Can You Keep a Secret?

Author: Tom Muller

Most real estate deals begin with a letter of intent defining the principal terms of the deal, the only enforceable paragraph of which is an agreement to keep the transaction strictly confidential. Prior to the start of due diligence for a real estate acquisition, the seller usually requires the buyer to agree to keep anything learned about the property confidential. Are these confidentiality agreements really enforceable?

As a technical legal matter, they are generally enforceable. However as a practical matter, it is hard to imagine a situation in which one could satisfyingly enforce them.

For one thing, such agreements usually permit disclosures required by securities or other laws, disclosures necessary to enforce the agreement and disclosures of materials that can be discovered in some other way.

Then there is the fact that the parties signing the agreements are corporations or LLCs, legal fictions that can't do anything except through their officers, directors, employees, consultants, lawyers, accountants, brokers, etc. But of course, none of these dozens of people who receive the confidential information actually sign the confidentiality agreement, so the agreement typically says that the parties shall "require" those people to conform (which may or may not happen). In any event, the requirement for them to conform doesn't make the confidentiality agreement enforceable against those individuals.

Often we see these agreements breached shortly after they're executed and signed, rarely out of malice and almost always because the renegade discloser either didn't know about the confidentiality agreement, forgot about it, or didn't think it applied to the fact that a deal was under way.

The more thorough versions of these agreements also require the buyer to return all confidential materials if the deal does not close. When due diligence information was transmitted on paper, this made some sense. But in this age of electronic war rooms and backed-up computer drives, it would be remarkably difficult for a buyer to reliably destroy all copies of due diligence materials downloaded to its computer systems.

For these reasons, actual attempts to enforce these agreements in court are remarkably rare. It is difficult to prove that a party to the agreement actually breached it, and once the information is disclosed, it's hard to see what the judge is supposed to do about it. While damages normally compensate for breach of a contract, most disclosures of confidential information don't cause quantifiable money damages, no matter how much they annoy the injured party.

For information that truly must be kept confidential, the best approach, learned by most in kindergarten, is to strictly limit the number of people who get the information. Limiting diligence teams to narrowly defined areas, masking parties' identities by code names, limiting the financial terms to a few key people, creating read-only war rooms and getting the deal done quickly are all ways to minimize unwanted disclosures.

At the end of the day though, confidentiality agreements should be thought of as memorializing the parties' unenforceable good faith agreement to actually keep the secret, again underscoring the importance of choosing trustworthy people with whom to do business.