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What Is A Non Circumvention Agreement
A non-circumvention agreement is a type of restrictive contract widely used in business where its primary purpose is to guarantee that a contracting party does not act or behave in a certain way.
The agreement is a legally binding written document between parties to protect at least one or both parties involved.
This type of contract is commonly used when two businesses work in the same industry or in joint ventures where a business partner does not want to have the other party circumvent it.
In essence, non-circumvention agreements help shield proprietary information, contact lists, business relationships, and trading relationships.
In English, “circumvention” means “to manage to get around by ingenuity or stratagem”.
In essence, a “non-circumvention” agreement is a type of contract prohibiting a contracting party to manage to get around the contracting party in such a way that the contracting party loses the benefit of a business transaction.
When To Use A Non-Circumvention Agreement
Non-circumvention agreements are usually used to protect business deals.
Here are a few examples of when non-circumvention agreements are used.
Brokers
Brokers and agents commonly use a non-circumvention agreement.
Since brokers are intermediaries to promote business deals for the benefit of their clients, they will have their clients sign non-circumvention agreements to prevent a client to directly deal with an introduced business contact.
Without it, the broker will be left defenseless to future circumvention by his or her client.
In these transactions, it’s common for the broker to request their business client to sign a non-circumvention agreement at the beginning of their relationship to compensate for all business opportunities the agent presents to the client.
Joint Ventures
When different businesses enter into a joint venture, there is a higher risk of circumvention, particularly if they are in the same industry.
That’s why a non-circumvention agreement is usually required prior to the commencement of the joint venture activities.
Each party has a different role in the joint venture and one might be a little more dispensable moving forward.
For instance, a party can provide nonessential skills or is only in charge of introducing the other parties.
In these cases, the exposed party can request to create a non-circumvention contract to notify about limited actions and the penalties for breaches.
What To Include In A Non-Circumvent Agreement
Depending on the nature of your transaction, you should consider drafting a non-circumvention agreement by including protective provisions that are suitable in the circumstances.
Although every contract is different, a well-crafted non-circumvention agreement can include the following.
Parties Involved
The agreement should properly list the individuals or entities intending to enter into the agreement.
If a person is signing on behalf of a legal entity, it’s important that you validate the person’s authority to legally bind that entity.
Description of Agreement
The description of the agreement includes all the information of the non-circumvention contract, including the timeframe, the possibility of automatic renewal, and mechanisms of managing term modifications.
Non-Circumvention Obligation
A non-circumvention obligation should specifically outline what are the parties specifically agreeing on.
For example, is a party looking to share business contacts and they do not want the other party to circumvent them to directly engage those contacts.
Confidentiality
The agreement must include a confidentiality provision where the parties define what constitutes confidential information and how to protect it.
A confidentiality provision is typically an essential component of most commercial contracts.
Compensation
If a party is agreeing to non-circumvention terms in exchange for some form of compensation, it’s important that the exact compensation be outlined in the agreement.
Penalties
Your agreement should include the penalties or consequences when a party violates its contractual obligations.
Add a section to define the penalties for breaching the terms of the non-circumvent agreement.
For example, you can include liquidated damages or other types of contractual remedies.
Choice of Law
The choice of law is an important element of the agreement as the parties select the law they wish to govern the contract.
Every jurisdiction has different laws relating to non-circumvention obligations, so choosing the law of a jurisdiction you’re familiar with could be an advantage.
Signature Block
All parties involved must sign the agreement.
In case of modifications, these should be made in writing and signed by all members.
This part of the contract should stop restricted parties from ingeniously avoiding breaches. You must broadly outline the term “affiliates” to ensure all successors, assigns, subsidiaries, parent companies, and more are included.
Optional Clauses
It’s possible to include other clauses in non-circumvention agreements, such as:
- Non-Competition clause
- Non-solicitation clause
Pros and Cons of Non-Circumvention Agreements
Non-circumvention agreements are excellent to protect your client list, business contacts, and other proprietary information when working with business partners.
Let’s look at the main advantages and disadvantages of non-circumvention agreements.
Advantages
These agreements guarantee that personal or sensitive information about the company cannot be disclosed or used.
Since non-circumvention agreements are legally binding, those who breach the contracts can face legal consequences such as breach of contract lawsuits, injunctive relief claims, and claims for compensatory damages.
This type of contract ensures that each party participates responsibly in the business transaction without misusing a party’s business relationships or contacts.
Disadvantages
One disadvantage of entering into a non-circumvention agreement is that the prohibited party can be restricted for a long time thereby impeding future business opportunities.
Another drawback is that even though these agreements limit the ability of parties to disclose sensitive information, including trade secrets, it’s challenging to enforce such agreements as the evidence may be complicated to make.
Non-circumvention agreements are usually difficult to negotiate and agree upon.
Typically, the business partners will need to hire qualified attorneys to properly negotiate and draft the non-circumvention agreement.
Non-Circumvention Agreement Example
Let’s suppose that a contracting party provides business intelligence, client contact information, and other sensitive business data to another party.
By having a non-circumvention agreement in place, the party giving the client list and business intelligence data will have the assurance that the receiving party will not use the information to circumvent it in the transaction.
If a party breaches the terms of the agreement, the non-breaching party will have the right to claim damages and file legal action against the breaching party.
Non-Circumvention Agreement FAQ
Is A Non-Circumvention Agreement Legally Binding?
Yes, it is.
Non-circumvention agreements are legally binding contracts.
This document is specifically created to ensure that a party circumventing another party can be legally held liable.
The parties will typically define the recourses and remedies for violating the agreement.
What Happens if a Non-Circumvention Agreement is Breached?
The most common remedies for a limited party breaking the contract are monetary compensation, injunctive relief, penalties, or any other proper action under the law.
In some cases, the parties can also include liquidated damages in their contract by ensuring the clause complies with the local law requirements.
What Happens When You Sign a Non-Circumvention Agreement?
The primary purpose of a non-circumvention agreement is to stop one or more parties in a business transaction from “circumventing” or “bypassing” the contracting party and dealing directly with third parties.
Particularly, the contract guarantees that the sensitive information, including trade secrets, customer lists, business contact information, and intellectual property that a party reveals to another party during business deals, will not be shared, used, or disclosed to a third party.
Usually, these agreements are used when a party starts working with another party for the first time, or there is not enough trust between entities.
When you sign a non-circumvention agreement, the restricted party must abstain from conspiring with others to circumvent the protected party in their business deals.
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Takeaways
So there you have it folks!
Non circumvention agreements are widely used to protect parties participating in business deals.
They’re created to prevent a party from bypassing another party in the context of a business dealing or transaction.
For example, a real estate broker will sign a non-circumvention agreement with his or her clients to prevent the client from engaging with an introduced prospect without paying the broker’s commission.
Non circumvention agreements are prevalent in business transactions, where one entity might introduce another party to its contacts, vendors, or customers.
If you need help drafting a non-circumvention agreement, consult a qualified business attorney.
Now that you know what is a non-circumvention agreement and how it works, good luck with your transaction!
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