NDAs Drafted by a Lawyer

What Are Non-Disclosure Agreements?

An NDA – also called a confidentiality agreement or secrecy agreement – is commonly used between businesses to protect sensitive information during a collaboration. The agreement covers both the data you deliberately share with a partner and information they may pick up incidentally. Actually protecting the data matters: the consequences of a breach can include regulatory fines if one of the parties is publicly listed and insider trading rules apply.

For international clients: NDAs are familiar documents everywhere, but German-law NDAs have some features worth knowing. First, the penalty clause (Vertragsstrafe) functions differently from US liquidated damages. Second, arbitration clauses – a common NDA feature – work differently under German and US law, in particular regarding discovery. Third, the Trade Secrets Act (GeschGehG), implementing the EU Trade Secrets Directive, provides a statutory baseline that applies regardless of what the NDA says.

The Contractual Penalty Clause

The counterparty’s legal team insists on an NDA with a penalty clause? Good lawyers. An NDA is fundamentally a promise to refrain from something. To have legal teeth, that promise needs a consequence for breach. Under German case law on injunctive relief, a penalty clause is what demonstrates the seriousness of the obligation.

Depending on how seriously the counterparty takes the matter, you can try to negotiate the penalty out. But what remains is a declaration of intent without consequence – “keep it between us” – because proving actual damages from a confidentiality breach is difficult.

What “Reasonable Discretion” Means

Non-lawyers often take issue with standard German penalty language like:

a contractual penalty to be determined by the party entitled to injunctive relief at its reasonable discretion and subject to review by the competent court

…and read it as “do whatever they want.” They worry the aggrieved party can demand a million and the other side must pay. That is not what it means. “Reasonable discretion” means: taking into account all circumstances – the extent of the damage, the degree of fault, any contributory fault, the age and sensitivity of the data, the financial capacity of the party in breach – the aggrieved party sets a proportionate figure that roughly captures the problem. That is not easy even for them.

The breaching party can have that decision reviewed by a court. Seven-figure penalties against companies without a legal department are essentially unheard of.

The Usual Outcome: a Compromise

These disagreements are usually resolved by compromise, because both sides need each other. A common solution is to cap the penalty. That actually benefits the aggrieved party too: working through all the proportionality factors is anything but a simple exercise, and a cap makes it easier to assess any given breach. A lawyer familiar with contract law can help find the right balance.

Why an Arbitration Clause?

Arbitration clauses are common in NDAs because ordinary court proceedings are public. If the whole point is to protect business secrets – worth protecting with a penalty clause – it makes little sense to litigate them in open court with a published judgment. Hence the arbitration clause.

Note: Be cautious about arbitration clauses where US law applies or the counterparty is based in the US. Research the discovery process (Entdeckungsverfahren) before agreeing.

Contact: