What is a non-circumvention clause?
A non-circumvention clause is a restraint on trade. It prevents the party subject to the clause from going directly to the other party’s suppliers or client, with the intention of bypassing (or circumventing) them and contracting with them directly, thereby harming the other party’s business.
In other words, non-circumvention clauses prevent one party from being cut out of a deal.
How can a non-circumvention clause be used?
Non-circumvention clauses may be most commonly found in non-disclosure agreements, where they are used to protect the disclosing party (ie the party disclosing confidential information). The non-circumvention clause blocks the recipient of the confidential information from passing over the disclosing party and contracting directly with the disclosing party’s suppliers or clients, once the recipient has learnt their names, thereby damaging the disclosing party.
When can non-circumvention clauses be used?
In addition to NDAs, non-circumvention clauses may also be found in other commercial documents such as:
Collaboration and joint venture agreements - where multiple parties create a joint venture or collaborate on a commercial project, a non-circumvention clause may be included to prevent one (or more) of the parties being cut out of the joint venture.
Supply agreements - when entering into a substantial supply agreement, a non-circumvention clause may be used to ensure that the client doesn’t bypass the supplier by engaging straight with a wholesaler.
Referral (or finder’s fee) agreements - these agreements involve one party referring customers or clients to another party, for a fee. Where a referral fee is to be paid to the party that makes an introduction or discovers an opportunity that results in a sale, a non-circumvention agreement may be used to ensure that the referring party isn’t cut out of the deal.
What if a non-circumvention clause is breached?
Non-circumvention clauses should set out the consequences of breaching them.
They typically allow the disclosing party to bring a claim for breach of contract, where the recipient bypasses them in breach of the clause.
Non-circumvention clauses may also allow for any benefits obtained by the recipient, through the misuse of the confidential information, to be turned over to the disclosing party for their benefit.