Last updated: 7 September 2023
At Legal123, we’ve partnered with thousands of business professionals on their agreements. A frequent question arises as to whether a mere Confidentiality Clause within an agreement is adequate or whether a full-fledged Confidentiality Agreement is required.
Understanding the difference between a Confidentiality Clause and a Confidentiality Agreement (Non-Disclosure Agreement or NDA) can be tricky. This article breaks down these terms and explains how they help protect private and confidential information and details when each should be used.
Summary: Confidentiality Clause vs Confidentiality Agreement (NDA)
|Topic||Confidentiality Clause||Confidentiality Agreement|
|Definition||A part of a broader agreement like an employment contract.||A standalone document focusing solely on confidentiality.|
|When to Use||When there’s a broader agreement already in place, such as an employment or vendor contract.||Employment contracts, vendor agreements, and business partnerships.|
|Enforceability in Australia||When the primary purpose is to share specific sensitive information, and no other agreement is in place.||Enforceable if it includes full names and a detailed definition of what cannot be disclosed.|
|Consequences of Breach||Mediation or court action for compensation.||Court action for compensation, calculated based on the harm caused.|
|Examples||Employment contracts, vendor agreements, business partnerships.||Business acquisitions, product development, employment situations.|
Legal issues covered in this FAQ
Click on any of the questions below to jump to that section of this legal FAQ.
- Confidentiality Clause vs Confidentiality Agreement
- Confidentiality Clauses
- Confidentiality Agreements (or NDA)
- Privacy, Non-Compete and Data Protection Clauses
Confidentiality Clause vs Confidentiality Agreement
What is the difference between a Confidentiality Clause and a Confidentiality Agreement?
A Confidentiality Clause and a Confidentiality Agreement share the same essential purpose: protecting sensitive information from unauthorised disclosure.
A Confidentiality Clause is part of a more extensive agreement, such as an Employment Contract or Divorce Settlement Agreement. A Confidentiality Agreement, on the other hand, is a complete, standalone document focusing solely on protecting confidential information.
When would you use a Confidentiality Clause rather than a Confidentiality Agreement?
Choosing between a Confidentiality Clause and a Confidentiality Agreement (or NDA) usually depends on the context and the nature of the relationship between the parties.
Use of a Confidentiality Clause:
A Confidentiality Clause is typically used when there’s a broader agreement already in place, such as an employment contract, a purchase agreement or a service agreement. In these cases, there’s more to the agreement than just confidentiality. The clause is added to protect specific sensitive information that could be disclosed or used within the context of fulfilling that main agreement.
Examples of when to use a Confidentiality Clause include:
- An employment contract when the employee needs to handle confidential business information
- A vendor/supplier agreement when the supplier will have access to proprietary business processes
- A business partnership agreement where parties share trade secrets
- A coaching services agreement where the coach will be exposed to confidential information to provide their services
Use of a Confidentiality Agreement or Non-Disclosure Agreement (NDA):
A standalone NDA or Confidentiality Agreement is mainly used when the primary purpose of interaction between parties is to share specific proprietary sensitive or specific information, and there is no other overarching agreement in place.
Examples of when a Confidentiality Agreement may be used include:
- Before a potential business acquisition takes place where sensitive financial and business operation facts need to be shared for the purposes of due diligence
- When you have reached a point of disclosing details regarding a new invention or business idea to a potential investor or partner
- When you have released a new product or software, and it is to be tested by beta testers, you need to stop them from revealing to the public precise information regarding it
What is a Confidentiality Clause?
The Confidentiality Clause is legally binding, which creates an obligation on either one or both parties to keep specified information confidential. A Confidentiality Clause is an important term as it seeks to protect sensitive information that may allow you to expand your business and stop potential investors, collaborators and employees from stealing critical information related to your business.
Definition of Legally Binding
When something is ‘legally binding’, it is enforceable by law. The other party can take them to court if someone fails to adhere to the contract, agreement or clause.
What should be included in a Confidentiality Clause?
This depends on the contract the clause is included in. For example, suppose the Confidentiality Clause is included in an employee contract document. In that case, it should include what confidential information the employee is likely to be exposed to, the requirement to keep this information confidential, and the likely consequences if the contents of the Confidentiality Clause are violated.
Inclusions that an employee could be exposed to but the employer wants to keep confidential may include any or all of the following:
- Marketing and business plans
- Strategies the business uses
- Contents of company manuals
- Specific production processes
- Lists of clients, suppliers or employees
- Financial or remuneration information, etc.
When would you use a Confidentiality Clause?
You may include a Confidentiality Clause in any of the following agreements:
- Supplier/Vendor Agreements
- Software Development Contracts
- Research & Development Agreements
- Real Estate Purchasing Contracts
- Personal Training Contracts
- Non-compete Agreements
- Merger and Acquisition Agreements
- Joint Venture Agreements
- Employment Contracts
- Divorce Settlement Agreements
- Contractor Agreements
- Consulting Agreements
- Coaching Service Agreements
- Business Partnership Agreements, etc.
Are Confidentiality Clauses enforceable in Australia?
A Confidentiality Clause can be enforced in Australia as long as you know what has been breached. There are two kinds of breaches – actual and anticipatory.
An actual confidentiality breach of a clause occurs when the other party does not uphold its contractual obligation. This may occur when the other party fails to keep secret confidential information and either discloses or uses it without authorisation or permission.
An anticipatory breach is present if the other party is unwilling to keep the information confidential and perform its contractual obligation and threatens to leak it.
If you prove a breach of the Confidentiality Clause, you can seek damages through the courts. However, if there has been an anticipatory breach, a court may order an injunction that prevents the other party from disclosing or using that confidential information.
What happens if you break a Confidentiality Clause?
If the other party can prove you have broken a Confidentiality Clause, they may try mediation to solve the breach. Still, if the outcome isn’t satisfactory, they can take the matter to court and demand compensation.
Confidentiality Agreements (or NDA)
What is an NDA or Confidentiality Agreement?
An NDA, non-disclosure agreement, or Confidentiality Agreement is commonly used by businesses to protect the business and its employees. It is a legally binding agreement that ensures that parties to the agreement and who have signed it must keep particular information confidential. If the NDA is violated, the business or organisation that has been the recipient of the violation may take the matter to court and seek compensation.
What should be included in an NDA or Confidentiality Agreement?
Any information the business or organisation wants to keep confidential under any Confidentiality Agreement cannot already be disclosed publicly, such as profit and loss statements or salaries of employees. Any information that is intended to be kept confidential and that may need to be disclosed in any discussions or to provide services, such as passwords to access company information, future plans for a business and designs for new products under development, should be protected by an NDA or Confidentiality Agreement and should ideally be listed in the description.
The NDA should emphasise whether the NDA includes written information or verbally acquired information, or both. This ensures clarity between the parties to the NDA or Confidentiality Agreement.
When would you use an NDA or Confidentiality Agreement?
You would use a “full” Confidentiality Agreement in the following situations:
- Product development and beta testing
- Business acquisitions or sales
- Employment situations
- Hiring external consultants for projects
- Legal settlements
- Manufacturing partnerships
- Market research
- Patent applications
- Real estate transactions
- Venture capital financing, etc.
In more detail, an NDA can include the following:
- Financial information, such as confidential financial statements, budgets, yearly sales figures, investors and possible projections for the business
- Customer information, such as contact information, buying history and preferences
- Employee information, such as job contact information, salaries and any performance evaluations
- Intellectual property, such as trademarks, patents and copyright material
Are Confidentiality Agreements enforceable in Australia?
Yes, Australian courts can enforce NDAs. A breach of an NDA or Confidentiality Agreement can be enforced in an Australian court as long as the parties’ full names are included in the NDA and a detailed definition of what information cannot be disclosed and any situations where the NDA is invalid. The jurisdiction should state that the laws of Australia cover the agreement.
What happens if you break an NDA or Confidentiality Agreement?
An NDA is a legally binding contract, meaning that if any part of it has been breached, intentionally or not, the affected party may take the violator to court. The NDA should contain a “breach of this agreement” clause that describes expected consequences. If the breach cannot be solved by mediation between the two parties, the affected party may take the violator to court and negotiate monetary compensation.
The court will calculate damages by the harm the breach has caused to the affected party, which includes an assessment of the loss sustained by the party. Damages are intended to put the affected party in the same position as if the NDA had not been breached. In addition, the affected party must show the damage it has endured due to the breach, for example, how much it will cost to re-secure any lost confidential data.
Privacy, Non-Compete and Data Protection Clauses
What is a Privacy Clause?
A Privacy Clause outlines how personal information collected from one party (often the user or client) by another party (typically a business or service provider) will be used, stored, and shared. Given the increasing concerns about personal data misuse, this clause ensures transparency between parties and establishes trust.
- Purpose of Collection: Clearly states why the data is being collected.
- Data Storage and Security: Describes how the data will be stored and the measures taken to protect it.
- Third-party Sharing: Specifies if the data will be shared with third parties and under what circumstances.
A Privacy Clause differs from a Confidentiality Clause in that it governs the handling and protection of personal data, while the latter restricts the disclosure or use of specific confidential information shared between parties in an agreement.
What is a Non-Compete Clause?
A Non-Compete Clause is designed to prevent one party, usually an employee, from entering into or starting a similar profession or trade that might compete with the employer. This clause protects businesses from potential threats from former employees, especially in industries where trade secrets and client relationships are paramount.
- Duration: Specifies the time frame during which the employee cannot engage in competing activities.
- Geographical Limit: Defines the geographical area where the restrictions apply.
- Scope of Restriction: Details the specific types of activities or businesses that are considered competitive.
A Non-Compete Clause differs from a Confidentiality Clause in that it prevents an individual from engaging in similar business activities or professions that might compete with the employer, while the latter restricts the disclosure or use of specific confidential information shared between parties in an agreement.
What is a Data Protection Clause?
Data Protection clauses have become crucial with the surge in digital transactions and online interactions. This clause ensures that businesses adhere to regulations and best practices when handling, storing, and processing data, especially sensitive information like financial details and health records.
- Compliance with Laws: Affirms adherence to relevant data protection regulations, such as GDPR in the European Union.
- Data Breach Protocols: Outlines the steps that will be taken in the event of a data breach, including notifications to affected parties.
- Rights of Data Subjects: Details the rights of individuals whose data is being processed, such as the right to access, modify, or delete their data.
A Data Protection Clause differs from a Confidentiality Clause in that it ensures adherence to regulations and best practices when handling, storing, and processing data, while the latter restricts the disclosure or use of specific confidential information shared between parties in an agreement.
We hope you found this article on the differences between a Confidentiality Clause and a Confidentiality Agreement helpful.
Confidentiality Agreement Template
Shield your sensitive information with our easy-to-use Confidentiality Agreement Template. This template offers three levels of protection to suit your needs. Whether you’re dealing with investors, contractors or employees, safeguard your ideas, business plans and intellectual property. With step-by-step video instructions and phone support. Save the cost of a solicitor with an affordable online template.