What is a Non-Circumvention Agreement?
A non-circumvention agreement is a legally binding contract which prohibits one party from circumventing another. Generally, such an agreement is a promise whereby one party agrees not to bypass the other in a transaction or deal with a third-party in relation to certain information or a business venture .
The principle purpose of a non-circumvention agreement is to protect business relationships and confidential dealings from competitors. In a business context, this type of agreement can apply, for example, in the import/export sector, where one party provides third-party associated information to the importing party, but does not want the third party to know or deal directly with the first party.
Essential Elements of a Non-Circumvention Agreement
A non-circumvention agreement should always be in writing. It may be prudent to sign a confidentiality agreement prior to disclosing proprietary information, trade secrets or other valuable client information. This is especially important if external parties are involved. If any independent contractors, agents, sales representatives, or other individuals or entities will be privy to your confidential information, it is critical to have them sign a non-circumvention agreement and non-disclosure agreement. A non-disclosure agreement is a contract to keep certain information secret, so it is the best tool for preventing the unauthorized use or disclosure of sensitive business information. The covenants of non-disclosure should identify what information and material must remain confidential (the "confidential information") and all extenuating factors. It should also detail obligations, the permitted use of confidential information, identify who is bound, and state confidentiality terms. Any time confidential information is used, disclosed, or shared; it must bear a confidentiality notice, to put the recipient on notice that the material is confidential. In addition, a non-circumvention agreement should limit how employees can use confidential information. Specifically, an employee should not disclose confidential information to others, whether during their employment or subsequent to the employment. A non-circumvention and system protection agreement should contain the following:
- List all parties involved.
- Include a description of the purpose of the NCNDA.
- Define the term of the agreement.
- Define the confidential information to be protected.
- Define what actions may be considered breach of agreement.
- List rights to both parties.
- Detail remedies for breach of agreement.
- List the governing law.
- Include binding arbitration clause for disputes.
- Include ailment of attorneys’ fees provisions.
- Include integration clause.
Advantages of Implementing a Non-Circumvention Agreement
For those who want to work with others yet remain cooperative and fair, a non-circumvention agreement serves as a useful safeguard. Circumventing the partnership or plan between two parties not only raises legal issues, but it also has the potential to ruin any future business transactions. This is why it is best for individuals and companies who wish to continue doing business to work together.
In many cases, individuals and companies change personnel or outsource work regularly. Those companies that include non-disclosure agreements in their policies typically choose to take this step and draft enforceable contracts. If two parties are working to benefit one another instead of undermining, a non-circumvention contract is useful. A contract will leave no doubt as to what the parties agree and how they plan to move forward. It is a proactive step of prevention to ensure each party will receive due benefit and a positive experience.
When a non-disclosure agreement has been breached, a lawsuit is often necessary to compensate one party who has lost out or suffered damages. Non-circumvention agreements can ensure matters such as this are avoided entirely.
Examples of a Non-Circumvention Agreement: What to Consider
A strong sample non-circumvention agreement will have several home run qualities when it comes to survivor clauses, governing law, and arbitration. In particular, the effect of a survivor clause in a non-circumvention agreement is that, thereafter, the obligation is not so determined and both parties are still bound. An example of an effective survivor clause in an agreement includes the following: "14.3 The terms of this Covenant shall (a) continue in effect beyond the termination or expiration of this Agreement and (b) survive such termination or expiration and any other agreement between the Parties even if such other agreement shall be terminated or expired." Some jurisdictions require a written non-circumvention agreement as a prerequisite to certain agent, commission and finder authorities. So, a strong non-circumvention agreement will consider such state or country statutes with special clauses for either "lawyers", "attorneys" or just finders and brokers. For example, keep in mind that the Attorneys’ Fees rule in California does not apply unless such provision is separately signed by the client (the party who will pay). Since non-circumvention agreements are inherently crafted to be unrecorded in public records – there are no "tips" published in FOCUS or SEC Mergers & Acquisitions that help measure if an agreement sample is sufficiently complete. An effective non-circumvention agreement will be air-tight on scope and time period. For example, the former investment banker should be prevented from approaching the 3-year old investment in the targeted merger; but may approach the target 4 years after the date the subject asset was acquired to suggest similar or additional services. A portion of a non-circumvention agreement that refers to Opportunity as something that might be communicated orally may seem unnecessary, unless, of course, there was an earlier unsigned NDA and the opportunity was never reduced to writing. An effective sample will set out a Negotiation Points Template – prefer items. A good sample will be no more than a few pages, since a longer form is unlikely to be read and therefore is less likely to be effective.
Common Mistakes in Non-Circumvention Drafting
The biggest mistake people make in drafting non-circumvention agreements is to not make it fit their industry. You cannot put a cookie-cutter agreement on a non-circumvention agreement that you read about somewhere on the internet. It needs to be tailored to your particular industry, business, and situation. Investor/distribution agreements have entirely different customs and practices than a joint venture or partnership agreement. If you don’t do this you can run into problems with the enforceability of the non-circumvention agreement itself if a dispute ends up in litigation .
Another mistake that is often made is not being diligent about protecting their interests once the parties begin working together. For example, you can write that, upon discovering a competitor is competing illegally, it must promptly notify the other party and give them an opportunity to cure the problem. However, if that does happen and a cure is not possible as it is too late or too far along, you will have no recourse because you were not protective enough in the drafting.
Legal Considerations and Enforceability
Like many business contracts, non-circumvention agreements have legal enforceability. A non-circumvention agreement is not just a piece of paper and there are recourse options if it is broken. Most often a court will enforce a non-circumvention agreement if the contract is considered well written. Non-circumvention agreements don’t have to be overly complicated or long in length, but if it is missing certain important information it may not hold up in court.
Since non-compete agreements are considered so personal, breaking one can only be proven through circumstantial evidence. That means that it is not always clear cut right away if a breach has occurred. For instance, if you own a business and suspect one of your employees is stealing clients and trying to make deals behind your back with that client, you would need to gather evidence of this before you could accuse them of breaking the agreement.
The first step in legally enforcing a non-circumvention agreement is to gather evidence that the agreement has been breached. Then, the person who created the agreement needs to send the parties who were allegedly involved a letter explaining why they feel it was being broken and that they should cease and desist. If the parties ignore this letter, then the creator can sue for breach and seek compensation for damages.
If the non-circumvention agreement was legally binding, the court would rule in favor of the creator. In most cases, the court would decree that the non-circumventing party return the property in question, pay for any damage caused by the breach and compensate for lost income.
Tailoring a Non-Circumvention Agreement to Your Individual Needs
The best agreement for your needs is one that has been thoroughly drafted and is specific to the situation. For example, if you are selling a business, hiring an employee, or partnering with a client, your non-circumvention agreement should be customized to that specific transaction. Including boilerplate language can result in legal issues down the road. For example, the law does not look kindly on a slow roll in a business deal. When a non-circumvention agreement contains a provision for a term limit (i.e. , I won’t cross you for 5 years), but the parties never actually discuss a timeline, that agreement is unenforceable.
There are many ways to customize a non-circumvention agreement to fit your specific needs. Below are just a few examples for various business situations:
We cannot stress enough the importance of consulting with a lawyer when drafting any contract. An experienced lawyer can help guide you toward the correct agreements and determine what language is best to suit your needs.