What is a Non Circumvention Clause?
How do you legally define it?
What are the important elements you should know!
In this article, we will break down the legal definition of a Non Circumvention Clause so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
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Non Circumvention Clause Basics
A non circumvention clause (or non circumvent clause) is a contractual clause where one or all parties agree not to “circumvent” or bypass a party by other parties involved in a business transaction.
Generally, a non circumvention provision is included in contracts or business transactions where the parties do not have full trust in one another.
To prevent a party from bypassing the other contracting party in a contract to engage in business dealings directly with a party’s clients, suppliers or partners, it may be worth considering non circumvention clauses.
Quite often, companies and business entities looking to do business with one another for the first time and can yet trust one another will include a non circumvention clause along with a confidentiality clause.
The combination of the two provisions is to ensure that if a party discloses confidential information about its business to the other, the other party will not take that information and work with a third party instead.
Non Circumvention Clause definition
How do you define a non circumvention clause?
A non circumvention clause is a contractual provision aimed at restricting the ability of one contracting party to deal and engage directly (or indirectly) with the business partners, clients, suppliers or contacts of the other contracting party.
The idea is to ensure that the contact names and information of the business contacts revealed by one person to another remain confidential in such a way that the party receiving this information would not be able to circumvent the other party to engage directly with the disclosed contacts.
According to the Thomson Reuters Practical Law, a non-circumvention clause is defined as:
A restrictive covenant can be used by a party that wants to prevent the counterparty from working directly with the disclosing party’s business contacts in a manner that damages the disclosing party
What are the advantages to signing a noncircumvention clause?
For the party benefiting from the noncircumvention provision, the advantage is that it is legally protected when disclosing the names and identities of its business partners, suppliers, clients or other relationships crucial to its business.
Should the other party obtain such contact information and try to bypass the contracting party, the non-breaching party has a legally binding provision to enforce against the breaching party.
From the perspective of the party agreeing to comply with the noncircumvention obligations, the advantage to this party is the ability to enter into a business transaction with the other party.
Otherwise, there may not be enough trust between the two business entities to enter into a mutually beneficial business transaction.
What are the disadvantages of a noncircumvention clause?
From the perspective of the beneficiary of the obligations, there may not be important drawbacks to note.
There are no drawbacks in the legal protection given to a business entity sharing sensitive business contacts with another.
The real drawback is having to deal with another contracting party that may not be trusted and who violates the terms of the noncircumvention provision.
As for the party obligating itself under a noncircuvmention, the drawback is the legal restriction imposed on being able to freely do business with other business entities for a certain period of time and in a certain territory.
Should the party inadvertently do business with a “restricted” company or business contact, it will be exposed to a lawsuit and potential damages resulting from the breach of contract.
Consequences of breach
If a party breaches the terms of a circumvention clause, it will be exposed to damages just like any damages resulting from any other breach of contract.
If the contract provides for penalties or liquidated damages, those provisions will be triggered and such penalties may be recovered in law.
Often, the parties to the contract will also include an indemnification clause to cover costs related to attorney fees or other related expenses incurred to enforce the terms of the contract.
It may also be possible to move for an injunctive relief against the party violating the terms of the contract.
An injunction is a type of recourse where you legally demand that the party doing business with your business partner immediately cease doing business in violation of the terms of your contract.
Let’s look at how we can use a non-circumvention provision to get additional legal protection.
Imagine that you have a business where you distribute certain goods in a certain territory.
To further expand your distribution capabilities, you are looking to partner up with another company capable of augmenting your distribution efficiency and speed.
However, you are worried that if the other company finds out who your suppliers and wholesalers are, the other company may bypass you and purchase the goods directly from your suppliers and distribute in your territory.
This will turn your partner into a direct competitor.
To prevent that, you enter into a confidentiality agreement and non-circumvention agreement where you indicate that the other party will not be able to take your confidential information and bypass you to go directly to your suppliers or to your clients.
You are essentially protecting your business should your contracting partner discovers or finds out the name of your business partners.
Let’s look at a sample non circumvention provision in a contract.
It is hereby agreed that the First Party will not circumvent the Second Party in any of its business dealings or transactions.
The Company understands and agrees that for the entire duration of this Agreement plus an additional three (3) years after this Agreement expires or is otherwise terminated that it shall not, directly or indirectly circumvent the Distributor to market, sell or distribute (or to assist any other parties to manufacture, market, sell or distribute) in the Exclusive Territories. Any violation of this Section shall be deemed to be an attempt to circumvent this Agreement and the Company shall be liable to the Distributor for any reasonable and demonstrable damages.
The Company and/or its Affiliates shall not contract, deal with or otherwise become involved in any transaction with any corporation, partnership, individual, bank, trust or lending institution, without the prior written consent of the Distributor. Any violation of this Section shall be deemed to be an attempt to circumvent this Agreement and the Company shall be liable to the Distributor for any reasonable and demonstrable damages.
So what is the legal definition of a Non-Circumvention Clause?
Let’s look at a summary of our findings.
Non Circumvention Clause:
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