A Case Study in Contract Drafting

The paragraph below comes from a nondisclosure agreement that was sent to me by a client for review. This particular NDA this particular NDA was drafted by another attorney. An NDA is a pretty straightforward and simple agreement, but is often one filled with contract terms, like the one below, that torture the mind.

The background on this provision is pretty simple. The company who presented this NDA was contemplating hiring my client to provide a variety of services. Without disclosing the services in question, I am not fully convinced that an NDA was necessary, but the company wanted the NDA.

Term. This Agreement shall begin on the Effective Date and continue in full force and effect for a period of three (3) years (the Protection Period) on which date this Agreement shall expire and not automatically renew, unless earlier terminated by either Party as set forth herein.  Nevertheless, the terms and conditions of this Agreement shall survive the expiration or termination of this Agreement and shall continue for a period of three (3) years.  The Receiving party shall not disclose to any third party any Confidential Information received pursuant to this Agreement during the three (3) year Protection Period, in whole or in part, However, should the parties enter into one or more successor Agreement(s), such as a Teaming Agreement or a Subcontract, referencing this Non-Disclosure Agreement, the term of this Non-Disclosure Agreement will be the longer of the term in the Non-Disclosure Agreement or in the successor Agreement(s).  Unless otherwise specified in the successor Agreement, all other terms of this Non-Disclosure Agreement remain unchanged.

The goal of this provision is to prevent disclosure of confidential information for at least three years. The three-year period would exist regardless of whether the NDA was terminated. There were three scenarios of how this contract would end:

  1. The NDA would be terminated by either or both of the parties. In which case the confidential information would be held in confidence for three years.
  2. The NDA would expire by its own terms in three years so the confidential information would be held in confidence for three years.
  3. The parties would enter into a subsequent agreement to provide services and if that subsequent agreement referenced the NDA the confidential information would be held in confidence for the length of three years or the termination of the subsequent agreement. The unstated assumption was that if the subsequent agreement contained similar confidentiality provisions, the NDA would be irrelevant.

So in looking at the contract language provided, I am not certain the contract drafter clearly communicated any of these ideas or the overall goals of the provision.

So let us start talking about specific provisions. The first sentence attempts to communicate several different ideas.

This Agreement shall begin on the Effective Date and continue in full force and effect for a period of three (3) years (the Protection Period) on which date this Agreement shall expire and not automatically renew, unless earlier terminated by either Party as set forth herein.

Idea one is that the agreement begins on the effective date and lasts for three years.

Idea two is that the agreement will not automatically renew.

Idea three is that the parties can terminate the agreement before three years is over.

The first idea is necessary. The second and third ideas are not needed. Why mention automatic renewal if it won’t automatically renew? If the goal is to prevent disclosure of confidential information for three years and the duty survives the termination of the agreement, why bother with an early termination provision?

There are other drafting issues present as well. For example, the agreement cannot have an obligation to do anything, which is the meaning of the word “shall.” (a real pet peeve of mine). The phrase “in full force and effect” is a rhetorical flourish that is unnecessary because the agreement would not be in partial force and effect at any time. Next spelling out the word three and then including a number in parentheses is redundant at best and potentially dangerously confusing if both the word and the number are not both changed (it has happened and there is case law on that idea alone).

But the goal of the provision is to say that the NDA lasts for at least three years and early termination of the NDA is irrelevant to the duty to keep the confidential information secure.

So here is a much better expression of the ideas in the first sentence.

This Agreement begins on the Effective Date and lasts for three years.

Next, sentence two:

Nevertheless, the terms and conditions of this Agreement shall survive the expiration or termination of this Agreement and shall continue for a period of three (3) years.

I believe the purpose of this provision is to say the confidential period is three years even if the parties terminate the NDA before the three years is completed. If that is the case, it would’ve been more succinctly said as I noted above. And I would have skipped entirely the provision later stated about early termination since early termination has no effect on the length of the protected period.

Next, sentence three:

The Receiving party shall not disclose to any third party any Confidential Information received pursuant to this Agreement during the three (3) year Protection Period, in whole or in part.

The whole purpose of an NDA is to maintain the confidentiality of information received from the other party. That duty is described (a bit better than this provision) elsewhere in the contract. Therefore, including this sentence which restates the contractual duty is redundant. Because it is redundant and is not necessary to a description of the term of the NDA, it should be stricken from this paragraph.

Next, sentence four:

However, should the parties enter into one or more successor Agreement(s), such as a Teaming Agreement or a Subcontract, referencing this Non-Disclosure Agreement, the term of this Non-Disclosure Agreement will be the longer of the term in the Non-Disclosure Agreement or in the successor Agreement(s).

This sentence grates me so much, I almost don’t know where to begin. So starting at the beginning, the words “however, should” can simply be replaced with the conditional “if”. The independent clause giving examples of Teaming Agreement or Subcontract is more rhetorical flourish and not needed. There is no reason to include the parentheses around the letter S, just use the singular “successor agreement.” Write the conditional as a clear “if..then” statement. Finally, the subsequent agreement must reference the NDA and in my experience, they almost never do and almost always include its own confidentiality provisions. So it is better to express the more unlikely scenario, that NDA will continue if the subsequent agreement does not contain a substantially similar confidentiality provision.

So expressed a little more clearly:

If the parties enter into a successor agreement that does not include confidentiality terms substantially similar to this agreement, then this agreement will terminate on the latter of (i) three years or (ii) the term of the successor agreement.

Finally, sentence five:

Unless otherwise specified in the successor Agreement, all other terms of this Non-Disclosure Agreement remain unchanged.

This is another provision that has absolutely nothing to do with the term of the agreement. It should not be included. Assuming for a moment that a successor agreement is entered into, that successor agreement is the better vehicle for saying that the terms of the NDA are changed or unchanged (again assuming the successor agreement actually references and incorporates the NDA). The terms of the NDA as a standalone agreement would not be changed except by an agreed upon amendment. So this sentence five is unnecessary.

So here is my Term provision written together:

This Agreement begins on the Effective Date and lasts for three years. If the parties enter into a successor agreement that does not include confidentiality terms substantially similar to this agreement, then this agreement will terminate at the conclusion of (i) three years or (ii) the term of the successor agreement.

As a reminder, here were the goals of the provision:

  1. The NDA would be terminated by either or both of the parties. In which case the confidential information would be held in confidence for three years.
  2. The NDA would expire by its own terms in three years so the confidential information would be held in confidence for three years.
  3. The parties would enter into a subsequent agreement to provide services and if that subsequent agreement referenced the NDA the confidential information would be held in confidence for the length of three years or the termination of the subsequent agreement. The unstated assumption was that if the subsequent agreement contained similar confidentiality provisions, the NDA would be irrelevant.

As rewritten, the term of the NDA and the duty to securely maintain confidential information lasts for three years from the effective date, unless the parties enter into a subsequent agreement. The question of what to do if the parties terminate the NDA is, according to the terms of the original provision, irrelevant. The duty of confidentiality lasts for at least three years regardless of interim events. So all of the stuff in the middle of the original provision is wholly unnecessary.

The original provision comprised five sentences and 166 words. My version is two sentences and only 49 words. Just to be clear, simply because in this example I was able to eliminate 117 words does not necessarily mean that a clear contract provision may not contain a larger number of words. A contract provision should contain as many words as necessary, but no more than necessary, to accomplish its goals.

This case study illustrates a simple point in a somewhat circuitous fashion. When drafting a contract is important to think about the goal of each provision. Once the goal is understood, either independently or in furtherance of another goal, the language should be written to clearly state the goal.

The whole NDA needed a top to bottom rewrite. Simply making the changes to the Term provision would do nothing. But I just used this as an example of how contracts get over-written when not enough attention is paid to the goals of the contract and each provision.

The other thing about this whole exercise with my client that I found frustrating is the fact that the company who created the NDA did not want to listen to or accept suggestions that would have made the term provision clear. But, that is a common occurrence in my experience, and that is a story for another time.

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