What is a Non-Circumvention Agreement?
A non-circumvention agreement prevents the circumvention or avoidance of a contractual agreement by protecting one party from having business conducted with another person outside of the terms of the contract. A non-circumvention agreement protects the disclosing party (typically the seller) in the event that the other party chooses to have business dealings with another person or company instead of the disclosing party, thereby circumventing the confidentiality agreement that they signed. Often, non-disclosure and confidentiality agreements are included as part of non-circumvention agreements . Typically, a non-disclosure or confidentiality agreement includes clauses that protect private business information and also prevent the disclosure of certain information to third parties. Non-circumvention agreements are useful for disclosing parties to prevent the circumventing or avoidance of the terms in the agreement wherein the buyer obtains necessary proprietary information and elects to either circumvent the seller and deal directly with third parties, circumvent the confidentiality of the information, or circumvent the terms of the non-disclosure agreement (i.e. not using the confidential information for its intended purpose).
Essential Components of a Non-Circumvention Agreement
A non-circumvention agreement typically consists of several standard components. The first component generally identifies the parties to the agreement. In many contexts, there could be numerous parties. For example, if you are going to be a finder in a business opportunity, you can imagine that the agreement will need to list everyone involved in the business prospective as a party to the agreement.
The next component will likely be the scope of the agreement. In other words, what does the agreement actually cover and how broadly or narrowly does it apply to the parties involved. The agreement will then likely provide a duration or time period (for example, 3 years) in which the parties, or some of them, are bound.
The agreement will also likely contain confidentiality clauses that limit the use of information disclosed between the parties or about the parties. It is important to remember that a non-disclosure agreement and a non-circumvention agreement serve different purposes. A key difference is that a non-disclosure agreement is typically limited to protecting each of the parties in the joint venture, whereas a non-circumvention agreement is typically broader in that it protects the intellectual property right of each of the parties involved. In other words, a non-circumvention agreement will likely extend beyond just what the parties are doing in the joint venture and may extend to a wider circle such as potential competitors of the parties. Broadly worded, a non-circumvention agreement can serve to ensure that the intellectual property rights of the parties are not used by the potential competitors to disadvantage the parties who are involved in the joint venture. For example, assume the joint venture at issue seeks to construct a new bridge, it may be that the potential competitors down the street who are constructing a new bridge will benefit from not having to incur the costs of what they can learn from the partners in the joint venture and therefore a non-circumvention agreement might be appropriate.
The final component provided in many non-circumvention agreements are remedy provisions for breach. Remedies often include injunctive relief, monetary damages and set off, or specific performance provisions. It may be that a money judgment in addition to an injunction will be available to the party who has been harmed by a breach. However, if there is a broad set off provision, it is possible that a plaintiff may not be able to recover a full judgment because the defendant may be able to offset any losses or damages with losses suffered in the deal. For example, assume that the competitor of the non-circumventing parties is able to offset damages by showing that it suffered $5,000,000 in losses as a result of the actionable non-performance. In this instance, the offset would be probably the maximum amount of damages, unless the non-defaulting party is able to show that the liability should be joint and several. Therefore, remedy provisions are often a hotly contested issue in non-circumvention agreements.
When to Consider Using a Non-Circumvention Agreement
Circumvention agreements are useful, and indeed necessary, for any number of transactions where it is important to ensure that the parties do not cut each other out of the deal. For example, if you are partnering with other businesses in order to put deal together, and if your partner will be making the introductory contact with the target company, you will need a non-circumvention agreement to make certain the partner does not simply cut you out and work directly with the target company.
A non-circumvention and confidentiality agreement can also protect you when entering into business relationships with individuals or entities that may have an "inside track" or "inside information" on a particular market or segment of a particular industry. Such circumstances include joint venture agreements, strategic relationships and partnerships between companies. An example of this might be a relationship between a foreign based corporation and a USA based corporation where the foreign corporation is familiar with local protocols. A non-circumvention agreement can make certain that none of the party’s use, or references to, any material terms in the structure, design or intent of the financing nor the proposed structure or particulars of the goal of the financing shall be disclosed to third parties, including government entities or other institutions without the prior written consent of the other party.
Advantages of Non-Circumvention Agreements
Non-Circumvention agreements can provide a number of benefits to the investor. While this certainly is not an exhaustive list, we highlight many items to consider for these typically pro forma agreements.
Confidentiality of Information. Clearly, if confidential information is exchanged between parties, it is important that that information be protected. This is especially true if your source is a foreign based company. Some global jurisdictions may provide less protection for confidential information than your intellectual property laws. It is also useful if one party wants to disclose the as an overlay to cover information that might not be considered confidential.
Preservation of Business Relationships. NCA’s can help to prevent the parties from using each other to get to the other party’s business relationships. Whether those relationships are active or in negotiation, if one party "circumvents" the other party, it could lose or jeopardize a business relationship. Instead of going to or through one party to obtain a desired destination, your source will eventually go direct to the source often to the detriment of the party initially securing the business relationship.
Protection of Investment. Sometimes you might view an agreement with a source as an "investment" where you are contributing money to entering the deal. That money would be lost if a more unscrupulous source gets the parties to circumvent you. Under this scenario, even if the contract itself continues, it provides no guarantee of obviously being honored.
How to Draft a Non-Circumvention Agreement: Key Considerations
The first step in drafting a non-circumvention agreement is to identify the parties involved. Specifics should include the names of the individuals or companies involved, as well as their contact information and signing authorities. Parties may also consider including their addresses, but this is less necessary for individuals than it is for companies. The next step is to identify the subject matter of the agreement, including the following: After identifying the subject matter of the agreement , you should then determine the time frame for its duration. A non-circumvention agreement will require one or more signing parties to withhold from discovering the confidential information for an agreed-upon length of time – usually several years. Depending on the provider or recipient of the confidential information, you may also want a confidentiality agreement in place. For instance, franchisers will want to make sure their franchisees abide by this as well. The last step in drafting a corporate non-circumvention agreement is to specify the penalties for breaking the agreement. These include both civil and criminal penalties, which may be legally binding or based purely on the honor system.
Non-Circumvention Agreement Template: A Sample
A non-circumvention agreement template is a form that outlines the required clauses for a business relationship that a lawyer would draft for you and your counter-party. As it turns out, this non-circumvention agreement template that I am about to share with you seems to be a pretty good deal of what you will encounter when you begin your search for a non-circumvention agreement.
This is a sample non-circumvention agreement template I routinely find:
THIS NON-CIRCUMVENTION AND NON-DISCLOSURE AGREEMENT ("AGREEMENT") is made and effective the ____ day of ______, _____ (the "Effective Date"), by and between ____________________________ and its officers, directors, employees, agents, or related persons or companies (collectively, "COMPANY") and ________________________, its officers, directors, employees, agents or related persons or companies (the "INDIVIDUAL") (each also referred to herein, both individually and collectively, as a "Party," "Parties" or "Schedule A").
RECITALS
A. The Parties are parties to an agreement dated _____________ for ____________________________________________________ (the "Prior Agreement").
B. The Parties understand and acknowledge that in order to further mutually beneficial objectives and ventures, it is necessary to share certain Confidential Information designated as confidential concerning the Parties’ activities.
C. The Parties agree to abide by the terms and conditions of this Agreement in order to protect the legitimate interests and proprietary rights of both Parties.
AGREEMENT
- DEFINITION OF CONFIDENTIAL INFORMATION
- NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
- ACKNOWLEDGMENT OF CONSTRUCTION OF PROPERTY
- NON-CIRCUMVENTION
- DISCLOSURES
- PROPRIETARY TAXSCHEMES OR JVS
- COVENANT
- LEGAL FEES
- OWNERSHIP
- BENEFIT-OF-AGREEMENT
- TREATIES
- DISPUTE RESOLUTION
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day and year first above written.
Enforceability and Legal Implications
The legal enforceability of non-circumvention agreements, sometimes referred to as anti-circumvention agreements, largely depends on their composition. While all agreements carry an underlying risk of non-enforcement, non-circumvention agreements are routinely enforced in jurisdictions across the United States, subject to the fact-specific analysis below.
Typically, the first inquiry a court will make when deciding whether a written agreement is binding and enforceable is if an express agreement was formed. Courts routinely hold that "no particular formalities are required in the formation of a contract, except as expressly provided by statute." Callano v. Owens-Corning Fiberglas Corp., 440 So.2d 242, 243 (1983) (citations omitted). If the terms in the written agreement sufficiently define all the material terms , then the Court will likely find that an express agreement was formed.
Courts will then consider whether there has been a breach of the contract. A breach of a non-circumvention agreement occurs when a party does one or more of the following: substitutes or arranges an alternative plan to replace a business plan; pursues a business opportunity similar to the opportunity described in the agreement or utilizes any information in a manner which violates the agreement; or discloses confidential information to a third-party without the consent of the signing party. The party alleging breach of the non-circumvention agreement is required to show that it performed all of its conditions under the agreement. A breach of a non-circumvention agreement does not occur where a party attempts in good faith to conclude the transaction but it falls through for a number of other reasons.
In addition to requiring the party alleging a breach to have performed under the agreement, Courts also consider whether the party asserting a breach of the non-circumvention agreement was the "sole cause" of the breach. Courts will deny a breach of the non-circumvention agreement where the complaining party is a "joint tortfeasor who has participated in some part in the breach." Courts have denied a breach of agreement claim where "both parties were at fault."
Other considerations the Court will consider are whether the complaining party has showed irreparable harm, the balance of harm, whether the non-circumvention agreement is sufficiently tailored to meet the interests of the company, and whether the public interest will be harmed.
