Contractul penalties in non-disclosure agreement (NDA)

Almost inherent in every Non-Disclosure Agreement (NDA) is a contractual penalty for failure to respect the confidentiality of the information provided. In practice, this is a very convenient measure, both disciplining the counterparty and expediting claims if our counterparty discloses the confidential information provided to it.

When is a confidentiality agreement or clause (NDA) entered into?

The parties to any contract may insert a confidentiality clause (either an entire paragraph or a single provision) into the text of the contract. Either or both parties may be obliged to keep the information provided confidential. The confidentiality clause most often covers any information that the contracting parties provide to each other during the course of the cooperation, which is of a confidential nature (i.e. information on the way the company operates, information on price lists or discounts, technological data, development strategies, information on products the company is working on, etc.).

Sometimes the provisions on confidentiality obligations are very elaborate and as such are excluded into a completely separate agreement (NDA agreement). In such a case, the NDA agreement applies, as it were, alongside the main agreement governing the parties’ cooperation.

It is also common for a non-disclosure agreement (NDA) to be concluded prior to entering into negotiations with a counterparty and before signing the main agreement. This ensures that, even if a final cooperation agreement is ultimately not concluded, the other party will be obliged to keep the information provided during the discussions confidential.

How is a contractual penalty stipulated in a non-disclosure agreement (NDA)?

The contractual penalty for the disclosure of confidential information is most often a specific amount, expressed in any currency (in contracts concluded in Poland it is most often PLN, EUR, USD or GBP).

It is also sometimes the case that the contractual penalty for disclosure of confidential information does not take the form of a specific amount, but a percentage or fraction of the remuneration of the main contract (e.g. 1% of the net remuneration of the main contract, for each instance of disclosure of confidential information).

The amount of contractual penalties in non-disclosure agreements (NDAs) varies widely and depends primarily on the value of the confidential information being protected. The more valuable the information transferred (e.g. information which disclosure could, for example, stop the functioning of the company or compromise its image) – the higher the contractual penalty for disclosure of such information written into the agreement will be.

Most often in the Polish realities of small and medium-sized business, contractual penalties for each disclosure of confidential information range from several thousand PLN to several hundred thousand PLN.

What are the advantages of including a contractual penalty in a non-disclosure agreement (NDA)?

The contractual penalty is designed to protect the confidentiality of the information provided in such a way that, in the event of unauthorized disclosure by the party that received such information – it will have to pay the other party a contractual penalty in the amount stipulated in the contract.

The greatest advantage of the contractual penalty in an NDA agreement is the simplified enforcement of payment from the person who has breached confidentiality. In such a case, it is not necessary to prove that damages have been incurred, i.e. to prove that, as a result of the disclosure of confidential information that we have provided, for example, our counterparty has overtaken us with the launch of a particular product.

If a contractual penalty is stipulated in a non-disclosure agreement (NDA) – it is only necessary to prove that there has been a contractually prohibited disclosure of confidential information. This is sufficient to demand payment of the agreed penalty on the grounds of failure to maintain confidentiality. In an extreme situation, it may even turn out that the disclosure of our confidential information has not caused any damage to our company, and we will still be entitled to claim payment of such a penalty. However, the so-called mitigation of the penalty (i.e. its possible reduction due to the complete lack of damage) will remain a separate issue.

In summary, almost every non-disclosure agreement (NDA) contains a contractual penalty provision. This is intended to further emphasize the consequences of disclosure of a secret, but also to make it easier to pursue a claim.