What is a Non-circumvention Clause?
A non-circumvention clause can prevent other parties from taking advantage of your business knowledge, expertise, and contacts. Here's how.
In order to grow your business, sometimes it is necessary to deal with parties that you do not have a relationship of trust with. Within this, there is a risk that the other party will take advantage of your business and the information and resources you possess. Consequently, the best way to protect against this risk is to set out clear rules regarding your business relationship through enforceable contract. Employing a non-circumvention clause protects against the use and abuse of your business’ knowledge, expertise, and relationships.
Non-Circumvention Clauses Defined
A legally-binding non-circumvention clause restricts the signatories from conspiring against the protected party for commercial advantage. It is most commonly used in agency and franchise agreements to restrain the actions of parties. Consider the following example;
- A restaurant has an agreement for the supply of beef from a wholesaler. The wholesaler has an agreement to obtain their beef direct from an abattoir. As an agent, the wholesaler has imposed non-circumvention clauses in agreements with both parties.
- The restaurant discovers they can get beef cheaper by dealing directly with the abattoir. Consequently, the restaurant begins dealing directly with the abattoir. Soon, the wholesaler becomes aware of this.
- The abattoir and restaurant have breached the non-circumvention clause imposed by the wholesaler. The restaurant and abattoir are then liable to pay the wholesaler what they would have received without the direct dealing.
A non-circumvention clause should include some key elements. These are;
- Time length – for how many years the agreement will be valid
- The parties – between whom the clause relates
- Specifics – the conduct to which the clause relates
- Renewal – whether the clause should be renewed following completion of the transactions the relationship is concerned with.
- Amendments – methods of handling term amendments
Non-circumvention clauses are effective in protecting business contributions when they are relationships-based. This is because they prevent two signing parties from bypassing a central protected party. In agency situations, it is the protected party that is responsible for introducing the two signatories, so a non-circumvention clause may operate to effectively protect their contribution.
Aside from protecting an agency contribution, a non-circumvention clause can also protect sensitive business information from being disclosed to a third party. Commonly, businesses may do this to obtain competitive advantage over the information-concerned party. That being said, most information disclosed in business dealings is better protected by other contractual provisions. These include non-disclosure agreements, or non-compete agreements.
What to avoid
Non-circumvention clauses can act to unfairly restrict signing parties. Generally, clauses should not relate to excessively long periods, or to areas in which the restricting party does not have business activities within.
Non-circumvention clauses are commonly paired with two other forms of agreements. Generally, the role of these agreements is to prevent the signing party from taking advantage of the other party.
It is a common business practice to combine non-circumvention clauses with non-disclosure agreements (NDAs). NDAs safeguard against the disclosure of confidential information to third parties without consent. In essence, the benefit of combining the two agreements is to prevent a party you are dealing with from using disclosed confidential information to their advantage in dealings with a third party. Obtain your comprehensive NDA here.
Non-compete agreements prevent one party from joining or engaging in business with a competitor of the protected party. The benefit of this agreement is to prevent the signing party from using their knowledge and expertise gathered through their relationship with the organisation to gain a competitive advantage. It is particularly important to have a non-compete agreement in highly competitive industries, such as technology, design, and sales. This is because these industries deal with highly sensitive and valuable information. You can create your non-compete agreement here.
Alistair is a Legal Intern at Lawpath. He is currently studying a Bachelor of Laws at Macquarie University. He is primarily interested in how changes in the digital space influence business activity, privacy, and freedom of speech.