The non-disclosure agreement (NDA) under Dutch corporate law: fake security or indispensable?
I spend most of my time as a Dutch corporate lawyer drafting agreements, or reviewing agreements drafted by someone else. The NDA (non-disclosure agreement, or in Dutch more often referred to as the confidentiality agreement) is the agreement I have to review for my clients most in absolute terms. I often see several a week. And all of them are different. Some are one-pagers, others are 10 pages long. Despite the big differences, I always check them at least for a fixed number of risks and pitfalls under Dutch law.
Dutch law Template NDA
For years, Penrose has offered a wide range of Dutch corporate law template agreements on its website, which are free to use by anyone. Penrose’s website also provides a lot of information on how and when to use these contracts. Penrose has made a Dutch law template NDA available on its website too. In this read, I will use this Dutch law template agreement published on our website as an example so that I can elaborate on some topics in more detail.
NDA: points of attention under Dutch law
What is an NDA in the Dutch law practice? This is an agreement that obliges contracting parties to keep the information they exchange with each other confidential. Parties use a non-disclosure agreement when they want to discuss or explore something with each other in confidence. Examples include a merger or business acquisition (M&A), a collaboration, or the development of a product or, for example, software. Below, I describe the main components of the NDA under Dutch law, which you will also see reflected in the sample NDA on our website.
Who is your counterparty to the NDA?
When entering into an NDA, think carefully about who you are entering into the agreement with. Which person or legal entity is the formal contracting party that will have access to the information and where is this party located? Can the other party share the information with its employees and consultants? Who do I want to be able to hold liable if the information is disclosed anyway? Make sure that you can also hold your contracting party liable if its employee or consultant is found to have leaked the information. In the Dutch law template NDA on our website, we have provided for this in article 2.4.
What is the purpose of the NDA?
It is important to set out in the NDA (non-disclosure agreement) the purpose of the information exchange. For example, a purpose could be: “to explore whether the parties can reach a joint business plan for the development of a software platform“. Another common example of a purpose is: “to discuss a possible acquisition by Party A of all shares held by Party B in Party C“. The purpose is important, as the NDA states that (if all goes well) the party receiving the information may only use that information for that specific purpose. And therefore not for anything else, such as to replicate the other party’s product or platform, or to compete with Party C. In the Dutch law sample NDA on our website, we have reserved space in recital A to describe the purpose of the NDA. Articles 4.1 and 4.2 of the sample NDA then state that the information exchanged may only be used for this specific purpose.
Is the NDA reciprocal?
Often, a non-disclosure agreement (NDA) is drafted so that one party provides information to the other. But the practice is often different, namely that both parties exchange confidential information back and forth. In that case, it is advisable to make the NDA reciprocal, so that the obligations in the NDA apply to both parties and both parties can safely exchange information. The sample non-disclosure agreement on our website is reciprocal. Both parties can therefore exchange information back and forth under the other party’s obligation to keep this information confidential.
What is the definition of Confidential Information in NDA?
Under Dutch law, define clearly in the NDA what is confidential information and what is not. One wants to avoid a discussion about whether certain information was confidential or not. On the other hand, you do not want to be accused of breaching the NDA the moment you share information with third parties that was already (publicly) known. For such situations, the NDA should therefore provide for an exception. In the Dutch law sample non-disclosure agreement on our website, we have included a broad definition of Confidential Information on the one hand, which covers all sorts of information. In addition, you can see in article 3.1 of our Dutch template NDA a few very specific exceptions to the duty of confidentiality.
What is the duration of the NDA?
Do not forget to include in the NDA how long the agreements will last. It is often agreed that discussions and the information exchange may be terminated at any time. The duty of confidentiality must, of course, continue afterwards. In addition, it is often agreed that after the discussions end, the information exchanged must be returned or destroyed. These provisions are included in the Dutch law template NDA on our website in articles 7.1, 7.2 and 4.3.
Does the NDA contain a penalty clause?
What happens if your counterparty to the NDA does not comply with the agreements in the NDA, as a result of which your confidential information is disclosed anyway? The basic rule under Dutch law is that you can then claim damages. The point, however, is that in most cases it is impossible to prove how much damage you suffered as a result of the information leak. And if you can’t prove the damage, you probably won’t get the right compensation. Therefore, an NDA under Dutch law often includes a penalty clause, stating that in addition to the damages, you are also entitled to a penalty amount in case the other party fails to comply with the NDA. The sample NDA on our website includes a penalty clause in article 6.4.
Which law applies to the NDA?
The provision I look at first when I have to review an NDA is usually the last clause in the contract. This is because it states which law applies to the NDA and in which court you have to bring proceedings if the other party breaches the NDA.
Indeed, you can find an infinite number of freely available NDAs on the internet, and most of them are subject to a different legal system than the Dutch one. A large portion of the NDAs I get sent, even if both contracting parties are from Europe, still appear to contain a standard clause stating that US Law applies to the NDA and that in case of disputes about the NDA, the New York court has jurisdiction. Of course, no one wants this if you are doing business in the Netherlands or elsewhere in Europe.
If the parties to the NDA are from different countries, always include a choice of law of the preferred country and explicitly state which court has exclusive jurisdiction to resolve on disputes. If you forget this, especially in the case of a reciprocal NDA, then in the event of a dispute over the NDA, you are guaranteed to get into discussions about which law applies and which court in which country has jurisdiction to rule on the dispute. And that leads to big unpleasant surprises. Litigation abroad is often so costly that people would rather turn a blind eye to a breach of the NDA than take action against it.
In the Dutch law template NDA on our website, we have therefore explicitly included in article 9 the choice of Dutch law as the applicable legal system, and that in the event of a conflict about the NDA, parties must apply exclusively to the court in the Netherlands (in Amsterdam).
For more information on Dutch corporate law, M&A and shareholder disputes, contact Mr. Lukas Witsenburg (Dutch M&A lawyer), at l.witsenburg@penrose.law or tel: +31 6 15025194.
Law firm Penrose in Amsterdam, the Netherlands.
