Confidentiality Agreements Are Not Legally Enforceable (Lesson 3)

The main reason for the existence of this myth is that people have heard from colleagues, friends, or others whom they respect and trust, that confidentiality agreements are unenforceable.

Others believe that it can be very difficult to prove that someone has actually disclosed confidential information in breach of their obligations under a confidentiality agreement and, because of this, they are not worth signing in the first place.

However, most people who believe the myth for the above reasons have never been to court and have no experience enforcing confidentiality agreements, or any contractual rights or obligations before a court.

Finally, some people also believe the courts will refuse to enforce confidentiality obligations due to a public policy argument against doing so or because they are an unfair restraint.

All of these assumptions are very often wrong. While in some cases confidentiality agreements are unenforceable, confidentiality agreements are generally enforceable where they meet the relevant legal tests.

What Can Go Wrong If This Is Not Done Correctly – Worst-Case Scenarios

So now that we have dispelled the myth that confidentiality agreements cannot be enforced, I would like to displace one more related myth – that all confidentiality agreements are the same and there is no reason to have them reviewed from a legal perspective.

There are so many different forms and permutations of confidentiality agreements that have come across my desk over the years – in fact, I have never seen two that are identical, and I have never once received a draft confidentiality agreement from a client that I have not recommended changes to.

Like any commercial agreement, it is of critical importance that senior executives have confidentiality agreements drafted and reviewed by a lawyer who is briefed with the specific objectives of the transaction, to ensure that the confidentiality agreement ultimately signed is enforceable.

What Happens If You Get Confidentiality Agreements Wrong

Under Australian law, obligations of confidence can be enforced even where there is no written confidentiality agreement in place. However, failure to have a confidentiality agreement in place can lead the recipient of the confidential information to believe that there is nothing stopping them from disclosing your confidential information. Whereas having a confidentiality agreement in place – whether it is enforceable or not – can lead the recipient to believe they are bound by its terms of confidentiality.

Therefore, getting a recipient to sign a confidentiality agreement is generally a good idea – as long as the confidentiality agreement does not contain provisions that actually compromise your commercial or legal position.

Getting confidentiality agreements wrong can make it difficult or impossible to enforce your rights. In one reported case (in which we did not act for either party), an Australian company took an ex-employee to court, claiming that the ex-employee had misappropriated and unlawfully disclosed the company’s confidential information.

However, the confidentiality agreement that had been signed was an American confidentiality agreement template, and referred to a similarly named company – with the suffix “Inc.”, instead of the company’s real name, which ended in “Pty Ltd.”

The agreement also purported to reverse the onus of proof, asserting that it was the ex-employee who had to prove that information was not confidential. In Australia, the onus of proof is generally on the party asserting breach of confidence to prove that the information has the quality of confidence.

In that case, the court found that the confidentiality agreement was a “very strange document” and found in favour of the ex-employee. Having failed to win the case, the company was ordered to pay the ex-employee’s legal costs.

This is just one example of how failing to have a proper confidentiality agreement in place (or having one which misses the mark altogether) can make it impossible to enforce confidentiality obligations.

To your success,