A mutual non-disclosure agreement (NDA), also called a mutual confidentiality agreement, is written to protect both parties entering into the agreement, and should be drafted to ensure both parties agree not to disclose the proprietary information they learn about the other.
For example, two separate companies may consider working together on a joint project. In order to thoroughly discuss the opportunity, both parties may need to disclose confidential information that they do not wish to be made public. They may also need to disclose information which a competitor could use to their advantage in the marketplace.
In this case, a mutual non-disclosure agreement would be used to ensure that both parties are protected from critical proprietary information being leaked.
Differences Between a Mutual and Unilateral NDA
A unilateral NDA is another term for a standard NDA agreement and is also called a one-way NDA. It is the most common type of NDA used by companies and is commonly used in an employment contract or independent contractor agreement. The unilateral NDA is drawn up to protect the information of the company, with the recipient agreeing not to disclose information. In these agreements, the company isn’t making any promises of non-disclosure – mostly because the receiving party has no important information they’re disclosing.
A mutual NDA can also be called a bilateral NDA or a two-way NDA. In a mutual NDA, both parties are agreeing not to disclose proprietary or confidential information about the other party’s interests. Like a unilateral NDA, the sensitive information covered by the NDA is defined within the contract.
When Do I Need a Mutual Non-Disclosure Agreement?
A mutual non-disclosure agreement is often used when two parties discuss working together in some capacity.
Business Collaboration or Mergers
For example, the companies might be hoping to collaborate on a new project or to merge some area of their businesses.
Startup Businesses Seeking Investment
Mutual NDAs are also commonly used when startup businesses are seeking investors. In order to secure investment, a startup needs to disclose sensitive information about their project, products, company financials, etc., in order to attract serious investors. Interested parties, like larger businesses or other private investors, will often need to share information with the startup in order to reach an agreement. A mutual NDA protects both entities.
Timing is Critical
This contract should be drawn up when both parties are still vetting the partnership, but before internal information has been shared. In many cases, collaboration of any kind will mean that at least one entity needs to disclose private information. Making the decision to move forward with business dealings will also often make it necessary for one or both parties to have access to confidential information about the other business.
Each business relationship differs. A standard (unilateral) NDA may be sufficient. In other cases, both parties will be divulging proprietary or sensitive data, so a mutual confidentiality agreement protects both parties more effectively.
There are also instances where two parties enter into business dealings and only one party is sharing sensitive data, and a unilateral NDA would suffice, here. It’s also possible that the business relationship might shift later on, necessitating that both parties share private information. In a case where the relationship evolves and both parties need non-disclosure protection, it’s advisable to draw up and re-sign using a mutual non-disclosure agreement.
To avoid drafting and re-signing multiple contracts, some companies use a mutual confidentiality agreement immediately, even though only one party is sharing sensitive information. This way, they protect their own company from sharing critical information, and also protect the other entity, should the partnership evolve. This step ensures that the companies won’t need to draw up further agreements later or risk lapsing on protecting both entities’ interests.
The Consequences of Not Having a Mutual NDA
Like a unilateral NDA, the biggest worry over not having one is that your sensitive information is not protected. Without one, there’s limited recourse if the other party makes sensitive information public, or damages your business interests in some way due to access to this information.
Here are a few possible negative consequences from not using a mutual non-disclosure agreement:
- Breeds Mistrust: When you have two companies discussing a merger or some type of joint project, a mutual NDA protects both parties. Offering only a unilateral NDA, even if only one party is providing sensitive information, might be seen as a red flag for caution. A mutual confidentiality agreement signals that both parties are on an even playing field. Both companies are agreeing to the same terms and protected by the same parameters.
- Theft of Ideas: This is the most feared consequence of not using the proper non-disclosure agreement. The biggest asset a startup has is its invention or idea. If they entered into discussions with a larger business without proper protection, what would stop the larger entity from bringing a similar product to market faster and with more ease than the smaller startup?
- Negative Publicity: Some data is sensitive because it could damage your company’s reputation.
Common Uses of a Mutual Confidentiality Agreement
Mutual NDA’s offer an excellent way to protect your interests as well as the other party’s confidential information. In some cases, a unilateral NDA will suffice because one company is sharing all of the information.
If the business relationship is likely to evolve, or if your company might like an extra way to nurture trust, a mutual NDA is an excellent option. It protects your interest while making the playing field fair for both parties. Neither party feels like they’re giving more considerations than they’re receiving.
Business dynamics where this document is beneficial include:
- Mergers: Companies will often discuss mergers at length before finalizing any agreement. Not all discussions end in a merger – a mutual NDA allows both companies to share information that helps them determine whether the merger is a good choice, without compromising sensitive information.
- Investor Relationships: Smaller startups partnering with larger companies that invest in their products.
- Partnerships: Two businesses partnering on the development of a product.
What Should Be Included in a Mutual NDA?
A mutual NDA includes the same information you’ll find in a unilateral NDA. The parties involved and dates are included. Sensitive and confidential information covered by the agreement is clearly defined. The main difference here is that both parties are agreeing not to disclose information gathered through the relationship with the other entity.