The Holy Trinity of MoU, NDA and Employment Agreement Explained [Legal Resources for Startups]

In the sea of legal terminology, three words (actually two are acronyms) stand out – NDA(s), MoU(s) and Employment Agreement(s).

So in this article, we are going to briefly discuss what these three are, how they are different, and how you should not confuse one for the other. Let’s start with the MoU.

MoU

An MoU essentially, as the name suggests, is an expression of understanding reached between parties.

It is not an agreement, although people confuse the two all the time. In fact, this mistake is so common that even Courts have begun to treat MoUs and Agreements alike!

But the fact is that they are not.

When two parties begin a relationship, they often enter into an MoU first to express their desire to work together. Here, they talk about what the goals of their relationship are, what role each party will play and broadly plan the road ahead.

Strictly speaking, an MoU does not create a binding contract, and does not compel the parties to enter into a relationship. Parties to an MoU can walk away from the MoU if they feel that it is not meeting their requirements, at any time. Sometimes, an MoU can even be used during the probation period, where the parties judge what it is like to work together.

NDA

As the name suggests, an NDA is to protect sensitive information. It is a promise not to disclose any sensitive information to a third party.

An NDA is normally entered into before parties enter into a formal agreement, or just after they enter into a formal agreement.

Unlike an MoU, an NDA is a binding contract between the parties, with consequences if you do not comply.

The case of Mr. Sharma and Mr. Sinha

Why do parties enter into an NDA? Well, the reasons are many. Let us take an illustration:

Mr. Sharma runs a garment manufacturing company. He employs Mr. Sinha as the managing director to run the business for him. Now, Mr. Sharma, who looks like the typical Indian businessman, has a few tricks up his sleeve. He actually has an optimized manufacturing process and a very efficient way of handling customer requests.

He naturally does not want the sharp and clever Mr. Sinha to take away all his valuable processes and go next door to the shop of Mr. Varma, Mr. Sharma’s arch rival for decades.

So he makes Mr. Sinha promise that whatever information and knowledge he earns from his employment will not be shared with anyone. That information will be contained in a Non DIsclosure Agreement. 

Normally, a “Non-Compete” clause is also included to guard against Mr. Varma poaching Mr. Sinha

In the NDA, Mr. Sharma will add a clause called the “Non Compete” clause. The Non Compete clause will say that Mr. Sinha cannot work with Mr. Varma for a certain period of time (say 2-3 years) after he has worked with Mr. Sharma.

Mr. Sinha, once he signs the Non Compete clause, cannot begin to work with Mr. Varma. If he does, Mr. Sharma can approach a Court of law and get an injunction against Mr. Sinha and prevent him from making the jump. 

Employment Agreement

Finally coming to the third creature in this equation, the Employment Agreement. 

An employment agreement is almost never a stand alone agreement. It is almost always prepared in conjunction with the other two agreements. 

Let us take the example of Mr. Sharma and Mr. Sinha once again. They have already entered into an NDA, and Mr. Sharma has decided that he wants to hire Mr. Sinha. Mr. Sharma will now enter into an employment contract with Mr. Sinha. 

The employment contract will contain the terms of the employment. It will contain details like the salary, bonus, period of employment and importantly, the notice period in case the parties want to terminate the agreement. 

So, can you summarize this for me?

We would like you to have two takeaways from this. First, an MoU is different from a contract. It is merely an expression of understanding reached between the parties before they enter into a formal agreement. 

Secondly, for any business, remember that while entering into a relationship, you should enter into specific agreements for specific purposes. Many businesses enter into one catch-all agreement. While one hopes that you never face any complications in your relationship, if you do, having tailor-made agreements for different purposes will help greatly. 

» More Legal/Law Related Resources For Startups.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more). Sourced from the vakilsearch.com legal knowledge base.]

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