What is a Non-Circumvention Agreement?
A non-circumvention agreement is a legally binding contract between two parties stipulating that the recipient shall not bypass the disclosing party and directly or indirectly engage in business with any third party involved in a transaction represented by the discloser. The primary purpose of a non-circumvention agreement is to create a legally enforceable obligation on the recipient not to circumvent the discloser and deal directly with the other party or parties involved in the transaction relating to which the non-circumvention agreement is disclosed. The non-circumvention elements of such an agreement range from a simple prohibition on direct contact to a detailed nondisclosure of confidential information and intellectual property. The non-circumvention agreement may also include the right of the recipient to market or promote the subject matter of the transaction and the right of the discloser to verify the identity of such third parties prior to any contact , so as to prevent the third party from directly dealing with the recipient.
Essential Elements of a Non-Circumvention Agreement
A non-circumvention agreement generally includes all of the following:
Parties. It is important to define the parties to the non-circumvention agreement as specifically as possible—for example, listing specific names and entities. The parties will also responsible for their respective principals, affiliates, employees, agents, clients and partners.
Purpose. The non-circumvention agreement should clearly spell out its purpose and intent.
Confidential Information. Like a confidentiality agreement, the non-circumvention agreement should include a definition of what constitutes "confidential information." Confidential information can include intellectual property, technology, customer lists, customer and supplier contract information, trade secrets, etc.
Obligation. Generally, the agreement will require the receiving party to use its best efforts to maintain the confidentiality of the confidential information, and not use it for purposes other than those contemplated by the agreement. It will often also require the receiving party to notify the disclosing party of any unauthorized uses or breaches of confidentiality.
Duration. Non-circumvention obligations have a defined period of time—they are usually time limited.
Advantages of a Non-Circumvention Agreement
One of the biggest advantages of non-circumvention agreements is that they give confidence and security thereby allowing the parties to concentrate on getting down to business. The parties do not have to worry about whether one of them will use the information they provide for illicit purposes and to cut out the other.
Non-circumvention agreements also provide a means of recourse if a party thinks the other has improperly used some confidential information. One of the first things lawyers will ask as they consider legal action, or any kind of negotiations, is whether there is a non-circumvention agreement in place. If such an agreement exists and has been breached, the lawyer will want to consider the options for asserting claims thereunder.
In addition to protecting business interests, non-circumvention agreements help build trust between the parties and set the foundation for an ongoing business relationship. Parties will feel more confident trading information and looking out for each other’s mutual interest because they know the relationship is governed by an obligation of trust and confidence.
Common Use Cases
Although non-circumvention agreements are commonly used in international business transactions, they can also be applied to any situation where more than one party is involved. This could include a joint venture, for example, in which case you want the other parties to agree not to bypass you or communicate directly with your business contacts. In a merger or acquisition it could be used, depending on the circumstances. The key ingredient is that you must ensure that a third party does not gain knowledge of your business relationships from someone who might otherwise be in a position to do so, and use that information to replace you in the transaction. Without some sort of restriction, your potential business customers or contacts could be contacted by your competition and offered better terms, thus cutting you out of the deal.
Legally Binding
Legal Enforceability: Non-Circumvention Agreements must be legally enforceable. A number of factors impact the enforceability of non-circumvention agreements, as discussed below.
Jurisdiction: Jurisdictions impose varying standards for what constitutes an enforceable non-circumvention agreement and whether a party can enforce or defend against a breach of contract claim. For example, non-Nevada jurisdictions require that to be legally enforceable, a non-circumventing party must have delivered value. Nevada enacted NRS 598A to establish a baseline standard for non-circumvention agreements entered into by members of the Nevada Limited Liability Company (LLC) network and the state’s industries. Essentially, the statute prohibits members of the LLC network from knowingly and willfully circumventing the LLC member’s introduction of them to a third party . LLC members who violate this statute will be liable to the member who introduced them to the third party for actual damages, including lawyers’ fees and punitive damages. Moreover, the statute allows a member of the LLC network to file a civil action in Nevada state court. The statute requires the court to grant injunctive relief to the member who has been circumvented by the LLC member.
Anticipated Legal Proceedings: If the parties to a non-circumvention agreement anticipate legal proceedings, the agreement may benefit from the inclusion of expedited alternative dispute resolution provisions. Expedited alternative dispute resolution relies on: To carry out these steps, the parties are encouraged to create a flowchart that will simplify the expedited alternative dispute resolution process.
How to Draft an Effective Agreement
Drafting non-circumvention agreements entails a number of issues about which the parties must be crystal clear. Some of such issues are:
-the parties (signers) to the agreement: it is typically not enough for a company to be represented on the agreement by one person who signs on behalf of the company, because, if the company’s employee has previously been introduced to the business opportunities at issue, the agreement is unlikely to be enforceable against the company, whose employee was not prohibited from circumventing the agreement in the first place; to create a binding agreement, it is important to name and specify all of the parties who were originally introduced to the business opportunities at issue;
-what business opportunities where you introduced to – specificity is key here;
-what form of communication was used for the introduction and for subsequent contacts;
-who controlled such contacts;
-who were the other parties to the communications[1];
-when were they sent and received;
-and from where and to where did such communications originate and end;
-what materials were provided;
-what was the method of delivery;
-who delivered such materials and when;
-what opportunities where disclosed through direct parties (face-to-face);
-what opportunities were disclosed in publicly available materials (e.g. a website);
-what opportunities were disclosed through a third party;
-what was the medium of disclosure;
-who disclosed the opportunities;
-when were such opportunities disclosed;
-and what was done with the confidential information in question;
-manner of contact;
-nature of confidentiality;
-modification provisions;
-governing law;
-jurisdiction;
-arbitration;
-severability;
-execution in multiple counterparts;
-and non-waiver provisions.
Being comprehensive in these relatively easy drafting tasks minimizes the likelihood of a dispute arising, or at least increases the likelihood that an agreement will be enforceable in a forum competent to do so.
There are familiar factors that the courts will take into consideration in evaluating whether an alleged non-circumvention agreement is enforceable:
-the nature of the relationship between the parties;
-the extent to which the parties are sophisticated;
-the industry and region involved;
-the importance of the confidentiality of the information disclosed;
-the reasonableness of the restrictions;
-the reasonableness of the restrictions in light of the entire agreement, including the duration, territory, and the nature of the business;
-the nature of the information disclosed;
-the amount or type of harm involved;
-the reasonableness of the means to protect the confidential or proprietary information;
-the reasonableness of the need for protection of the disclosed information;
-the effectiveness of the efforts taken to maintain the secrecy of the information;
-the difficulties of determining the amount of damages that could result from any breach of the agreements; and
-industry standards.
A non-circumvention agreement is not a substitute for a confidentiality agreement. Many courts have indicated that non-circumvention agreements, or non-circumvention and confidentiality agreements, will not be enforced without a specific confidentiality provision so long as the entire deal between the parties is not contained therein.
Provision can be made in a non-circumvention agreement for the non-circumvention agreement to be followed by a more formal confidentiality agreement. Such provision is probably necessary if the parties to the non-circumvention agreement want to preserve confidential aspects of their agreement beyond the length of time required for its performance, e.g., two years.
Non-Circumvention Versus Non-Disclosure
When a non-circumvent agreement is prepared it is often times prepared at the same time as a non-disclosure agreement. However these are two different agreements with two different purposes.
A non-circumvent agreement between parties ensures that one party won’t interfere with an existing business relationship with a third party without compensation or without permission. A non-disclosure agreement is used to protect your proprietary information on a temporary basis for a certain number of days.
Depending on your state law and your laws of preference and any applicable issues of equity, you may be able to create obligations on parties pursuant to a non-circumvent agreement that may last indefinitely. Parties that have a signed non-disclosure agreement will often disclose their proprietary information to third parties. Those third parties may then use their proprietary information without compensation or grant compensatory use in a way that can violate the original agreement. A non-circumvent agreement is complimentary to a non-disclosure agreement , it provides the original party with greater power over the terms of the business relationship.
If either party violates the non-circumvent agreement they may be liable to the disclosing party for damages that arise from the breach. This may include compensatory damages, consequential damages, and damages that could possibly still be valued in equity.
If either party violates an agreement with a non-disclosure provision it has violated its confidentiality obligations. Furthermore the scope of a non-disclosure agreement is much more limited than the scope of a non-circumvent agreement. For example the non-disclosure agreement may only apply for three years and may have limited applicability.