Confidentiality

Why you need it, and how to get it

Protecting important confidential information can be a key factor in the success of your business, which is why it is important to get the right tools to ensure a few leaks don’t sink the boat.

The business world is a competitive environment.

With many different players all jockeying for their share of the market, any advantage (no matter how small) can mean the difference between prosperity and bankruptcy. As such, many businesses will go to great lengths to keep important information confidential and out of enemy hands.

International fast food chain Kentucky Fried Chicken (“KFC”) is one such business.

The popular franchise tantalises the tastebuds of its customers with its famed recipe of “11 secret herbs and spices”. This recipe is the foundation upon which the KFC empire is built, and provides a significant point of difference in a market place overrun with businesses providing pre-prepared poultry.

As can be imagined, KFC goes to great lengths to ensure that the recipe remains confidential.

To begin with, only one copy of the recipe exists – a hand written note made by the late Colonel Sanders himself – and is kept in a heavily guarded vault somewhere within KFC headquarters. However, as an additional safety net half the ingredients are mixed at one location, half at another, and they are both combined at a third location. To ensure complete secrecy, each step is even completed by a different company.

In between each of these steps, the people involved are also required to sign a confidentiality agreement with KFC – stating that they will not reveal any confidential information about the recipe to the public.

Now, while the KFC model may go above and beyond the needs of the average business, it is still a great endorsement that you can’t be too careful. It is important for every business owner to properly consider what security measures may be required to ensure that any information vital to the business remains confidential.

The most practical and common way of doing this is through a confidentiality agreement.

What is a Confidentiality Agreement?

As the name implies, a “confidentiality agreement” is an agreement which obliges a party to keep information confidential.

Unsurprisingly, they are therefore used whenever information of some nature is to be disclosed or made known by one party to another, and the party disclosing the information wishes to restrict the use or disclosure which may be made of that information.

This can extend to several situations ranging from an employee of a business being told trade secrets (such as the KFC recipe example above), to an inventor disclosing the details of their invention to a business partner, to a freelance writer pitching their story idea to a publication company. Essentially, whenever there is a disclosure of information that one party wants to keep regulated, a confidentiality agreement should be present.

A Rose by any Other Name …

“Confidentiality agreements” may have other names. There are several types of agreements that restrict and regulate how confidential information can be dealt with. They include:

  • Confidential Disclosure Agreements;
  • Non-Disclosure Agreements;
  • Secrecy Agreements;
  • Trade Secret Agreements.

While the circumstances in which each agreement operates may be slightly different, they all include the common element that information is required to be treated as confidential.

What Sort of Information can be Confidential?

Confidentiality agreements often relate to information which is technical or scientific. Confidential information, however, may be information of almost any sort.

It can be financial, or commercial, or personal. Common examples of information that is not technical are lists of customers, suppliers or trade contacts and pricing information.

Regardless of the type of information, as long as it is confidential in nature the agreement will be valid.

When is Information Confidential?

At law, information may be confidential information if it is “confidential” or “secret”. These two terms are used somewhat interchangeably.

Secrecy is a somewhat relative concept, as to be completely secret, information would only be known to one person. In practice, this is seldom the case. The concept is, generally, that information will possess the quality of confidentiality if it is only available to persons who are obliged to keep the information confidential or “secret” and not to use or disclose it except as may be permitted by the agreements or the person to whom the obligations of confidence are owed.

If information is within a category of information which the law recognises as confidential information, then the law may impose an obligation on someone in possession of the confidential information to keep the information confidential without the need for an express confidentiality agreement.

When will the Law Imply Obligations of Confidentiality?

The law will imply an obligation on the receiver of information to keep it confidential in certain types of legal arrangements or relationships between parties such as:

  • Employer and employee;
  • Principal and agent; or
  • Professional adviser (e.g. a solicitor, patent attorney, or accountant) and client.

The obligation of confidentiality will also be implied in other non-specific relationships where the circumstances are such that it should be clear to the parties that information is imparted and accepted on the understanding that it is confidential. This is often the case where one party approaches the other to disclose a new idea or technology with a view to discussing possible commercial arrangements.

If There is Some Level of Confidentiality Implied by Law, is a Confidentiality Agreement Needed?

In many circumstances, such as a negotiation between parties for commercial arrangements, an obligation of confidentiality is likely to be implied without the need for a specific agreement.

In most circumstances, however, it is desirable to have an agreement so that:

  • there is no doubt that obligations of confidentiality apply, without the need, if disputed, to test this in Court;
  • the nature and extent of the information that is to be confidential and the obligations relating to it can be clearly specified;
  • the parties are aware of the obligations of confidentiality; and
  • in appropriate circumstances, the range of obligations of confidentiality can be extended beyond those which would be implied at law.

As outlined above, it is usually wise to ensure that a confidentiality agreement is presented in advance without relying on the likelihood that a Court will imply an obligation of confidentiality.

How Long Does a Confidentiality Agreement Last?

Theoretically, in Australia the obligations imposed by a confidentiality agreement can continue forever provided that the information to which it relates continues to be genuinely confidential. If the information becomes public, however, then an agreement which purports to continue to restrict its use may be a restraint of trade and may be invalid if the period and extent of restraint is unreasonable.

Some confidential disclosure agreements have a fixed term, which is usually an arbitrary period such as 5 or 10 years. This is not necessary, but is often a requirement of parties receiving disclosures so that there is a finite limit on the obligation of confidentiality which is accepted. From the point of view of the party disclosing information, a time limit may not be appropriate if information which is disclosed is potentially valuable confidential information which may retain its value, if kept confidential, beyond the period of the restraint.

Is a Confidentiality Agreement Required to be Limited to a Particular Area?

Normally, a confidentiality agreement relating to information which is in fact confidential need not be limited in any way, and should not be so limited. If, however, the subject matter of the agreement does include information which is, or which could become, public then the area of any restraint is to be taken into account in considering whether the restraint is reasonable and enforceable.

If you require a confidentiality agreement, or would like to discuss any issue relating to confidential information please give us a call.

For more information, please contact:
Sandy Donaldson

Sandy Donaldson
Director
p.  +61 8 8124 1954
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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