The role of NDAs and confidentiality clauses for a new supplier

When appointing a new supplier there is often a dilemma over the issue of confidentiality. How do you strike the balance between sharing enough information to obtain the best deal without jeopardising confidential business information?  

It is imperative that business owners treat their confidential information with the utmost importance when appointing new suppliers. For example, sharing designs and recipes with other businesses can be risky if the process is not managed carefully with appropriate legal safeguards.

How to mitigate the risks of a confidentiality leak

Counterfeiters and copycats often obtain information via the existing supply chain, so one of your earliest considerations when appointing a new supplier should be the matter of confidentiality. It is advisable to think about this issue in advance of the initial meeting, so that you can prepare your strategy and approach from the very start.

The two main options are limiting disclosure and the use of a non-disclosure agreement (NDA); however it is usually prudent to use a combination of both.

• Limiting disclosure – by taking extreme care with precisely what confidential (or commercially sensitive) information is revealed, to whom, and at what stage, you can go some way towards mitigating the risk of leaks. Think of this like the ‘dripping-tap’ approach, whereby at each stage just enough information is shared with the right people to take the appointment process to the next stage without over-sharing at any time. 

• A non-disclosure agreement (NDA) – here, a contractual agreement is entered into with proposed suppliers at a very early stage, ideally before any information that is not already in the public domain is shared. The NDA contains confidentiality clauses which protect the information from being shared further or used other than for the purposes of this disclosure. If the supplier is then formally engaged, there is likely to be additional confidentiality clauses embedded in the supplier agreement, as a ‘belt and braces’ approach.

The pros and cons of each option

The key advantage of the dripping-tap approach to disclosure is that you limit the risks at source; put simply, if information is not released in the first place then it cannot get into the wrong hands.  

However, this approach comes with a sizeable downside, which can impact both you and your supplier. Without your supplier being able to see the full picture, it may prove problematic in scoping, quoting and selection. Also, when the relationship gets underway, the limitations in your disclosure may cause your supplier to be hamstrung and producing at less than their full potential.

An NDA can be an excellent tool in protecting your business information. They are becoming an accepted part of modern business practice as courts have shown a willingness to enforce them, either by way of an injunction, damages, or both, depending on the circumstances of the case.

However, on occasions an NDA can scare some potential suppliers who may otherwise have been a good fit. This may be the case for smaller or less sophisticated suppliers, who may not feel comfortable in signing up to a legally binding document at such an early stage.

Trust and risk management

Clearly you should adopt a tiered risk management approach to any supplier engagement, taking a practical approach to each appointment depending on the circumstances. The higher the risk profile of the appointment, and the greater the impact to your business if it goes wrong, the more care you need to take with confidentiality information.

Also, it is vital that you do not overlook confidentiality issues as the relationship between you and your supplier progresses. Over time, the nature and extent of the business relationship may evolve and their access to confidential information and documentation may increase. Where this is the case, great care should be taken to ensure that the confidentiality terms are reviewed regularly to ensure they remain fit for purpose.

Further, the role of trust in the supplier relationship cannot be underestimated. Naturally, you will generally exercise more caution when dealing with new suppliers who you have not done business with before.

Summary

In conclusion, when appointing a new supplier, you will need to take a balanced approach towards confidentiality that suits the nature and risk profile of the contract, the type of disclosure contemplated, and your previous experience (if any) with that particular supplier.

You need to find a balance between sharing enough information to get the best deal, while not over-sharing in such a manner to expose your business to any unnecessary risk. In addition, you should use non-disclosure agreements and confidentiality clauses in your supplier agreements where possible to add an extra layer of security.

How we can help

If you are appointing a new supplier and are looking to address confidentiality risks, then get in touch with our commercial solicitors without delay. We can discuss the specifics of your situation and prepare suitable contractual agreements, to give you some peace of mind when disclosing key information.  

For an informal conversation, please contact Ian Barnard on 01653 600070.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.