To explain it even more simply, let’s use an analogy. A company that mines precious gems, let’s call it Opalz, LLC, desires to hire a company that furnishes large drilling equipment along with specialized laborers who can operate the equipment — we’ll call this company Digging Dirt, Inc. In order for Opalz, LLC to hire Digging Dirty, Inc., Opalz, LLC will need to disclose the location at which they require drilling along with the owner of the property (who hired them to mine the precious gems).
By entering into a Non-Circumvention Agreement, Digging Dirt, Inc. would not be able to contact the owner of the property directly and offer their services thereby cutting out Opalz, LLC altogether.
How are Non-Circumvention Agreements Commonly Used?
Most frequently, a non-disclosure agreement (NDA) and non-circumvention are combined into one agreement, which is commonly referred to as an NCNDA. An NCDNDA is essentially a standard NDA document with a non-circumvention clause that, along with other key provisions, survives the expiration or early termination of the agreement for a period of time.
NCNDAs are common when the confidential information that’s shared between the two parties is pertinent to an important transaction or deal that’s yet to close. An NCNDA is one of the easiest ways for two parties to seamlessly share crucial information without potentially jeopardizing future revenue.
What makes a strong Non-Circumvention Clause?
A strong non-circumvention clause is one that protects the disclosing party against a number of “bad acts” by the recipient of the information. It should prohibit the recipient from:
Going behind the disclosing party’s back and completing the transaction/business deal without the recipient;
Using the information to sabotage or undercut the pending transaction or business deal;
Using the information generally to harm to the disclosing party’s business or good name; and
Using the information to try and steal away opportunities or employees.
These protections should extend to not only the recipient entity, but also the the recipient’s affiliates, directors, employees and agents. And, in addition, the clause should prohibit the recipient and of its related parties from soliciting or causing another party (not subject to the agreement) to do any of the above on its behalf.
In other words, the non-circumvention clause needs to address all of the potential loopholes the recipient may ultimately try to use in order to get around the protective restrictions.
While it may seem odd to enter into agreements with the assumption that the other party will do exactly what they’ve agreed not to — it’s just part of doing business. And, if you know the business or person with which you’re entering into discussions, you might be pressured by them to just go ahead and share pertinent information “without getting all the lawyers involved”. However, you’re better off protecting against all of the potential bad acts of the third-party with which you intend to do business than to go unprotected and regret it later.
It’s somewhat akin to signing a prenuptial agreement prior to getting married. If you have amassed a small fortune and intend to marry the love of your life, it might feel “off” to then turn around make them sign something that, in their mind, make them feel like you don’t trust them. You might need to re-assure them that you in no way feel worried that you’ll ever need to enforce such an agreement and smooth over any ripples it may cause in the relationship. But, similar to not purchasing insurance for the vacation you booked in the middle of hurricane season, pre-planning for the worst is the best model for avoiding undesirable outcomes.
A strong non-circumvention clause also contemplates whether the disclosing party should prevent the recipient from making direct contact with the parties that have been disclosed. If direct contact is permitted, the clause should require that all such contact is documented and the recipient be copied or included on all e-mails and verbal discussions.
An example probably helps make all of the above more clear.
Imagine a manufacturer of PPE has gloves to sell and they hire an individual named Joe to find buyers for the gloves. While Joe is out prospecting for buyers, he meets a broker (let’s call him Mark) that represents a group of hospitals looking to buy PPE. In order for the two to work together, Joe and Mark decide they must share certain confidential information about both seller and buyers of the PPE.
In this situation, Joe doesn’t want Mark to go directly to his seller to buy the gloves without him (thereby circumventing the transaction and eliminating Joe from the sale altogether) and Mark doesn’t want Joe contacting the well-known hospitals Mark represents without Mark’s permission or inclusion. As a result, the two will elect to enter into a non-circumvent mutual non-disclosure agreement with a well-drafted non-circumvention clause that addresses the above concerns.
Should the non-circumvention agreement include a non-competition provision?
If you plan to give the recipient access to your employees or independent contractors that possess key knowledge about your business and are, in your mind, pivotal to your success, it may be smart to include a non-competition provision.
A non-competition provision prohibits one or more parties from inducing or soliciting, directly or indirectly, employees to leave your employment and come work for them.
Non-circumvention clauses can be an important part of a well-drafted non-disclosure agreement depending on the circumstances of the business relationship.
It’s one of the few way to protect against the recipient of your confidential or proprietary information from usurping or commandeering business deals you intend to consummate. For this reasons, it’s one of the best ways to protect your business from suddenly loosing guaranteed revenue and important growth opportunities.
For anyone thinking about entering into a joint venture or a working relationship where confidential information about pending leads or sales are openly shared with a third-party entity, broker or outside consultant, entering into a non-circumvention non-disclosure agreement is a necessary and important step for building a safe and effective business relationship.