Introduction

Every business aims to grow and expand; however, it is not always possible for an organization to possess expertise in every functional area. Businesses often require specialized knowledge and technical expertise which may not be available internally. Therefore, it becomes necessary to engage external professionals such as Chartered Accountants, Company Secretaries, Lawyers, IT developers, PR and marketing consultants, investment bankers, engineers, and other domain experts.

Engaging external consultants helps businesses obtain professional advice and execute specialized projects efficiently. However, such engagements may involve certain risks, particularly where confidential business information is shared without adequate legal protection.

In the absence of a confidentiality arrangement, there is a risk that consultants or professionals may use sensitive information, data, or documents shared during the course of the engagement for their own benefit or disclose them to third parties without the consent of the rightful owner.

To mitigate such risks and safeguard proprietary business information, it is advisable for businesses to enter into a Non-Disclosure Agreement (NDA) with consultants and professionals before sharing any confidential information. An NDA helps ensure that all information shared during the engagement remains protected and is used only for the intended purpose.

Drafting Issues

It is generally observed that under a confidentiality agreement, the client seeks to protect the information and documents shared with the consultant. However, it is also understood that certain situations may arise where the consultant may be legally required to disclose such confidential information. For instance, disclosure may be required in connection with legal proceedings where a court or regulatory authority directs the consultant to provide such information.

In such cases, it is important that the consultant discloses only the information that is strictly necessary and only on a “need-to-know” basis, ensuring that no additional confidential information is shared beyond what is legally required.

Accordingly, while drafting a confidentiality agreement, it is essential to ensure that the agreement is legally enforceable and clearly specifies the circumstances under which disclosure may be permitted. The agreement should also provide that, even in cases of mandatory disclosure, the consultant shall limit the disclosure strictly to the extent required by law and take reasonable steps to protect the confidentiality of the information.

Suggested Confidentilaity Clauses

1. Define Confidential Information: This will cover those information, documents, paper etc. which would be considered as a Confidential Information under the Confidential Disclosure Agreement. It needs to be detailed and exhaustive one considering the nature of business and consultant with whom client is intending to enter into an Agreement.

For Example:

“Confidential Information in relation to both parties means and includes any non-public information whether or not designated as being confidential or which under the circumstances surrounding disclosure ought to be treated as confidential. “Confidential Information” for purposes of confidentiality includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing) marketing techniques and materials, marketing and development plans, customer names and other information related to customers, information about the employees (including, addresses, phone numbers, e-mail addresses, and all other information relating to the employees), price list, brokerage/ commission structure, pricing policies and financial information, discoveries, ideas, concepts, software in various stages of development, drawings, specifications, techniques, models, data, mark-up languages, documentation, diagrams, flowcharts, research, development, formulas, computer programs, processes (both business and technical), technical specifications, data, ideas, inventions, algorithms, source code, object code, know-how, software listings, schematics and discussions between the Disclosing Party and the Receiving Party.”

2. Usage of Confidential Information: It is very important to set out the cases wherein the consultant would be permitted to use the Confidential Information’s and it is also needs to be mentioned that other than the consultant who will be authorised to use the information and what will be the manner of usage of such Confidentiality Information.

3. Exception for Non-Disclosure:

In certain situations, it may become necessary for the Consultant to disclose confidential information due to legal, regulatory, or professional requirements. To address such situations, it is advisable that the confidentiality agreement clearly provides for specific exceptions to the non-disclosure obligations. Such exceptions may include disclosure of information under the following circumstances:

• • is, at the time of disclosure, publicly known and made generally available in the public domain;
  • becomes, at a date later than the time of disclosure, known to the trade or the public otherwise than a wrongful act or negligence or breach of this Agreement of or by the Consultant;
  • is known or possessed by Consultant free from any obligation of confidentiality, as evidenced by Consultant written records immediately before receipt of the Confidential Information from client;

However, it is pertinent to note down that even in above cases, information and document needs to be shared on “Need to Know” basis and prior intimation, if possible, needs to be given to the client by the consultant.

4. Validity of the Agreement: The validity period for which the agreement shall stand in effect needs to be defined specifically. This clause helps to determine the liability of the concerned in case there is breach of any of the clause of the Agreement.
5. Ownership of Confidential Information: The client (Disclosing Party) shall be the sole owner of the documents prepared/ acquired/ shared during the tenure of the Agreement.

Clause for Instance: “Notwithstanding anything contrary contained in this Agreement, all Confidential Information will remain the exclusive property of the Disclosing Party. The Disclosing Party’s disclosure of Confidential Information will not constitute an express or implied grant to the Receiving Party of any rights to or under the Disclosing Party’s patents, trademarks or other intellectual property rights. Except to the extent permitted by applicable law in the absence of any express license or other grant of rights, neither party will use any trade name, trademark, logo or any other proprietary rights of the other party (or any of its Affiliates) in any manner without prior written authorization of such use by an authorized representative of such other party.”

6. Handover of Confidential Information: It is the responsibility of the Consultant to handover all the confidential information which he has received while working during the agreement to the Client once the agreement is terminated and work is over. Sometime, client may also urge for getting an undertaking from the consultant that all the information’s has been returned and cancelled and destroyed and shall not be used in any manner.
7. Residual Clause: A Residual Clause is most of the time mentioned in the non-disclosure agreement which specify that if during the period of the Agreement if one party learn something from other party which comes under intangible form of information, then such person is free to use those information’s in a manner he/ she wants.

There has been an argument in relation to residuals clause as it is very difficult to ascertain and keep it separate from confidential information. Even after drafting a residual clause carefully in favour of disclosing party in the Agreement, it is very difficult to mitigate the risk associated with it.

However, it would be suggestible to have below consideration while dealing with this clause:

• • Make sure that such clause specifically exclude any license under the discloser’s patents and copyrights;
  • Such information shall apply only to recipient Unaided Memory without any reference to written or electronic information;
  • Restrict the recipient employees or contractor from working on competing business project for certain time period.

So it is advisable to avoid residual clause at first instance if you are acting as Disclosing Party and where very sensitive information would be shared and if contrary to this, then then do consider the above safety measures.

8. Indemnity Clause: The term Indemnity is defined under Section 124 of the Indian Contract Act, 1872 wherein it is stated that “A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.

Under the Confidentiality Agreement with the Consultant, Indemnity clause helps to protect the Disclosing Party from the wrong doing of other Recipient Party under the Agreement. In case of breach of duty on the part of each Party, the Party committing the default shall indemnify the other party and make good the loss suffered.

9. Notice: The address of each party shall be stated wherein all the written communication including notices are to be served.
10. Severability Clause: This clause is regarding severability of any clause of the agreement, which becomes invalid, for the time being in force, is to be severed from the agreement in such a way that only that clause becomes inoperative without affecting the entire agreement.
11. Bribery Clause: The Client shall not promote/ pursue any work by payment of bribe. Further Consultant shall not do any act of bribe in order to take assignment from Client.
12. Representation and Warranties: The parties represent and warrant that they have been duly authorised to sign and submit the necessary agreement and documents on behalf of the Parties.
13. Termination: Terms on which the agreement stands to be terminated shall be mentioned specifically in the Agreement. Few Instance for the same are :

• on completion of service
• on expiry of the term
• continuous delay in completing the work
• misuse of information and records
• on breach of terms of the Agreement

Notice Period which needs to be given should  be mentioned.

14. Arbitration: In case of any dispute, the Parties can mutually agree to settle the dispute through arbitration also and same shall be carried out as per the provision of Arbitration and Conciliation Act, 1996 and amendment therein from time to time.

15. Jurisdiction: The agreement should define the jurisdiction of the Court which can be approached by the Parties to the Agreement in case of any dispute arose.

As we all know that there can’t be “One Size Fits All” kind of Agreement for securing all kind of Confidential Information and above clauses is only illustrative list not exhaustive and the same would also depend upon how a particular clause is being crafted considering the nature of transaction. Majorly above clauses creates a significant impact on the agreement and makes it more qualitative.

Non-Disclosure Agreement for Consultants: Essential FAQs

1. Why is an NDA necessary when hiring outside consultants or experts?

Growing a business often requires hiring outside experts like Chartered Accountants, Website Developers, or Investment Bankers. Hiring these professionals involves risk if assigned without an enforceable confidentiality agreement. In its absence, a consultant may use shared information for their own purposes or reveal it to rivals, making an NDA essential to safeguard business data.

2. How is “Confidential Information” defined in a consultant agreement?

The definition must be detailed and exhaustive, covering all non-public information, documents, and papers. According to the suggested clauses, this includes:

• Marketing & Finance: Marketing techniques, development plans, price lists, and financial information.
• Technical Data: Software source code, algorithms, specifications, formulas, and flowcharts.
• Operational Info: Customer names, employee details, and internal business processes.

3. What is the “Need to Know” basis for disclosures?

Even when a consultant is legally or judicially required to disclose information, they must do so only on a “Need to Know” basis. This means disclosing only the specific information required by the authority and no extra data, while providing prior intimation to the client whenever possible.

4. Are there exceptions to non-disclosure obligations?

Yes, information may be exempt from non-sharing if it:

• • Was already publicly known at the time of disclosure through no fault of the consultant.
  • Was already possessed by the consultant before the agreement, as evidenced by written records.
  • Must be disclosed due to a legal matter or judicial authority.

5. What is a “Residual Clause” and why should it be handled carefully?

A residual clause allows a party to use “intangible” information or ideas learned during the agreement. Because it is difficult to separate these residuals from confidential information, it is often advisable for the disclosing party to avoid this clause entirely. If used, it should be restricted to “Unaided Memory” and specifically exclude any licenses under patents or copyrights.

6. Who owns the documents and work created during the consultancy?

The client (Disclosing Party) remains the sole owner of all documents prepared, acquired, or shared during the tenure of the agreement. The disclosure of information does not grant the consultant any express or implied rights to the client’s patents, trademarks, or other intellectual property.

7. What are the consequences of a breach of duty by a consultant?

Under Section 124 of the Indian Contract Act, 1872, the Indemnity Clause protects the client from losses caused by the consultant’s wrongdoing. If a breach occurs, the defaulting party must indemnify the other and make good the suffered loss. Common triggers for termination and potential liability include:

• • Misuse of information or records.
  • Breach of any terms of the agreement.
  • Continuous delay in completing the assigned work.