12 July 2022

The NDA: a legal assessment and the option to dissolve

Category: Corporate law

The non-disclosure agreement (NDA) plays an essential part when it comes to mergers and acquisitions. An interested buyer will wish to view the company documents in the negotiation phase. Although this is understandable from the buyer’s point of view, the seller is in fact taking a risk by disclosing confidential information. This is why parties sign an NDA in which they agree which information is confidential, and what can and cannot be done with it.

With a unilateral NDA, only one party shares information and obliges the other party not to pass it on to others. If both parties share information with each other, this is what is known as a mutual NDA. Due to the considerable importance that parties – often the selling party in particular – attach to an NDA, its dissolution is usually ruled out contractually. But suppose you didn’t include such a provision – can an NDA be dissolved?

Violating the NDA   

If the purchasing party acts contrary to the NDA and discloses the selling party’s business secrets, it can be assumed that the selling party suffers damage. Given that it is quite difficult to prove (the extent of) the damage suffered, the customary remedy for a violation of an NDA is a fine within the meaning of Article 6:91 et seq of the Dutch Civil Code. If the party is a company, it is furthermore also liable for its employees in a qualitative sense. This is frequently also included in the NDA itself.

Legal assessment of an NDA

Before looking into the possibility of dissolving the NDA, it is first necessary to determine the legal assessment of an NDA.

In the Dutch Civil Code, dissolution is regulated in the section entitled “mutual agreements”. Mutual agreements, in turn, fall – along with unilateral agreements – under obligatory agreements. These are agreements from which obligations arise.

According to Article 6:213 of the Dutch Civil Code, in order to qualify as an obligatory agreement, the following must be true:

  1. A multilateral legal transaction
  2. From which obligations arise.

A multilateral legal transaction is a legal transaction conducted by multiple parties. Since multiple parties are involved in establishing an NDA, the first requirement is deemed met.

Do obligations also arise from an NDA? Once the NDA has been signed, the main issue is that the party receiving business-sensitive information undertakes not to share this information with third parties. On the other hand, the disclosing party is obliged to share the business-sensitive information. It should be noted that there is some discussion in the literature as to how far that obligation extends.

Since an NDA falls under the category of obligatory agreements, there is the question of whether it is also a mutual agreement. The existence of a mutual NDA suggests that this is the case. However, this term originates from practice and does not mean an NDA is also actually a mutual agreement. A “nature of exchange” would be required for this. Although this gets fairly technical, there is a consensus in the literature that this nature of exchange is not present in the case of an NDA.

Is dissolution possible?

Failure to observe an obligation gives the other party the right to dissolve the agreement. Dissolution is regulated in Article 6:265(1) of the Dutch Civil Code and falls under the section “mutual agreements”. Since it has just been shown that an NDA is not a mutual agreement, it can also not be dissolved.

However, Article 6:261(2) of the Dutch Civil Code contains a linking provision (schakelbepaling) that sets out a way to possibly dissolve an NDA after all. This article states that the provisions on mutual agreements also apply to other legal relationships extending to fulfilling obligations reciprocally, insofar as the nature of those legal relationships does not exclude this.

Although it is unclear to what degree an NDA extends to fulfilling obligations reciprocally, it does open the door to the possibility of dissolution.

Blenheim advises business owners on selling their business

If you’re thinking about selling your business, it is vital to draw up an NDA with great care. And if you intend to acquire a company and are about to sign an NDA, it pays to let a lawyer examine it first. The lawyers in Blenheim’s Corporate Team are highly experienced in advising companies on mergers and acquisitions.