligation not to disclose it and not to use it for its own benefit.

This text is extremely wide-ranging, laying down a general obligation of non-disclosure and non-use of any confidential information disclosed in the course of negotiations, and also stating that breach of these obligations will render the offending party liable.

Although the legal regulations provide this safety net in Art. 1184 Civil Code, in practice, however, in most cases the parties opt for a non-disclosure agreement ( NDA ). On the surface, one might think that the Civil Code text provides an express legal guarantee, stemming from the general obligation of good faith in negotiations, with a comprehensive scope of application, prohibiting the disclosure and use of confidential information, under penalty of liability of the other party.

However, such an appearance can be misleading - particularly in contractual matters, the degree of generality with which such a duty of abstention is established is inversely proportional to the degree of protection it affords to its creditor. On the other hand, the more precisely the content of the obligation of confidentiality is laid down, the clearer it will be for the party to whom the information is disclosed what conduct he must refrain from, and the easier it will be for the party concerned to prove that there has been a breach of that obligation. For this reason, for the need for certainty and predictability, the first step in any transaction is to sign an NDA.

In practice, through pre-contractual agreements, the parties clearly establish what conduct will be considered contrary to good faith in negotiations and what will be the standard of good faith whose breach could entail liability (this time contractual) for the party engaging in such conduct.

Essentially, through confidentiality agreements, the parties are free to shape the content of the obligation of confidentiality themselves and are able to provide a priori answers to the questions that might have arisen if Art. 1814 of the Civil Code had been directly applied to the factual situation: is a certain piece of information considered confidential? how long must the obligation of confidentiality be respected? does this obligation of confidentiality cover all employees of the company? how is the damage caused by the breach of the obligation to be assessed?

Apart from the certainty it provides, a considerable advantage of confidentiality agreements is the possibility for the parties to determine the degree of protection of confidential information: depending on the interests of the parties and, in many cases, on their bargaining power, information that would not have been considered confidential under common law may be included in the scope of protection or, on the contrary, the disclosure or use of information that would have been penalized under art. 1184 of the Civil Code may be permitted.

The conditions of liability for breach of this obligation may also be dealt with by the parties in the NDA, which may, for example, include a penalty clause providing for an advance assessment of the damage resulting from the breach of the obligation.

The most important part of a confidentiality agreement is the provision on its subject matter. In this way, the parties (pre-)establish an inventory of the information which they consider to be confidential, indicating, for example, the subject matter to which it relates (accounting information, customer data, know-how, etc.), the purpose for which it has been disclosed (e.g. information provided for due diligence), the means of communication through which it has been disclosed, and so on. The importance of this provision lies in the fact that it is, in essence, a definition of the obligation of confidentiality that the parties agree to be bound by and to which the parties will refer whenever the question arises whether information is confidential or not.

Continuing our analysis of the content of a confidentiality agreement, we point out that another provision that is not absent is the provision on duration, which should, as a general rule, correspond to the period of time during which the information can be considered to continue to have an economic value or sensitive content.

Another issue that the confidentiality agreement should also address is the scope of the persons bound by this obligation, as well as the manner in which liability for possible disclosures by company employees will be triggered, particularizing according to the circumstances and the manner in which they came into possession of the confidential information. At the same time, the confidentiality agreement should clearly define the recipients of the information and the circle of persons to whom the information may be disclosed (lawyers, external consultants, etc.)

Of course, the above are only generally valid guidelines to be taken into account when drafting a confidentiality agreement, the content of the contract should be adapted and enriched according to the specificities of the field in which the parties operate. The efficiency of the confidentiality agreement and the way in which it succeeds in meeting the need for protection and stability depends overwhelmingly on how carefully it has been drafted and negotiated.

An article signed by Mircea-Bogdan Popescu, Partner (bpopescu@stoica-asociatii.ro) and Gabriela Bodnărescu, Junior Lawyer (gbodnarescu@stoica-asociatii.ro) - STOICA & ASOCIAȚII