The Basics of Non-Disclosure Agreements in Canada: What You Should Know

What Is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA) is a legal contract between two or more parties that outlines the terms under which confidential information shared between the parties will be handled. NDAs serve as legally enforceable contracts that set out the specific purposes for which the confidential information may be used and the ways in which it should be protected.
In most instances, an NDA will include both a definition of the confidential information and what specific uses of that confidential information are prohibited . Parties typically use NDAs to protect sensitive information and ensure that trade secrets remain confidential. Information often protected by an NDA includes client lists, financial information, strategic planning documents, technical data, software code, and intellectual property. However, the exact nature of the information sought to be protected will depend on the circumstances. NDAs have a variety of uses:

The Essentials of Canadian NDAs

The NDA construction process begins with the preamble, whereby the parties are identified. The definition of the disclosing party may be more complex where it is a corporation or other formalized legal entity. Often there is a single individual who will identify as the contact to keep things simple, but frequently there are numerous individuals who need to be included. While the practical implications of this seem small, defining the parties becomes critical when the business or company stops existing or changes. For example, if one of the disclosing parties is to be a former employee, how will that be described? Will that employee’s spouse be defined as a Related Party and therefore subject to the NDA?
The duration of the confidentiality obligations is often one of the most hotly contested issues. The recency of the information – if confidential by law – may be a significant factor. If the relationship between the disclosing party and the receiving party is likely to evolve into a partnership, for example, a true friendship, then the duration of the confidentiality obligations may stretch considerably.
In almost all cases, the information that is the subject of the non-disclosure obligation is described. Confidential information which shall include ‘any information that is disclosed directly or indirectly’ by the Disclosing Party is too broad and runs afoul of the requirement that the Agreement must be certain in its intent and scope. Instead, the type of information must be strictly defined, and limited to the specific forms in which it exists.
The scope of information that falls within the NDA is typically limited to information that is proprietary to the disclosing party. If, however, you are obtaining confidential information from several previous employers about your client base, you may come across information that is somewhat proprietary to one of them. A question for a lawyer to contemplate as they draft the nondisclosure agreement is whether this information should be covered where it was not intended to be the subject of confidentiality protections. This is one example of an area of potential conflict that can arise in NDA’s.
Additionally extensive protections are available whereby the disclosing party upon demand can request that information should be returned, or if it can only be acted on in certain ways. In such a situation, the main goal is to ensure that the recipient avoids using this information for his own use. Aggrieved individuals have had considerable difficulty forcing these disclosure obligations on their former co-workers, regardless of potential remedies.
The last consideration is that the NDA may often describe the manner in which the information in subject is to be protected. This too has become subject to considerable scrutiny in recent years as data protection laws have become more stringent and materials are stored and accessed in a multitude of ways. To the extent that your ability to comply with these terms has changed since you signed the NDA, a renegotiation of these terms may be necessary.

When You Should Use a Non-Disclosure Agreement

Non-disclosure agreements (NDAs), also known as confidentiality agreements or clauses, can be useful in a number of situations and are commonly used in most industries in Canada. You may want to consider the use of an NDA when:
• you are negotiating a business deal and will need to share proprietary, confidential or technical information about your business that is not available to the public;
• you are partnering with another business or individual (such as a contractor) and expect them to sign an NDA before they gain access to confidential information;
• the terms of your employment require you to keep confidential information within the company and not to share it without the permission of your employer; or
• you have hired an employee who will gain access to confidential information or trade secrets.
An NDA can also consider the use of non-solicitation agreements which prevent individuals from soliciting employees, clients, etc.
Although an NDA is not always necessary for certain business transactions, the use of one is often required when:
• Confidential Information relating to a prospective investment, joint venture, partnership, financing, acquisition, divestiture, licensing, research and development, distribution, franchising, and/or servicing arrangement between the parties which would otherwise be generally available to the public, will be disclosed;
• Confidential Information relating to a proposed business relationship, alliance and/or joint venture will be disclosed;
• confidential information released by one party to the other (the "Discloser") affords the recipient of such Confidential Information greater than trivial or negligible value; and
• the relationship between the parties is such that the Discloser has a specific interest in keeping its confidential information confidential and the other party (the "Recipient") has an interest in maintaining such confidentiality.

Legal Requisites and Enforceability

For NDAs to be enforceable in Canada, they must generally meet these essential criteria: they should be written in a clear, unambiguous manner; they should specify the confidential information being protected; and they should not impose an unreasonable duration or subject matter scope. For example, an NDA that covers all scenarios could be interpreted literally to prevent disclosure of information. Practical business concerns also keep contracts relevant. Generally speaking, there may be enforceability issues related to a contract that is overly constrictive in terms of its schedule or scope.
Although English common law principles govern the enforceability of NDAs in Canada, the general idea is that non-monetary contracts like these will only be enforced if the contract is supported by consideration. Even in tough, skeptical legal confines like Ontario, the rules around restrictive covenants and liquidated damages are given some flexibility when it comes to these NDAs. Yet in order for the mutual promises to be binding, they require consideration. Action or consideration could be an exchange of business ideas or client contacts, or simply the exchange of public information.
Canadian case law is fairly sparse when it comes to examples of legitimate or enforceable NDAs. NDAs might be litigated under a number of different labels, such as confidentiality agreements or proprietary information agreements. Even though the wording might differ, the substance is often the same and is held to the same legal requirements.

Common Errors to Avoid

A common pitfall is failing to clearly define the confidential information to be protected, and leaving it to the recipient to determine which information requires protection. Given that confidential information can take many forms, from documents and visual images to verbal disclosures, many would agree that specifying applicable information is easier said than done. Notably, in Simon v. CFTO Limited, 1995 we see that the existence of a confidentiality agreement does not protect all information shared between the parties, but only the information specified in the agreement. Information shared prior to the signature of the agreement but after negotiations commenced, was not protected because that information was not in the NDA.
Another common error is omitting time frames for confidentiality and for the return or destruction of confidential information. Time frames should be appropriate to the confidentiality interest at hand. This is particularly important for confidential information that loses its value over time, like technical innovations. With this in mind, many NDAs are becoming silent on time frames to allow the terms to remain in effect perpetually, or until the security of the information is unable to be further protected. For the purposes of return or destruction, requiring a recipient to confirm in writing that it is no longer in possession of the confidential information will serve two functions . First, if items of confidential information resurface down the line, it will provide some degree of protection for the disclosing party who can point to the writing to prove that it is not responsible for the purloined information. Second, it will guarantee that the recipient was forced to contemplate the matter and act on their obligation to return or destroy confidential information in good faith.
The next pitfall is not distinguishing confidential information from trade secrets. As mentioned, confidential information can be primarily anything that has value. In contrast, trade secrets must have economic value and reasonable efforts must have been taken to keep it secret. Trade secrets should have limited disclosure to protect the disclosing party’s marketability and so should be written as a separate clause. In an NDA, the confidential information and trade secrets clauses should therefore be kept separate and due care should be taken to not confuse them. In addition to their differences, it is important to remember that although trade secrets are protected for an unlimited period of time, they are not protected indefinitely. If the delay between disclosure and secret retention is too long, the economic value may be lost and the information will no longer be protected as a trade secret.
Finally, many NDAs improperly authorise commercial exploitation of confidential information prior to the commencement of an NDA. This practice exposes the disclosing party to unnecessary security and can potentially lead to further disputes further down the line.

Making NDAs Work for Canada

It is imperative that non-disclosure agreements tailored for Canada (or for any other country) not be photocopied or otherwise downloaded and then used as a template for the next jurisdiction in which a company would like to utilize it. This is because there are many aspects of the law in Canada that can vary from province to province. Areas including law of contract, torts, nuisance and even property law have been shown to differ across the ten provinces and three territories. If you have a global business and would like to maintain trade secrets or other intellectual property in multiple jurisdictions, you need to make sure that your non-disclosure agreement considers the legal features of each and that it is enforced to the extent possible in all jurisdictions.
Just because it is the case in one province that your agreement will be enforced in another province with identical wording does not mean that it will be the case in all provinces – indeed, it is likely that there is variation in the common law and statutory requirements across all of Canada. Canadian provincial and territorial differences relate to the following legal features: the test of whether an agreement is restrictive, the minimum employment period required to enforce a restrictive agreement, the right to make remedial relief, and the amount of damages imposed.
Further, there are cultural differences between the different Canadian jurisdictions. As Canada is a country built on immigration, many of the cultural norms that citizens of Canada have become accustomed to have been imported from other countries. Each jurisdiction has its own customs and cultural nuances that are uniquely its own, and because of this, you should contact us in order to have a custom-tailored non-disclosure agreement specific to the jurisdiction in which it will primarily be used.

How to Craft an Effective NDA

When our firm is retained to assist in negotiating an NDA, one of the most common issues we review is how broad the precluded uses of protected information are. Usually, clients want an NDA to prevent a party from doing anything with the confidential information provided – they don’t like the word "used", and often object to that term being used instead of "exploited." Nevertheless, the law requires use of "use" or its synonyms, and using "exploit" instead will not help to keep an NDA enforceable.
Another common issue clients have with non-disclosure agreements is the length of time for which protected information can be disclosed. While a period of five years is long enough in most cases, time periods should be as short as circumstances allow. A non-disclosure agreement should not have a set length that is going to apply to all clients. Thus, a supplier NDAs with its customers might have a five year period, but an inventor’s NDAs with potential licensees would likely have a much shorter period (a year or less). This is because while a customer and supplier have a healthy business relationship, the innovator/potential licensee relationship is not inherently so healthy.
It is also important to note that the law requires some objective criteria to determine whether information is still confidential. The NDA should provide that if the information ceases to be confidential, such as by being publicly disclosed, that the NDA would no longer apply to that information.
Even though a non-disclosure agreement is a contract, courts in Canada are very willing to grant relief for breach of a non-disclosure agreement even when the loss is of uncertain value. This is particularly beneficial in cases when the confidential information is difficult to quantify, such as in trade secret cases. However, this does not mean that courts will refuse to give relief if the NDA includes overly broad terms or too many exceptions or does not specify the consequences of a breach of a non-disclosure agreement. In such cases, the NDA may be voided, or limited to what is explicitly contained in the agreement. For example, a breach of a non-disclosure agreement might be actionable, even if the information was known to be publicly available, if the non-disclosure agreement did not specify that it was not applicable to publicly available information.

Dispute Resolution for NDAs

In the event of an NDA breach, the first step should be an assessment of the harm done to determine whether that injury can be repaired through a civil claim for breach of contract. If the injury is severe enough, an injunction stopping the other party from further disclosure may be sought in court.
The Injunction
Injunctions are an equitable remedy, meaning that they are exercised at a judge’s discretion, unlike monetary damages which are assessed according to a specific formula. Injunctions can stop someone from doing something at all, or can stop someone from doing a particular action until a specified time.
To get an interim injunction, the applicant must show that they will suffer "irreparable harm" if the injunction is not granted. If the harm can be quantified in monetary damages, then it is not considered "irreparable" and the injunction will likely be denied.
An interlocutory injunction will be granted only if:

• there is a serious issue to be determined
• the injunction is necessary to prevent irreparable harm
• the balance of convenience favours the granting of the injunction
• the order will not have a negative effect on the public interest

It is important to note that "irreparable harm" is a very high bar in Canadian case law, and courts have always been very hesitant to grant injunctions without hard evidence of imminent and serious injury . In other words, applicants should be prepared to undergo thorough vetting and examination.
If the applicant is seeking a permanent injunction with the final adjudication, the judge will consider whether an injunction will prevent irreparable harm to the plaintiff given the rights of the parties at the conclusion of the litigation.
Damages
If you cannot show enough harm to get an injunction, your only recourse is to plead for monetary damages. Unlike the high standard of an injunction, it is enough to show that a plaintiff has in some way suffered.
Canadian law provides that breach of an NDA gives rise to damages even if the defendant had no intention of breaching the contract. A claim for breach of contract lies in the objective construction of the agreement, and not the actual intention behind the agreement.
Whether a plaintiff must show actual damages, or whether they can automatically recover damages, is still being determined by the courts.