Contracts form the basis of many essential business transactions and provide useful protections to companies and other parties along the way. One type of contract often used is the nondisclosure agreement, also called a confidentiality agreement.

What an NDA does

A nondisclosure agreement really has two purposes. The first is to safeguard sensitive information from getting into the wrong hands. The second is to prevent another party from benefiting from the information.

When an NDA makes sense

As explained by Entrepreneur magazine, there are many times when a business may benefit from using an NDA. One of these is when considering a sale of their business to another party. The potential buyer would need to know details about the company’s sales, financial status and more that should be kept secret. Other situations involve conversations with potential partners, vendors, licensees or distributors. Many businesses also opt to have employees sign confidentiality agreements.

What an NDA should identify

According to Forbes, it is important that the terms of a nondisclosure agreement are complete and detailed. These terms should include provisions for resolving any conflicts that may arise between the parties. An NDA should identify the duration for which the contract is in effect. A clear delineation of what information is deemed confidential is also essential for an NDA.

Mutual and non-mutual NDAs

Some nondisclosure agreements may bind both parties to confidentiality while other contracts only require one party to keep information confidential. The nature of the relationship between the parties and the information shared may dictate which type of contract is appropriate for a given situation.