Do NDAs have a future?

Recent developments suggest that reliance on non-disclosure agreements (NDAs) needs to be reduced, but that they will remain an important part of the legal eco-system.

Background

The abuse of NDAs has become notorious in an employment context (on both sides of the Atlantic). But they are used much more widely than that. This article starts with an exploration of their use by employers, before discussing their use in a commercial context.

While contracts of employment commonly have confidentiality restrictions, they do not normally attract public attention. Rather the focus has been on what employees are asked to sign when they leave employment. Typically, this is a settlement agreement, which needs to satisfy certain formal requirements laid down by employment law. If these requirements are met, it is possible for an individual to contract out of all their statutory claims against their employer in return for an agreed termination payment. Until relatively recently it was common to impose fairly broad confidentiality obligations on outgoing employees in these agreements. Then came the Harvey Weinstein scandal in October 2017 and the re-launch of the #MeToo movement, which put the use of these restrictions under the spotlight.

The core concern was that rich and powerful men could deploy NDAs to hide past sexual misconduct – some of it criminal – and to buy protection for their reputation. These concerns were equally valid in relation to covering up other kinds of serious misconduct, whether by individuals or organisations. As a result, there has been wide agreement that the use of NDAs needs to be appropriately restricted, with some calling for an outright ban.

The general law

There is no legislation currently in force in Britain which directly regulates the use of NDAs. What legal restrictions there are currently derive from the common law or from legislation which has an indirect effect on their use.

An example in the former category is the principle that the courts will not enforce a contract which is founded on illegality or is against public policy. The scope of this principle is hard to define, but it is likely to prevent the enforcement of a contractual term that purports to prevent an employee from reporting a criminal offence to the police. This particular example (of a much broader principle) has been incorporated into the Victims and Prisoners Act 2024, which was passed just before the general election. However, the Act has not yet been brought into force.

The best-known example of legislation that has an indirect effect on the use of NDAs is the provisions which protect whistleblowers from victimisation by their employers and colleagues for making “protected disclosures”. One key provision is that any wording in an agreement which purports to preclude the employee from making a protected disclosure is of no effect.

Regulatory requirements

In the absence of a dedicated legal regime for NDAs much of the slack has been taken up by regulators. This subject has been a particular concern of the Solicitors’ Regulatory Authority. It has issued a warning notice directed at solicitors drafting and advising on confidentiality clauses, whether these are in an employment or commercial context, though it is fair to say the most of its concerns are directed at their use by employers to restrict the information that ex-employees can reveal. The latest revision of the warning notice was published on 6 August 2024, following a review of the role of solicitors in drafting or advising on NDAs. The key concern – which has been reiterated through the various editions it has passed – is that these agreements should not purport to restrict the reporting of serious concerns to SRA or the relevant regulator or give the impression that the agreement has that effect. They should also be clear about the scope of the other exclusions that the law requires – for example where protected disclosures are involved.

More targeted sector-based guidance has been published by other regulators. The most recent example is the complete ban imposed by the Office for Students on Universities using NDAs in relation to student complaints involving sexual misconduct or unlawful harassment. The ban came into effect on 1 August 2024.

NDAs in commercial agreements

The context will be different, but the same general principles apply. Those involved in drafting or negotiating confidentiality clauses need to be aware of the legal principles which constrain their use. In particular, they cannot be used to suppress the reporting of crimes and should not seek to constrain making protected disclosures under whistleblowing legislation.

While the most compelling examples of their misuse come from an employment context, if anything the risks are more significant in the context of complex commercial transactions involving the exchange of large amounts of sensitive information. For that reason we are seeing the wording of confidentiality clauses in a commercial context align increasingly closely with that used in the employment field. In both cases there is a growing emphasis on spelling out the precise circumstances in which the duty of confidentiality is over-ridden by the wider public interest.

It’s not just the confidentiality clause itself that must be carefully drafted. The SRA warning notices also flags that NDAs must not use warranties, indemnities and claw back clauses in a way which improperly prevents or inhibits permitted reporting, or disclosures being made.  For example, asking a person to warrant that they are not aware of any reason why they would make a permitted disclosure.

NDAs in commercial litigation

Many settlement agreements compromising commercial disputes include a confidentiality provision. Given the publicity about NDAs in the employment and sexual misconduct contexts, it would be easy to assume that concern is not directed at those dealing with commercial disputes. This would be wrong. The SRA’s warning notice makes it clear that NDAs include any form of agreement or contract, or a clause, regardless of context, where it is agreed that certain information will be kept confidential.

The notice stresses the duty not to take advantage of an opposing party, whether represented or unrepresented. This duty is heightened where the opposing party is vulnerable or a litigant in person. A confidentiality clause or agreement should be tailored to the circumstances of the case and expressed clearly in standard plain English. Avoid comprehensive confidentiality provisions: it is important to set out what disclosures can and cannot be made and to whom. Anyone dealing with an agreement including a non-disclosure provision should check the guidance in the SRA’s notice.

Conclusion

With limited exceptions, we don’t have a ban on NDAs yet, or any comprehensive statutory code restricting their use. It is however reasonable to assume that further restrictions are on the way. In the current climate, those seeking to rely in NDAs in any context will wish to be satisfied that they have a legitimate interest to protect, and that the restrictions imposed are clearly drafted and go no further than is reasonably necessary to protect that interest.