Non-circumvention clause is used typically in NDA’s, also known as nondisclosure agreements and confidentiality agreements. NDA’s are usually used to disclose confidential information, such as different forms of trade secrets. You can read more about confidentiality agreements from this article: ABC of NDA’s.
In essential, non-circumvention clause is a restrictive covenant that can be used by a disclosing party that wants to prevent the counterparty from working directly with their business contacts in a manner that damages them.
Non-circumvention clauses allow parties to proceed with a transaction with confidence that a disclosing party’s business contacts are not going to be misused.
THE REASONS BEHIND A NON-CIRCUMVENTION CLAUSE AND WHAT DOES IT PREVENT
If the parties to the NDA are business competitors or are otherwise concerned that the other party might cut the disclosing party out of a business opportunity by working directly with the disclosing party’s contacts, it is common for the disclosing party to require including a non-circumvention clause in the nondisclosure agreement.
Basically, the non-circumvention provision means that the recipient party can not use or attempt to use its relationship with the disclosing party to compete against the discloser in a manner that is against the purpose of the agreement. They can’t cause the disclosing party to lose some benefits of the transaction in question.
As a restrictive covenant, a non-circumvention clause may raise antitrust concerns because it limits the recipient’s right to enter into a potentially competitive transaction.
This may be against the relevant jurisdiction’s public policy. Usually this depends on the transaction’s nature, scope, and duration.
Sharing confidential information under the NDA may also cause antitrust concerns if the parties are competitors.
AFFILIATES AND THIRD PARTIES
A key element of a non-circumvention clause is the definition of persons subject to the covenant.
A non-circumvention can also apply to a receiving party’s affiliates and representatives. It is often beneficial for the disclosing party to make sure that the receiving party’s representatives or third parties can not take actions prohibited from the recipient.
Make sure that the other persons included are defined carefully (the scope of representatives, affiliates, subsidiaries etc.) and consider whether the recipient actually discloses any confidential information to them.
UNILATERAL OR MUTUAL?
Non-circumvention clauses are usually drafted unilaterally to protect the disclosing party.
However, if the confidentiality agreement is mutual and both parties are disclosing confidential information and introducing their respective contacts to the other, circumstances may speak for a mutual non-circumvention provision.
Bear in mind that a mutual obligation has a more prominent anticompetitive effect and is therefore more likely to be considered illegal or challenged by the antitrust agencies.
TERM OF THE NON-CIRCUMVENTION OBLIGATION
Non-circumvention obligation is one of the obligations that has to taken into consideration when deciding the term of the obligation. Sometimes non-circumvention is effective for a shorter term than confidentiality obligations.
Choosing a shorter term can be beneficial especially to limit antitrust concerns.
If the confidentiality agreement includes different terms for different obligations, any differing durations of their non-circumvention and confidentiality obligations should be clearly addressed in the term and termination section.
HOW CAN VEDINOR HELP YOU?
We are experienced in protecting trade secrets and confidential information in international situations and have advised several sectors. We have drafted numerous NDA’s for different situations and can help you with your matter. Contact Partner Anne Nyström (email@example.com) in your NDA inquiries.