Confidentiality agreements

Confidentiality should be safeguarded in commercial transactions

Every transaction includes elements of confidentiality, especially with regard to the sale of assets, property, shares or in the event of agency, franchising and employment. During negotiations, a seller usually provides the potential buyer with documents and business information of confidential nature in order to assist with due diligence with the prospect of purchase. Even the fact that the seller is willing to sell, as well as reference to the consideration, are confidential until the transaction is completed. Confidentiality is safeguarded by a relevant agreement so as to protect the seller and prevent the potential buyer or their employees, representatives or professional consultants from disclosing documents or information regarding the potential transaction.

Upon completion or termination of negotiations, whether the transaction results in signing of an agreement or not, an obligation is imposed for the return of documents and information provided. It is preferable a confidentiality agreement is signed prior to disclosure, even though its purpose is to cover information already disclosed. In this way the recipient of the confidential information cannot unfairly find himself in an advantageous position, as required by the principle of equity and the law of contract.

Confidentiality is incorporated in documents referring to the heads of terms of a potential agreement, as well as in almost every commercial arrangement. Apart from the seller, the buyer may also request confidentiality for the information provided to the seller. In a confidentiality agreement, the recipient undertakes the obligation to keep certain information and documents secret and exclusively use them for the particular purpose. Certain measures are taken for the protection of the information, such as placing the word ‘Confidential’ on a document, signing and sealing of the document by the person providing it, sending a numbered copy which cannot be processed, stating the persons who may have access to the contents, who will also be bound to keep it confidential.

When it is necessary to provide a third unauthorised person with confidential information, the recipient is obliged to secure prior written consent of the provider and thereafter to impose confidentiality upon the third person. If there is unauthorised, negligent or inadvertent disclosure of confidential information, the recipient undertakes to inform the provider immediately in writing. The confidentiality agreement is valid for a specific period of time, however the rights and obligations arising thereof survive for a longer period stated in the agreement, despite its expiration or termination.

In the event of breach of confidentiality, the remedy available is to secure an injunction preventing unauthorised disclosure and damages, even though it is difficult to prove damage. The criteria for such a claim to be successful are: (a) the information given to become confidential, (b) the information to have been disclosed under circumstances creating a duty to keep them confidential and (c) it is used without authorisation to the detriment of the provider. The consideration is usually the confidentiality and the undertaking by the recipient for non-disclosure; however, it is possible to add an undertaking for the payment of a nominal amount. The provider avoids undertaking any liability regarding the accuracy and completeness of the information and states that they make no warranties or representations for them or for their update.

In the event a potential transaction is not completed, the recipient is called to return or destroy all information, copies, notes and records made and delete them if digital. Moreover, they are asked to sign a declaration that they did so. Confidentiality agreements are common practice nowadays especially in large transactions. The obligation for confidentiality can be in the form of a formal agreement or a letter.

George Coucounis is a lawyer practicing in Larnaca and the founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]