The case study: confidentiality agreement
For ChatGPT's drafting of the agreement, we assumed the following case study: you, as a company, have come up with a good idea for an iPhone app. However, you lack the technical knowledge to develop such an application. You therefore start looking for a developer who can develop the iPhone app for you.
Before you share your ideas about the application with the developer, you want agreements to be made about the confidentiality of your idea. You are not legally literate, but you know that these kinds of agreements are usually arranged in a non-disclosure agreement. You therefore ask ChatGPT to draw up a non-disclosure agreement for you.
Entering the prompt in ChatGPT
ChatGPT can only perform tasks based on so-called prompts. A prompt is basically an instruction given to ChatGPT to perform the specific task.
In this case, you want ChatGPT to draft a non-disclosure agreement. You do not know exactly what provisions should be included in the agreement (after all, you are not legally literate). However, you do know from experience that it is important to include a penalty clause to ensure confidentiality.
You therefore formulate the following prompt which is then entered into ChatGPT:
"I intend to partner with a developer who will develop an iPhone application for my company. I want to agree that he will keep what I share with him confidential. If he violates his confidentiality then he must pay a fine. Can you draft a confidentiality agreement for me?"
Output by ChatGPT
Based on the prompt entered, ChatGPT provides the following response (from which, of course, no rights can be derived):
I am not a legal expert, but I can suggest a sample text of a Non-Disclosure Agreement (NDA). Be sure to consult qualified legal counsel before signing or implementing the agreement.
Confidentiality Agreement
Between:
[First Party's Name, Address, Company Name if any] ("the Discloser")
and
[Second Party's Name, Address, Company Name if any] ("the Receiver")
Together referred to as "Parties".
Considerations:
The Discloser wishes to share certain information with the Recipient for the purpose of [brief description of purpose, e.g., development of an iPhone application];
Both parties wish to protect the confidential information from unauthorized disclosure and use.
Agree:
- Definition of Confidential Information: Information in any form that is marked as confidential or that could reasonably be considered confidential under the circumstances of disclosure.
- Obligations of Recipient: The Recipient shall not disclose, copy, use or store the Confidential Information except as necessary for the purpose stated above.
- Penalty: If the Receiver breaches its obligations under this agreement, it shall pay a penalty to the Discloser in the amount of [amount in euros].
- Duration: This agreement is in effect for a period of [number of] months/years from the date of signing.
- Other provisions: (e.g. dispute resolution, applicable law, etc.)
- Exceptions: This Agreement does not apply to information that is already known to the Recipient, publicly available, or independently developed by the Recipient.
Signed on [date] at [place].
Name:
Position:
On behalf of the Discloser
Name:
Position:
On behalf of the Receiver
This is a simple example and may not cover all aspects that may be relevant to your particular situation. Therefore, consult with legal counsel to ensure you are fully protected.
Review of confidentiality agreement prepared by ChatGPT
That ChatGPT can create a non-disclosure agreement within seconds based on the prompt entered is impressive. The agreement is also quite useful as a first rough draft as far as we are concerned. Still, the agreement lacks some important provisions necessary for a good non-disclosure agreement. We discuss a few of them:
1. The definition of "Confidential Information.
For a good confidentiality agreement, it is important to clearly define the scope of confidentiality. This scope is often determined by defining what should be considered confidential information by the parties (and thus not to be shared with third parties).
The confidentiality agreement drafted by ChatGPT uses a vague and open-ended definition of confidential information. As a result, there may be ambiguity as to what exactly is meant by confidential information between parties and therefore what may and may not be shared.
Therefore, it is recommended that the term confidential information be defined in detail so that it is clear to the parties what it does and does not include.
2. Contractual penalty, damages or both?
To ensure confidentiality between parties, many confidentiality agreements contain a penalty clause. ChatGPT (as instructed by us) has also included a penalty clause in its confidentiality agreement. When drafting a penalty clause, wording is critical.
A good penalty clause always contains a caveat to claim damages in addition to the penalty. If this is not the case, the legal principle applies that the penalty replaces the right to damages. By not taking this into account in the wording of the clause, you (unknowingly) limit the possibilities of recourse in the event of a breach of confidentiality.
Also, as a discloser of confidential information, you want the recipient of this information to be liable not just for a one-time fine per violation (as the agreement now provides), but also for a fixed amount per day for as long as the violation continues. ChatGPT's proposed penalty clause does not take this into account.
3. Agree on duration and termination
When drafting confidentiality agreements, extra attention should be paid to the duration of the agreement and the possibility of termination. As a discloser of confidential information, it is important that the information remain secret in principle for as long as possible. Thus, the inclusion of a term is in many cases not directly in the interest of the discloser.
As for the termination an sich, it is important to agree on the possibility of interim termination (through dissolution, for example). In many cases (especially with reciprocal confidentiality) you do not want the confidentiality agreement to be terminated prematurely by one of the parties. This in fact creates a risk because secrecy is then no longer guaranteed.
It is therefore advisable to include, for example, that the agreement can only be terminated or dissolved by mutual consent or only by the party providing the confidential information. In our opinion, the agreement drafted by ChatGPT also falls short on this aspect.
4. Agreements on intellectual property rights
In the case of secrecy of ideas and know-how, it is important that a secrecy agreement also contain a provision on intellectual property rights (such as copyrights). This is because, as the discloser of an idea, you want to properly document that the non-disclosure agreement does not under any circumstances extend to transferring your idea to the contracting party.
The agreement drafted by ChatGPT completely ignores this point, resulting in potentially nasty discussions. Conversely, you want to agree with the developer precisely that any intellectual property rights that arise from the development of your idea are transferred directly and in no way belong to the developer in ownership.
Should the cooperation break down, it is also advisable to agree in advance that the developer will return to you all information he has received (or data he has developed based on it) or destroy it immediately upon request.
Future: have agreement drafted by ChatGPT?
The foregoing shows that the confidentiality agreement drafted by ChatGPT is quite useful as a first draft. Currently, however, the output is not of such a level that such an agreement can actually serve the intended purpose. It is therefore always advisable to engage a specialist so that your interests are optimally represented.
When using ChatGPT, also be aware that all data entered is processed and analyzed by ChatGPT. Especially with topics that require confidentiality, extra care should be taken with ChatGPT.
Want to make sure your ideas, know-how or important business information is properly protected? Then contact one of our commercial contracts specialists using the form below.
