The Confidentiality Clause In The Contract: Some Remarkable Constraints

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The Confidentiality Clause In The Contract: Some Remarkable Constraints

The Confidentiality clause in contracts sometimes referred to as the Non-disclosure clause, is a clause providing that if either party receives several certain information from the other party through a contractual relation, such party shall be responsible for keeping such information confidential. Nowadays, information and data have had commercial value more than ever and gained a significant competitive advantage. Therefore, confidentiality has been gradually becoming a basic need for not only commercial activities but also civil transactions. However, the Confidentiality clause in contracts has its own limitation of which not many enterprises are well aware. 

Being restricted as an ordinary clause in a contract

Similar to any other contractual clauses, the Confidentiality clause shall also be restricted in terms of independence. Currently, the clause on the arbitration agreement is the only one that is legally recognized for its independence from the contract. Specifically, unless the arbitration agreement is declared invalid, the invalidity or the impossibility of performing the contract will not invalidate the arbitration clause. [1] In theory, except for the clause on the arbitration agreement mentioned above, where the contract is declared invalid entirely, it shall invalidate all clauses in the contract as well. As a result, the parties shall not be bound by any rights and obligations in the contract (such as confidentiality obligation) but only be bound by rights and obligations arising from the invalidity of the contract (such as compensation for damages) [2] In other words, the recipient shall not be obligated to treat any information received during the performance of the contract as confidential. Therefore, this is a high potential risk for enterprises if the disclosed information is valuable.

In practice, the Confidentiality clauses are often agreed upon and committed by the parties to extend their effectiveness beyond the termination or cancellation of the contract (surviving clauses). However, the effectiveness of surviving clauses might not be recognized by the law. Currently, Vietnamese law only recognizes the surviving validity of several clauses, such as contractual penalties, compensations, and dispute resolution in the case of the termination of the contract. The Commercial Law 2005 is the only one that recognizes the surviving validity of the clauses agreed upon by the parties, but only in the case of cancellation. [3] Therefore, as the law has not recognized the surviving validity of the Confidentiality clause, it is a limitation for enterprises in protecting their information when involved in contractual relations.

There is a way to handle the consequences and reduce risks for the disclosing party (information) when disputes occur in the above cases is to cite a new point of the Civil Code 2015 on the obligation to keep information confidential in the process of concluding a contract. [4] Specifically, the receiving party is responsible for keeping any “confidential information” confidential which has been provided before the parties enter into the contract (i.e., offer, negotiation stage). In other words, the obligation to keep such information confidential which has been provided prior to the conclusion date of the contract shall not be subject to the validity of the contract. However, it should be noted that the Civil Code does not provide a definition of confidential information. And, not all circumstances that the Civil Code stipulates a confidentiality obligation for information provided during the contract implementation stage.

Peculiar restrictions to the Confidentiality clause

Unlike other contractual clauses, a peculiar restriction of the Confidentiality clause is the limitation on the practical application of sanctions. In order to apply sanctions for violations, the disclosing party must prove the obligor’s breach of the confidentiality obligation. In the context that the exchange of information via cyberspace has become more accessible, it is almost impossible for enterprises to prove the obligor’s breach of the confidentiality clause.

Even if the disclosing party can prove the obligor’s breach of the confidentiality obligation, the application sanctions, such as contractual penalties for violations or compensations for damage, are still challenging. The reasons behind this challenge are (i) it is hard to determine the actual damage or the value of the breached obligation to determine the amount of the contractual penalty; and (ii) the Confidentiality clause in the contract is usually simplified by the parties, leading to the lack of sanctions or remedy in case one party violates the Confidentiality clause. Due to these objective and subjective reasons, the enforcement of the Confidentiality clause may be less powerful than other contractual clauses, thereby creating many potential risks for enterprises when one party to the contract violates the confidentiality obligation.

A standalone non-disclosure agreement is necessary!

For the above reasons, enterprises should consider separating the Confidentiality clause from the contract. Specifically, the parties can sign a standalone non-disclosure agreement (NDA) before negotiating and implementing the contract. A standalone confidentiality agreement shall help an enterprise minimize the risk of the independence and survival of the Confidentiality clause as mentioned above in most cases, even in the case that the contract is invalid. Because, in this case, the validity of the confidentiality obligations of the receiving party is no longer bound by the invalidated contract, but by the non-disclosure agreement signed between the parties independently. Even in some cases, the non-disclosure agreement and the commercial contract can be governed by two different laws. In most cases, non-disclosure agreements apply the laws of the country in which the disclosing party is located. Thus, it facilitates the enforcement and dispute resolution for the disclosing party without affecting the other commercial contract.

[1] Article 19 of Law on Commercial Arbitration 2010.

[2] Do Van Dai, Scientific commentary on new points of the  Civil Code 2015, Hong Duc Publisher, page 183.

[3] Clause 1, Article 314 of Law on Commercial 2005.

[4] Clause 2, Article 387 of Law on Civil Code 2015.