Non-Circumvention Agreement Templates: The Complete Guide

Non-Circumvention Agreements Explained

What is a Non-Circumvention Agreement?
Defines the prospective Relationship and prevents the parties from passing confidential information to a designated third party, or from doing business with a designated third party, without compensation to the party which has provided the confidential information. Upon execution of this Agreement , the parties will not pass any identified third party persons or companies to one another without providing compensation to the parties furnishing that selected third party person or company. This document is generally used in conjunction with a non-disclosure agreement (also known as a Confidentiality Agreement). A non-circumvention agreement is a document which is designed to protect relationships in the distribution chain. By ‘circumventing’, a party may eliminate the need for other intermediaries between them by approaching the end client directly. Such a strategy can certainly save the intermediary commissions, but it can have a chilling effect on the ongoing relationship, as each intermediary may fear that the arrangement will be terminated at any time.

Essentials of a Non-Circumvention Agreement Template

A well-crafted non-circumvention agreement template should include certain key components such as the names of the parties involved, the scope of the agreement, confidentiality clauses, and duration. For instance, the parties involved are typically the individuals or entities that have confidential information to share, be they brands, suppliers or manufacturers, and the intention of the agreement is to prevent circumventing relationships formed through the sharing of proprietary information.
The scope of the agreement is another important element to include. The scope of the agreement should clearly delimit the realm of the information that cannot be circumvented, i.e., target markets, products, suppliers, etc. For example, the parties may prohibit one another from engaging in direct business in a particular market for a defined period of time.

Advantages of Using a Template

The most obvious benefit is the time savings associated with a non circumvention template. You will not have to review multiple template agreements for each specific agreement you need to draft. Since you will already have the foundation set, the drafting process of an agreement can be started immediately without a time delay searching for something that may fit closely to the specific type of agreement to be drafted. Additionally, the template will alert you to certain clauses/sections you would not have thought to include in a newly drafted agreement.
Another benefit of a template is the legal reliability. Overall, non circumvention templates have been around for a much longer time than other contract agreements. Therefore, various templates have withstood the test of time with courts. The fact that a template has already withstood the test of time increases its level of reliability and assurance.
Additionally, since the re-drafting process is lessened, the quality of the drafts is improved. One of the major pitfalls of lawyers and businesspeople alike are the lack of care taken when drafting non circumvention agreements and templates. Over time, many of the key clauses that should be in a non circumvention agreement lost their importance. By using a template, the specific agreements clauses will be present at all times.
Lastly, be careful of using unrelated templates. Templates can be personalized in order to fit your business needs. Such personalization is beneficial because it ensures you are drafting the relevant and important clauses without the fear of forgetting one.

Common Mistakes and How to Avoid Them

One common mistake that parties make when it comes to non-circumvention agreement forms is to simply use a template that they find on the internet without customizing the document to their specific circumstances. Every business transaction is different, and it is important for the parties to consider their unique situation when crafting any agreement.
Another common pitfall is not fully understanding the terms of the agreement before signing. Parties often rush into signing agreements before getting them fully reviewed, and in some cases, this leads to confusion about key terms after the fact. Not knowing the meanings of certain terms can result in an ineffective agreement.
A simple mistake that parties should avoid is not using a non-circumvention agreement at all. In certain situations where a party has pre-existing relationships with the other parties or is not a major player in the deal, a non-circumvention agreement may be unnecessary. Ultimately, it is important for the parties to understand all elements and aspects of the potential deal prior to executing the non-circumvention agreement so that they can determine if such an agreement is warranted.
One problem that arises often is a party not taking the other party seriously when it comes to enforcing the terms of the non-circumvention. Sometimes, a trusted relationship between the parties leads one or both of them to violate the agreement when it suits their needs, thinking that they will be able to later explain why they did it. However, that action can be priced into a breach of contract claim or be seen as bad faith and breach of fiduciary duty.

When You Need to Use a Non-Circumvention Agreement

A strong non-circumvention is a valuable addition to any supply or other contract. Consequently, these agreements are very selectively used. The two most common scenarios requiring an independent non-circumvention agreement are in the following examples:
A large company is making a significant investment in a target company or industry of interest. Because of the large sums of money involved, the investor does not want to invest large sums of money and work out a business structure with the target company only to be cut out when the investor makes valuable introductions or shares valuable information. The investor wants to know the target company will not seek to directly connect with their contacts or her superior suppliers and service providers .
In another example of the use of an independent non-circumvention agreement, a foreign investor is seeking to invest a reasonable sum of money in a foreign country’s target industries. The investor does not want to travel to, say, Thailand, make the investment, and then have the target seek to directly work with the investor’s contacts. The non-circumvention agreement gives the investor the assurance that the foreign entity will not seek to undertake business with the investor’s contacts.
The most obvious industries where non-circumvention agreements are used is in high technology and new media. But the energy industry is fast emerging as a user of this tool as well.

How to Edit Your Template

Customizing a non-circumvention agreement is an important step in protecting your interests in a business transaction. These clauses are not "one size fits all." Each business relationship is unique, and a general clause does not address issues specific to each arrangement.
The process of customizing the agreement to meet your needs begins with identifying the parties involved in the transaction. A non-circumvention agreement should specify individuals, not just commercial entities. This means if at either end of the agreement there are a series of individuals or sub-companies that form a chain of distribution, it’s appropriate for the full chain of lawyers, advisors, distributors, agents, partners, etc., to be specifically named in the agreement. This is particularly important when there might be a business intermediary or middle man involved in the transaction.
When drafting a non-circumvention clause, it’s advisable to specify who is responsible for protecting confidential information and intellectual property. It’s also important to specify which parties are prohibited from using this information to circumvent the relationship. In a one-to-one relationship, typically only the parties named in the agreement are held accountable for protecting each other’s confidential information. However, in a commercial transaction, it’s often worthwhile to prohibit employees, contractors, and/or agents from being intentionally or unintentionally involved in the circumvention of a relationship.
Another consideration when drafting a customized agreement involves determining whether it will be mutual (meaning both parties are required to protect each other’s information) or one-way. This is frequently within a single agreement, such as "Party A will protect Party B’s information," "Party B will protect Party A’s information," or it can be broken down into two distinct agreements.
Finally, it’s important to consider whether your clause will include a schedule of affected parties or just be a general prohibition against the circumvention of the parties.

Legal Considerations and Guidelines

A key legal consideration is what damages or other measures may be advanced or claimed in the event of a breach. For example, if in fact a non-circumvent agreement is breached, it is often difficult to prove the damages or rather the amount of damages, and the duration/component of the period of damages including duration of contract, duration of damages etc. However, where parties have agreed in the non-circumvent agreement a liquidated damages clause, there are benefits to both parties. First, if proven, the innocent party, once it can establish the breach, will be entitled to such sum or damages; second, the breaching party is provided with the certain knowledge that if there is a breach and such breach is proven, it will have to pay to the aggrieved party the amount specified in the non-circumvent agreement; thirdly, the parties are encouraged to comply with the terms of the non-circumvent agreement in order to avoid unquantified loss. One best practice, therefore, is for parties to discuss or negotiate the components of such a clause and one advantage would be for parties to seek the advice of legal counsel or a lawyer because drafting of such clauses can be quite complicated and will usually include the nature, the amount and component of loss as well as a vexed issue of jurisdiction – where should breach proceedings be brought? Most contracts will specify one jurisdiction and the venue for any dispute or breach proceedings i.e. English court, Singapore, New York etc . On the one hand a breach may be proven on the barest level of other than on the balance of probabilities that a breach occurred. For example, if a contract or non-circumvent agreement is signed by both parties, it bears out the intention of the parties’ agreement and is prima facie an indication that there has been compliance. However, one of the difficulties with proving such breach is the level of detail that is required to prove such a breach. For example, should the clause be drafted by a layperson who does not appreciate that a breach of contract (a Non-Circumvent Agreement is an agreement with the force of a contract) is more likely to be proven where the standard of proof is high as opposed to the balance of probability that a breach occurred. Legal Counsel can assist with the drafting and identifying the issues and areas of contention. While non-circumvent agreements are usually standard form contracts, they may be subject to local jurisdictional requirements and may differ based on the country and/or industry in which they are used. Legal counsel can also advise on any special laws or regulations which may apply specifically to the industry, deliverables and/or material subject matter. Because these agreements are intended to establish the relationship going forward between parties it is very important and essential to ensure that each party can carry out its expectations that it has confidence in the dealings of the other party and will not be thwarted.