Confidentiality and Non-Disclosure Clauses in Commercial Contracts – Is it worth the Effort?

Let’s set the scene….

The parties to an active litigation case or in the case of a pre-filing settlement discussion or mediation have worked hard, given up more than they wanted to or not received as much as they desired, and are concerned collectively about how their attorneys fees are continuing to pile up. Throw in some bruised egos and negative past events that have been ruminated over and rehashed and you have folks who want to get something down in writing as to basic terms and be done. Details be damned! That’s what the lawyers are there for. Right?

This situation creates fertile ground for the parties, and perhaps even their attorneys, to not spend the time and effort that they should in crafting a solid, workable and individualized confidentiality agreement that captures the present and future concerns the litigants may have about anyone else discovering the details of their settlement. Many clients suggest lawyers use “boilerplate” clauses or the “usual verbiage” in order to avoid having to be involved with situations that they have gritted their teeth over and reached an agreement. A weary or inexperienced attorney might reflexively reach for form language that he or she used in previous settlements. Even worse, they may ask for the same type of generalized language from another attorney who has not been involved with the parties and the issues in dispute.

Here’s why that is a recipe for disaster in many situations.

1. Motivations for and against confidentiality clauses in commercial real estate disputes. 

No need for complex analysis here. Landlords seeking money or other items of value don’t want their tenants, competing business owners and the general public in some cases from knowing that they accepted cents on the dollar for what they have alleged or asserted that they are entitled to from the tenant, or assignee and/or a guarantor. This could create more claims from like-minded tenants.

On the flip side, settling tenants who are having to pay money or transfer property to landlords don’t want their customers or others interested in their goods and services to form an inference that they did anything wrong or that they did not live up to their obligations. This is clearly true with a guarantor who is only an investor or capital source for the tenant.

If you carve out the “crusading litigant” group, most landlords and tenants are united in interest in not wanting the terms of their settlement publicized in a public forum where they may be misunderstood or misinterpreted as being weak, scared or simply not feeling strongly about their business and their actions.

All the more reason to cautiously and carefully draft language that protects the interests and concerns of the parties, while also allowing a proper enforcement mechanism if one of the parties breaches the confidentiality clause. Right?

Given time to step away from the heat of the moment and the exhaustion that comes with settling an emotionally charged dispute, most parties would work with their counsel and the opposing side to create such a mechanism for their individual needs and the collective desire to settle the case or dispute, but also protect their interests as best possible. However, here are some reasons why parties sometimes are motivated in the opposite direction:

A. exhaustion;

B. desire to remove themselves from the situation as soon as possible;

C. stop the attorneys fee clock from running any further; or

D. an undisclosed desire to harm the reputation of the opposing party in the future.

2. Crafting confidentiality clauses that clearly address the rights and responsibilities of the parties.

Again, no magic potion here. The confidentiality and non-disclosure clause should clearly address both concerns of the parties and their rights and responsibilities. This is not a laundry list, but you would want to describe:

A. WHO – which folks are covered (or not) by the scope of the clause. Parties, agents, assigns, accountants, attorneys and employees are a given, but also think about secondary or tertiary parties such as relatives, clients, the press and the public.

B. WHAT – all material terms of the settlement including continuing duties to perform.

C. HOW LONG – we all want forever, but realistically it should last as long as the situation is relevant to the business community and the parties’ reputation(s).

3. Do you want to know a secret?  Enforcement mechanisms for breach.

Anyone can breach a non-disclosure agreement, but the tough part is what can be built into the language to protect each parties’ rights. Some key clauses are:

  • Non-disclosure AND non-use of confidential information;
  • Non-Competition restrictions where relevant;
  • Affirmation of specific terms to remain confidential;
  • Duration of confidentiality;
  • Restrictions on use of confidential information – exceptions usually include information required to be produced by means of a subpoena or at the request of a governmental agency;
  • Return of all materials that describe or relate to the confidential information;
  • Liquidated Damages for non-breaching party  – tricky, but useful tool to enforce this covenant. Be careful to not underestimate anticipated damages that could result upon disclosure; and
  • Attorneys fees and other charges if the agreement is breached.

4. Takeaway(s)

“No one can can prevent anyone from disclosing what they choose to disclose” – Anonymous.

However, careful consideration of the parties’ concerns and enforcement mechanisms can make a huge difference. Take the time. It is worth it in the long run.

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