Confidentiality Agreements (NDA) and Memorandum of Understanding: what is the difference and when to use them?

Many people think that the non-disclosure agreement (NDA) is the one and only necessary precaution in a negotiation. This is wrong, because this agreement only refers to a facet of the business relationship that the parties want to discuss or manage.

Why is it important

The function of the NDA is to maintain the confidentiality of certain information that the parties intend to exchange and to prevent it from being used for purposes on which the parties did not agree. However, many aspects of the negotiation are not regulated in the NDA.

The main issues that the parties should agree on in writing are the following:

• why do the parties want to exchange information?
• what is the ultimate scope to be achieved?
• on what general points do the parties already agree?
• how long will negotiations last?
• who will participate in the negotiations, and with what powers?
• what documents and information will be shared?
• are there any exclusivity and/or non-compete obligations during and after the negotiation?
• what law applies to the negotiations and how are potential disputes resolved?

If these questions are not answered, it is likely that misunderstandings and disputes will arise over time, especially in lengthy and complex negotiations with foreign counterparts.

How to proceed?

• It is advisable that the above agreements be set down in a Letter of Intent («LoI») or Memorandum of Understanding («MoU»). These are preliminary agreements whose function is determining the scope of future negotiations, the timetable, and the rules to be observed during and after the negotiations.

Common objection

«These are non-binding contracts, so what is the point of using them if the parties are free not to comply?

• Some covenants may be binding (exclusivity during negotiation, non-competition, dispute settlement agreements), and some may not (with the freedom to conclude or not to conclude the agreement).
• In any case, agreeing on the negotiating roadmap is an advantage over operating without having set the negotiating guidelines.

What happens if no agreement is reached?

• The MoU usually expressly provides for each party to be free not to finalize the negotiation as long as that party behaves, keeps acting in good faith during the negotiations and preserves the other party’s rights.
• It should be noted that in case of early or unjustified termination of the negotiations by one of the parties, the other party may be entitled to damages (so-called pre-contractual liability) if the agreement and/or the law applicable to the contract so provide.

Then, when should a non-disclosure agreement be concluded?

• It can be executed at the same time as the MoU / LoI or immediately afterwards so that the specification of confidential information, the way it is used, the duration of confidentiality obligations, etc. are defined in a way that is consistent with the project the parties have agreed upon.

For more information on the content of confidentiality agreements, see this article.