What is it?
A Non Circumvention Agreement is a legal agreement between parties that want to prevent the misuse of confidential information that they have shared with each other. A common scenario involves a disclosing party (“Disclosing Party”) providing their confidential customer or supplier list to the receiving party (“Receiving Party”). This kind of agreement would be used to prevent the Receiving Party from directly contacting or working with the Disclosing Party’s customers or suppliers.
If the Disclosing Party and Receiving Party have not yet entered into a non-disclosure or confidentiality agreement (“Confidentiality Agreement”), the parties can include non-circumvention clauses into a Confidentiality Agreement. However, if the parties have already entered into a Confidentiality Agreement, then a separate Non Circumvention agreement can be used.
Non Circumvention Agreements versus Non-Disclosure or Confidentiality Agreements
A common misconception is that Non-Disclosure Agreements and Non-Circumvention Agreements are essentially the same. While they are both inherently related to the sharing of confidential information, each type of agreement serves a different purpose.
Confidentiality Agreements prevents the parties from disclosing each other’s confidential information to third parties. A Non-Circumvention Agreement is used to govern how the Receiving Party can or can’t use the Disclosing Party’s confidential information. More specifically, it prevents the Receiving Party from going around the Disclosing Party and using the confidential information to its own advantage. Using our earlier example, the Receiving Party can not use the Disclosing Party’s customer list to obtain business from these customers.
A non-circumvention agreement can be used in any industry but here we will examine a Broker Non-Circumvention Agreements and Non-Circumvention Agreements related to joint ventures.
Business Broker Non Circumvention Agreement
Business Brokers either represent a business owner that is trying to sell or business (the “Seller”) or an interested party that is interested in buying a business (the “Buyer”). In the case where the Broker represents a Seller, it will introduce the Seller to prospective buyers. If the Broker is representing a Buyer, it will introduce the Buyer to prospective sellers. The Broker usually earns a commission based on the sale price of a completed transaction between the parties it has introduced. However, since the Broker must introduce the parties prior to a transaction being completed, there is a risk that the parties may independently reach a deal and not involve the Broker. To prevent itself from being “phased out” of the transaction, the Broker can use a Non-Circumvention Agreement to protect its role in the transaction and its subsequent commission.
If the Broker represents the Seller, the Non-Circumvention Agreement prevents the Seller from completing a transaction with prospective buyers introduced by the Broker without the Broker’s involvement. If the Broker represents the Buyer, the Non-Circumvention Agreement prevents the Buyer from completing a transaction with a prospective seller introduced to the Buyer without the Broker’s involvement.
Whether you are a Broker, Buyer or Seller, a Non-Circumvention Agreement will help clearly define each party’s role in a prospective transaction so that disputes about the parties’ respective roles and the commission rates don’t arise.
Joint Ventures and Non Circumvention Agreements
When three or more businesses create a joint venture, one or all three parties may want to prevent the misuse of confidential information that they share with each other. Joint venture partners will often share their confidential information with each other for the benefit of a common goal. This type of information could include supplier lists, customer lists, key contacts or strategic partners. While this information may benefit the joint venture, it could be used by your joint venture partners in a way that could harm your business.
As an example, a joint venture partner could use one of your strategic partners to obtain a foothold in another market. However this could also harm your business in that market. Ideally, you would want “control” over how your joint venture partners contact your own company’s contacts. A Non-Circumvention Agreement would prevent your joint venture partners from leveraging your contacts without your involvement.