So-called Letters of Intent are often concluded in the course of contract negotiations. These also included non-disclosure agreements. The latter can of course also be agreed separately. In my opinion, however, a non-disclosure agreement is not sufficient in numerous instances. In addition, a non-use agreement is also required.
Letter of Intent
The term «Letter of Intent» (short «LoI») is not defined anywhere in Swiss law. In legal practice, a LoI is usually concluded with a view to the conclusion of a main contract. A.i., the conditions for the contract negotiations will be regulated, in particular who bears the costs incurred, nota bene if the main contract is not concluded. Typically, a LoI does not oblige to conclude the main contract (!), but regulates, a.i., the consequences of the failure to conclude the main contract. A simple example is the case in which prospective buyers of a house, which still requires extensive preparatory work for the seller or the estate agent, undertake to pay a certain amount for the corresponding expenses and a new tender if the purchase is not concluded (legally also called «forfeit money»).
Non-Disclosure Agreement
A Non-Disclosure Agreement (short «NDA») is a confidentiality agreement. The agreement contains the promise not to disclose information to third parties, that is not known to them. Thus, part of an NDA can only be what is not already known to third parties. In addition, it is important that a confidentiality agreement is combined with a contractual penalty (CO 160 ff.), which must also be high enough to «motivate» the obligated party to comply with it. A disproportionately high contractual penalty can, however, be reduced to an acceptable level by the judge in a dispute (CO 163). An NDA without penalty is like a tiger without teeth. The contractual penalty must not be confused with a liquidated damages clause: it is a means of pressure and is therefore due upon the mere breach of the confidentiality obligation – irrespective of whether any damage has occurred or can be proven (CO 161 para. 1). This is precisely what makes it valuable in an NDA, since the damage caused by a breach of confidentiality can hardly ever be quantified. Note, however, that this reasoning only works under Swiss (or another civil law) governing law – common law jurisdictions do not enforce penalty clauses (→ see the excursus below).
Non-Use Agreement
Especially regarding innovations, practice shows that an NDA is not enough. In addition, a Non-Use Agreement (short «NUA») is required, which not only prohibits the obligated party from disclosing secret information to third parties, but also from using this information itself and unauthorised by the owner, or from supporting third parties in their use. This agreement must also be combined with a contractual penalty (see above).
Excursus: Contractual penalty vs. liquidated damages
The two clauses must not be confused. Under Swiss law, the contractual penalty (CO 160 et seq.) is a means of pressure and is due upon breach, even if no damage has occurred (CO 161 para. 1); excessive penalties are reduced by the court (CO 163 para. 3). A liquidated damages clause merely fixes the amount of compensation in advance: damage must have occurred in principle, only its exact amount need not be proven, and in case of doubt the sum caps liability – although this cap, like any limitation of liability, cannot be invoked in cases of unlawful intent or gross negligence (CO 100 para. 1 – s. Chapter 07.09 Exclusion of liability). The contractual penalty, by contrast, does not limit liability but increases it – damage exceeding the penalty remains recoverable where the debtor is at fault (CO 161 para. 2) – which is why the restriction of CO 100 does not apply to it. Both clauses are valid under Swiss law; decisive is the purpose of the clause, not its label (BGE 144 III 327 consid. 5.2). The common law takes the opposite approach: penalty clauses are unenforceable, only liquidated damages protecting a legitimate interest in a proportionate manner are valid (Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC (UK Supreme Court) 67; for the US: UCC § 2-718(1)). Drafting tip: If the contract is governed by English or US law, the Swiss-style contractual penalty does not work. Courts there do not enforce punishments, only genuine compensation. The clause must therefore be built differently: when concluding the contract, the parties make a realistic estimate of the likely damage in case of breach and agree on that amount as liquidated damages. The better the estimate is reasoned and documented, the more likely the clause will hold up in court.