What You Need to Know about Non-Circumvention Agreements
At its most basic level, a non-circumvention agreement is an agreement that ensures that one party won’t try to avoid being responsible for obligations to another party by entering into a modified version of a deal with a third party. For example, if a master distributor enters into an agreement with a sub-distributor (a distributor that distributes the product of the master distributor to end-users) that has certain obligations in its agreement, the sub-distributor shouldn’t be able to cheek its obligations by entering into an agreement with the same manufacturer directly. The sub-distributor is circumventing its obligations by avoiding its agreement with the master distributor.
From the above, it is clear that a non-circumvention agreement has a limited scope. It only prohibits a party from being involved in a deal that is structurally similar to the original deal , and only if it is purpose of avoiding its obligations. There are other agreements that can encompass a much broader spectrum of conduct. Non-circumvention agreements can be written very narrowly, and focus on the very limited conduct of avoidance of the requirements of the agreement. Contrast this with a non-compete agreement. A non-compete agreement generally seeks to restrict an employee from working anywhere in the industry. The employer may even prohibit the employee from working for any competitor in the industry, or prohibit the employee from working with any potential competitors. Attempting to limit a party’s dealings with all potential competitors is a much broader request than simply requesting that the party not avoid its obligations to the first party.
Elements of a Non-Circumvention Agreement
When drafting a non-circumvention agreement, certain key components should be included to ensure that the provisions are comprehensive enough to cover all aspects of the agreement to which the parties have come to understand and believe. At a minimum, a non-circumvention agreement should include a confidentiality clause, a duration clause, and a clause listing the offending parties. It is important to note that this is not a complete listing, but it will provide a good framework for the drafting process.
A confidentiality clause is very important for a non-circumvention agreement since the underlying purpose of the non-circumvention agreement is to prevent the disclosure of sensitive or proprietary information to competitors. Essentially, the confidentiality clause will dictate what parts of the relationship that the information or entity cannot disclose during the period as outlined in the agreement.
Having a duration clause in the non-circumvention agreement is very important as it will allow the parties to know the extent of the agreement and how long it will last. This time period should be strictly adhered to, because most non-circumvention agreements are designed to stop the offending party from acquiring information in the course of their work, and then after a set period of time, the offending party should be free to utilize the acquired information.
The final key component is the identity of the offending parties. Identifying offending parties is a crucial aspect of the non-circumvention agreement, as it will allow the party that has been circumvented to identify who they can bring actions against if they should find themselves in a situation where the agreement has been violated.
Overall, a non-circumvention agreement is only as effective as the parties that are bound to it, as the provisions that are contained therein will only be as powerful as the ability to enforce the restrictions outlined within the document.
Advantages of Non-Circumvention Agreements
For businesses and individuals seeking protection from those who may be inclined to circumvent their interests, non-circumvention agreements can be invaluable tools. Among the most notable benefits of these legally binding documents include:
Protection against business interference
Non-circumvention agreements can be highly beneficial for businesses, particularly when this protection is established before parties begin doing business. In addition to protecting against market competition, non-circumvent clauses can be used to help keep a business’ information, clients and confidential details secure from greedy competitors. This prevents other companies from poaching clientele under false pretenses, while protecting their best interests.
Protection against unfair business practices
Unfair business practices are typically those that violate a single language or a combination of languages within the law. Circumventing agreements can protect people and businesses from fraud, slander, lawsuits and a variety of other unscrupulous behaviors. The foundation of these agreements are meant to allow the intended to conduct business without fear of deceitful practices or ulterior motives.
Enforcement and Legal Issues
Enforcement of Non-Circumvention Agreements Can Present Legal Challenges and Disputes
A non-circumvention agreement binds the parties to respect the terms of an existing agreement. Where the agreement is in writing under seal, a party who breaks it is liable for a breach of contract, but if the party committing the act is not a party to the original agreement, that party may raise a defence that explains why the contract was broken. If a second party has no dealings with the plaintiff, it cannot be held liable for the loss of the plaintiff caused by the defendant’s activities.
While the defendant contended this was the case, the plaintiff asserted that up to the time of trial, the defendant had clearly breached the conditions of the option contained in the joint venture agreement, meaning they had breached their agreement with the plaintiffs . As such, the defendant then could not raise the defence of non-circumvention. However, the judge found that an amendment to the agreement was made to extend some features of the option to a subsidiary and signatories representing the subsidiary were informed of the development concerning the plaintiff’s extension of time. In that respect, the judge found the expansion of the option to the subsidiary sufficed for the purpose of extending the time and was not in breach of the agreement. Further, it was held that even if the plaintiffs were not under the impression that a subsidiary company was included in the deal, the judge stated that the agreement had not been breached and that the dispute should be dealt with by the dispute resolution procedure which the parties had agreed upon.
Tips and Guidelines for Drafting
Non-circumvention agreements should be written as plainly as possible, but should avoid making any representations that sound like a legal conclusion. Drafting an effective non-circumvention agreement requires precision, but in practice mistakes frequently arise. Clarity is always preferred, and in most cases competent counsel can resist the temptation to gild the lily with elaborate clauses and conditions that do little for their clients. Non-circumvention agreements should avoid the need for interpretation by being as direct as possible. Red herrings are populist in these times, but they have no place in an enforceable non-circumvention agreement. Non-circumvention agreements should consider alternatives to litigation. An alternative dispute resolution forum (ADR) should be inserted into a non-circumvention agreement to avoid the costs and complications associated with litigation, and to assist the parties in reaching a compromise without incurring the expenses of a courtroom battle.
Practical Applications and Examples
Non-circumvention agreements are commonly used in a variety of industries and contexts. Here are some examples and case studies that demonstrate their application and importance.
Example 1: Manufacturers and Suppliers
A manufacturer in India wishes to enter into a joint venture agreement with a distributor in the United States. The joint venture will focus on selling bicycles in North America. The Indian manufacturer considers entering into a contractual relationship between itself and the U.S. distributor. The Indian manufacturer recognizes the business reputation of the U.S. distributor and asks its counsel to draft a letter of intent between the two parties in anticipation of entering into a formal joint venture agreement.
The Indian manufacturer wants to restrain the U.S. distributor from participating in sales or arranging sales of bicycles in China, India or anywhere outside of North America. A letter of intent may be considered to be enforceable in China. In addition, the Chinese courts recognize the terms "non-circumvention" and "non-disclosure". The counsel advises the Indian manufacturer and the U.S. distributor to place the terms "Non-Circumvention" and "No-Compete" in the appropriate sections of the letter of intent and sign it. The Indian manufacturer and the U.S. distributor later sign a formal joint venture agreement.
Example 2: Internet and Technology
In 1999, the City of San Jose, California sought to enter into an agreement with three Internet start-up companies to convert city-owned land into a technology park. The city owned 15 acres of land that it leased out to companies for a term of 25 years. The city sought to lease an additional 5 acres for technology-related usage and to provide additional services to the start-up companies . The city invited 30 companies to submit proposals with respect to the 5 acres. The RFP was clear in its insistence that confidentiality was to be maintained among and between the municipalities and the companies submitting proposals. San Jose did not find that any of the proposals were sufficiently attractive and decided to withdraw the RFP.
As a result, four of the companies sued the municipality because the RFP’s nondisclosure clause was claimed to constitute an enforceable non-circumvention agreement. The plaintiffs in the lawsuit asserted that they shared sensitive information with the City of San Jose about facility designs, architectural drawings and layouts, floor plans, engineering drawings and heating, ventilation and air conditioning specifications in the hope that their proposals would eventually be accepted. Evidence of actual negotiations existed between three of the companies with respect to the city’s requirements and needs.
The companies submitted proposals to the City of San Jose for the development of its technology park because they had a competitive advantage. They believed that their applications would be more successful if they signed a non-circumvent agreement with the city. The city’s RFP suggested that its proposal analysis would be enhanced by receiving assurances that the companies would keep secret and confidential the information provided by the city.
San Jose later settled the lawsuits. With respect to the confidentiality provisions of the RFP, it agreed to enter into non-circumvent agreements with at least two of the plaintiffs in the lawsuit. The reaction of the other litigants was one of mild resentment. However, the success of the plaintiffs described above was based both on their willingness to spend money on litigation and their matching negotiating power, which matched that of the city.
