Confidentiality Agreements in Canada: A Closer Look

What is a Confidentiality Agreement?

Confidentiality agreements (also known as non-disclosure agreements, or often abbreviated to "NDA") are contracts between two or more parties which impose confidential obligations on the parties. In most cases, the confidential information is shared between the parties so that they can have a frank discussion about certain matters or about a particular matter, without the fear of the other party disclosing or publicly using the information which is shared.
The purposed of a confidentiality agreement is to protect the confidential and proprietary information of a party from being disclosed to the public or the media. Confidential and proprietary information may be anything from company financials to information about a product, a new development, a technology, or even trade secrets. The purpose of a confidentiality agreement is not to give the other party an opportunity to shop around the confidential information after it has been disclosed. If a party is looking to shop around the information which is being disclosed as part of a negotiation phase, then a confidentiality agreement may not provide sufficient protection to the party disclosing the confidential information.
An example of a confidentiality agreement is as follows:
Confidentiality Agreement
THIS AGREEMENT is made this ____ day of _________ , ___________.
BETWEEN:
_________________________
(hereinafter called the "Disclosing Party")
AND
_________________________
(hereinafter called the "Receiving Party")

1. DEFINITIONS

"Agreement" means this Confidential Agreement.
"Purpose" means the purpose of this Agreement is to prevent the unauthorized disclosure of the Disclosing Party’s Confidential Information.
"Confidential Information" means all written, electronic or oral information, regardless of form or characteristic, furnished or made available by the Disclosing party, before or after the date of this Agreement.

2. ENTIRE AGREEMENT

This Agreement shall constitute the entire Agreement of the parties with respect to the subject matter of this Agreement and supersedes all prior Agreements and understandings, whether written or oral with respect to the subject matter of this Agreement, except that this Agreement shall not supersede any other Agreement made by Schedules "X" or "Y" hereto which is attached hereto. No amendment, supplement, or modification of this Agreement will be binding unless executed in writing by both parties.

3. GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of ____________, Canada.

4. SEVERABILITY

In the event any part or provision of this Agreement is determined to be illegal or invalid, as a matter of law, such part or provision shall be deemed severed from this Agreement and the remaining parts or provisions shall remain in full force and effect.

Canadian Legal Context

Confidentiality agreements, or NDAs, exist within a complex legal framework in Canada. Their enforceability and application are often determined on a case-by-case basis, considering the specific context of each agreement.
Confidentiality agreements are generally enforceable in a business context in Canada, as long as they are reasonable in scope and duration. Canadian courts tend to focus on perception (i.e., was/wasn’t it reasonable to treat or expect this information to be confidential?) as opposed to determining whether the information actually is confidential. It is not uncommon to read as follows in reported decisions involving confidentiality agreements: "it can be assumed, barring evidence to the contrary, that the parties in entering into a confidentiality agreement perceived the subject matter as confidential."
For legal purposes, confidential information does not have to be strictly proprietary or secret. Rather, it must not be known to or readily accessible by a significant number of persons outside the company and should require some effort to maintain the confidentiality of the information in question.
The governing statute for confidentiality agreements varies by province. For the purposes of federal confidentiality agreements, the common law applies. Quebec’s Civil Code governs confidentiality agreements for matters in Quebec.
Canadian courts have identified various circumstances under which confidentiality agreements are unenforceable:
In Boeing v. Canadian Airlines, the British Columbia Supreme Court cited the following as relevant to determining the enforceability of a confidentiality agreement: "(1) whether it is in writing; (2) the extent to which the information sought to be protected is described; (3) the length of time during which obligations are to apply; (4) the scope of restrictions as to persons bound; (5) the scope of restrictions as to the activity bound; and (6) the opportunity afforded by the disclosing party to the party to whom the information is disclosed to enter the information in order to verify its accuracy."
The inquiry into whether information is confidential is commonly a fact-bound question, requiring an inquiry into relevant circumstances, including:
Canada has fairly well developed jurisprudence on confidentiality agreements. Canadian courts tend to take a pragmatic view when assessing these types of agreements, favouring commercial certainty and flexibility over rigid and technical interpretations.

Essential Elements of a Canadian Confidentiality Agreement

A typical confidentiality agreement in Canada will outline certain elements essential for its legal binding. The parties themselves, or individual who have an interest in the information being protected, are usually stated first. This adds clarity to which individuals or organizations are strictly bound by the contract.
The scope of the confidential information is generally specified next so that the parties know what types of information they are forbidden from revealing to anyone who is not bound by the agreement.
The duration is also generally specified. If the parties wish to avoid a strict timeframe, i.e., two years, they may express this instead as "until such time as the information becomes public knowledge."
Any exceptions to the contract should be included in the contract, as well. These exceptions may include: continuing to use the information if the parties’ business relationship allows; if they are under a legal obligation to do so; or the information is already in the public domain through no fault of the parties.

Different Forms of Confidentiality Agreements

Types of Confidentiality Agreements in Canada
In a general sense, there are two types of confidentiality agreements in Canada. The first are those that are entered into before the disclosure of confidential information and those that are entered into after confidential information is disclosed.
In Canada, a non-disclosure agreement (NDA) is a type of confidentiality agreement (also referred to as a confidentiality agreement (CA) or confidentiality/non-disclosure agreement) that prohibits a party from disclosing certain information to a third party. These information restrictions may include any proprietary, sensitive or otherwise confidential information belonging to a discloser, the owner of the confidential information (secrecy). Similarly, the information restrictions may restrict a party from making or keeping copies of the confidential information (replication) or restrict a party from exploiting the confidential information in their own behalf (use), both of which will be further explained in a separate section below. NDAs are usually accompanied by restrictive covenants. In business relationships, they may also be entered into by individuals in advance of purchasing a business so that they are given the opportunity to evaluate the business before committing any resources to it. In Canada, NDAs are legally enforceable, so long as they are reasonable in scope, excluded items of information from the scope of its restrictions, provided a limited duration and did not contradict public policy.
As NDAs are often entered into in the pre-contractual stage, it is important that the discloser is vigilant of what information it is divulging to the recipient in such an NDA, in order to ascertain what information would be kept confidential in such NDA and then thereafter be protected as confidential information. It is important to consider the following types of information: (a) information that the parties expressly show to be confidential, by identifying the information as confidential in writing; (b) information that a discloser is obligated to keep confidential; and (c) information that a discloser considers to be confidential and is not generally known to the public (or not lawfully acquired by the public).
If the information is not expressly kept confidential, the discloser must ensure that the NDA sets forth the specific means in which confidential information must be kept. Such agreements may set forth means such as limiting access to confidential information, encrypting confidential information, and/or password protecting electronic access to confidential information.
Essentially, an NDA restricts a party from disclosing or otherwise using the confidential information as referenced above. While a NDA can be broadly interpreted to include the aforementioned, for purposes of this article, the focus is on the disclosure aspect only. A NDA can be premised on a general and/or overly broad provision such as "any and all confidential information possible." Overly broad provisions may be problematic as the Canadian courts may hold them to be void or unenforceable. Thus, in order to ensure a valid NDA, a discloser should ensure that the scope of the information restricted does not contradict public policy and that a period of time is not set out, may be limited to 5 years.
In Canada, an example of a two-way agreement is a mutual confidentiality agreement between an employee and employer, in which case the agreement would generally cease on termination. In most cases, without consent from the parties to the agreement, such agreements should not survive on termination of employment.
A mutual confidentiality agreement (MCA) is an agreement that restricts both parties from disclosing confidential information to a third-party. Both parties in a mutually binding agreement are entitled to the other party’s confidential information and thus are required to abide by their contractual limitations, as well as restrictions set out by law.

When to Implement a Confidentiality Agreement

Confidentiality agreements are particularly useful for both businesses and individuals when disseminating or receiving confidential information. In business transactions, confidential information must be appropriately protected during negotiations and after the transactions is completed. Under Canadian law, these obligations continue, and can even increase depending on the terms of the agreement. If a breach occurs it may result in the losing of business relationships or competitive advantage . Employment relationships require confidentiality agreements because the employer-employee relationship is premised on the trust that confidential information will not be disclosed outside of the scope of the employment. Without such a confidentiality agreement, the employer may find its competitive advantage eroded or its confidential information exposed, as former employees are free to disclose or misuse confidential information that they have received during their employment. Confidentiality agreements are also common in business partnerships, which often involve the sharing of trade secrets and sensitive information in order to facilitate the business relationship.

Breach Implications and Application

In Canada, courts generally enforce confidentiality agreements, subject to some limitations. Courts will typically uphold a confidentiality agreement where it is found that the information was confidential and the recipient understood their obligation to keep that information confidential. Over the past years, however, the trend has been to enforce confidentiality agreements broadly to ensure that the relevant provisions are not merely being treated as stand-alone principles of construction but are being applied within the context of the entire agreement. Generally, irrespective of whether the agreement expressly states that it is governed by clear and unambiguous language, the interpretation given to such provisions will turn on the circumstances of the case. Enforcement of a confidentiality agreement on the basis that it is a contract can be challenged if the confidential information involved in the particular case is not specific enough. The information may not be sufficiently detailed for the purpose of the agreement, i.e. so that it can be identified as confidential in the context of the agreement themselves. Thus where the information has still to be developed, no matter how novel, and is not reduced to a specific form, it may not be capable of protection. Generally, the breach of a confidentiality agreement allows the aggrieved party to seek damages and sometimes injunctive relief to prevent further disclosure of the confidential information. Under Canadian law, damages can be recovered to put the plaintiff in the position that it would have been had the breach never occurred. As an alternative, the plaintiff may sue for an account of profits made by the defendant from the use of the confidential information. However, an award of profits may be less than what would be awarded as damages. Injunctive relief can be obtained to prevent further disclosure of the confidential information, however, the court will only issue an injunction preventing the disclosure of confidential information if the plaintiff can establish that the disclosure of the information would cause irreparable harm. Normally, damages are sufficient; however, there are instances where compensatory damages cannot adequately repair the injury caused. Such cases may involve special situations such as proprietary information or trade secrets where the loss of the trade secret cannot be estimated in money and where its value may be irretrievably lost in a manner not compensable by damages.

How to Draft a Canadian Confidentiality Agreement

A confidentiality agreement (also commonly referred to as a non-disclosure agreement or NDA) can be as short as a one-pager or push 25 pages and the amount of time spent finalizing one can range from literally 5 minutes to weeks (or even months in some cases). In Ontario at least, confidentiality agreements can be argued to be a special form of contract (i.e. a contract regarding a "disclosure of secret") which puts a slightly heightened onus on ensuring it meets general contract law requirements for enforceability.
In the B.C. decision of Peragallo v. Hemlock Printers Ltd., 2009 BCSC 1012, the Court discussed and provided an extensive review of applicable confidentiality agreement case-law under Canadian contractual principles. The advice of the Cases can generally be distilled down into the following practical tips for drafting effective Canadian confidentiality agreements:
To avoid wasting time on a poorly written specific confidentiality agreement that requires significant revisions, it is best to get the drafting right the first time. A large portion of paid billable hours between lawyers engaged in drafting negotiations over confidentiality agreements can often be due to the drafting being problematic to start – leaving the lawyers with little choice but to re-doing a lot of the original work.
Unfortunately, the decisions referenced above create something of a "tightrope" situation. Working with an unpaid draft confidentiality agreement can pose risk due to the fact that the courts may not take a sympathetic view to claims of misappropriation (e.g. by a former employee) if that confidentiality agreement included overly broad restrictions. That said, many practitioners engage in "drafting negotiations" with clients based on the basis of a "unilateral confidentiality agreement" (without any remuneration) expressly "subject to" the client’s input on its "final form".
In my experience, the key to avoiding conflicts on confidentiality agreement negotiation (that too often burn a large amount of otherwise profitable time at what should be the start of a business relationship) is making sure that each side – the paying party and the drafting party – are both aware that the confidentiality agreement is intended to be a controlled and documented discussion on the terms that will be concluded.

Consulting a Lawyer

An important part of confidentiality agreements (or mutual confidentiality agreements or MCEs) in Canada that need to be thought through is whether you should obtain legal advice about the agreement before you sign it. There are a number of different factors that can affect the answer to this question. One factor is a basic one of age and experience. Are you a young person signing your first confidentiality agreement (or MOU)? Have you been in business for years? Have you drafted agreements before, or are you entering into your first confidentiality agreement? Obviously, the more experience the parties have on these issues, the less one would usually need to worry about the details. The questions emerge when it is a young person entering into an agreement, or signing a standard form document that may be somewhat ambiguous.
Another factor is how much money is at stake. If you (or your company) have significant amounts to lose, and it appears that the confidentiality agreement (or MOU) will bind you for years, there is probably good reason to get some quality legal advice. While reviewing pre-agreed forms is relatively inexpensive (although it depends on how much time the lawyer spends changing the agreement), the cost of YET ANOTHER confidentiality dispute can be much higher. In approaching the lawyer to seek advice on confidentiality agreements (or MOUs, or R&D agreements, or IP agreements, etc.) one suggestion would be to have the agreement reviewed against a template which has already been prepared by the lawyer. This allows the lawyer to read the agreement with the knowledge of a preferred format and language combinations, allowing for quicker review times (and thus lower costs). However, that being said, if a suggested change has been made, note that if you intend to argue about the change , be sure to tell the lawyer so that they are not blindsided when you bring it up.
There are different issues that arise (on an agreement-by-agreement basis) that can require advice. These include discussing an incomplete or unclear definition of "confidential information", the time period that the confidentiality obligations are supposed to be in place, the scope of your ability to talk about the agreement (and the parties to it) with family and friends, or whether you can take a copy of the confidential information away (e.g. as part of a backup to your existing database). Superficial (or poorly drafted) requirements for the parties to a confidentiality agreement (or MOU) to return copies of confidential information by a certain date can be particularly troublesome when a lawsuit comes around. Accordingly, if you do not have a plan for how you are going to preserve that information (because of a backup or an accidental loss), you need to be careful about what you are agreeing to. Similarly, if there are inconsistent (or unclear) provisions in the confidentiality agreement, one provision may end up essentially voiding other provisions. Again, be careful about what you are agreeing to.
While confidentiality agreements and MCEs may appear to follow some boiler plate (or even just standard forms) in Canada, there are always surprises that can occur later on. For example, the courts have refused to summarily approve confidentiality agreements in Canada because of the fact that different conditions can apply to uphold or resist claims of both breach of contract and breach of confidence. These are also known as equitable obligations, and these obligations continue to exist even after the breach of express confidentiality obligations. Accordingly, in this area of the law in Canada, the courts have also shown a preference for a more case-by-case approach to disputes arising out of confidentiality agreements or MCEs that seem straightforward on their face, but are really quite complicated.