How to Draft a Non-Circumvention Agreement

The purpose of a non-circumvention (or non-circumvent) agreement is to prevent one or more parties from being passed over in a transaction, leaving them without full compensation for their labor or involvement. A nervous party typically introduces a non-circumvention agreement when either it is working with another party for the first time, there is little trust between the parties, or both. In short, by signing a non-circumvent agreement, certain parties (the restricted parties) enjoin themselves from conspiring with each other to cut out a third party (the protected party) from their dealings.

Joint Ventures

One common situation in which circumvention might become an issue is when three or more parties create a joint venture (see Five Questions to Ask Before Forming a Joint Venture and How Do I Start a Joint Venture?). Depending on the different roles of each party, one party might feel relatively dispensable when it comes to moving the transaction forward. As an example, this situation could arise if the concerned party has readily replaceable skills or was merely an intermediary who introduced the remaining parties. In such cases, the vulnerable party will want all of the other principals to execute a non-circumvent agreement in order to put them on notice regarding prohibited actions and the ramifications for any breaches.

Brokers and Agents

Brokers (sometimes called agents) commonly use non-circumvention agreements when they serve as intermediaries to solicit business on behalf of their clients. Oftentimes, other than providing an introduction, the broker adds little or no value to the transaction, which could leave that party vulnerable to future circumvention. In these cases, it makes sense for the broker to have their business client execute a non-circumvention agreement at the start of their relationship to cover all future business that the broker brings to the client. See Nolo's article Fee Protection and Commission Agreements With Brokers: What You Need to Know for further discussion on this topic.

Standard Non-Circumvention Provision

The following is a non-circumvention clause that provides standard protections:

"The Parties hereby agree that their business involves, among other activities, introducing, participating, effectuating and consummating transactions between their respective contacts, including other Parties and Affiliates (each, a "Transaction"). In consideration of the foregoing, each undersigned Party hereby irrevocably agrees and warrants that it and its Affiliates shall not, directly or indirectly, interfere with, circumvent, attempt to circumvent, avoid or bypass any Party from any Transactions between the Parties' contacts, or obviate or interfere with the relationship of any Party and its contacts for the purpose of gaining any benefit, whether such benefit is monetary or otherwise. The Parties also undertake not to make use of any third party to circumvent this paragraph."

Agreement Not to Contact or Communicate Without Consent

The following language can be used to bolster the standard provision above, by making it clear that any contact between the restricted parties must be accomplished through the participation and facilitation of the protected party:

"The Parties hereby legally and irrevocably bind themselves and guarantee to each other that they shall not directly or indirectly contact or communicate with, or submit a request for a product or service to, any contact, entity, or institution introduced by a Disclosing Party to a Receiving Party without the prior case-by-case written approval of the Disclosing Party authorizing such contact or communication."

Agreement to Inform

You can also add terms providing that in the event the protected party does allow communications between the restricted parties, those communications must be fully documented and shared with the protected party. Here's a sample provision:

"In specific Transactions where one of the Parties allows two or more other Parties to communicate directly with one another, the Party allowing this direct communication shall be informed by the other Parties of the development of the Transactions by receiving copies of each and every correspondence, as well as updates of verbal communications made between the other Parties."

Remedies in the Event of Breach

Your agreement should provide remedies for the protected party, in the event that any restricted party breaches the agreement. These remedies can include monetary compensation, legal fees, penalties, injunctive relief, or any other equitable relief under the law. Feel free to get creative and impose any penalties that you think you can motivate the other parties to strictly comply with the agreement.

Related Entities

Restricted parties shouldn't be able to creatively avoid breaches by assigning the agreement or using related entities or third parties to circumvent the agreement's intent. For this reason, the term "Affiliates" should be defined as broadly as possible to include all parent companies, subsidiaries, successors, assigns, and so forth. Here is a sample provision:

"This Agreement shall be binding upon all Affiliates and other related entities of a Party and upon the principals, employees, assignees, heirs, and/or successors-in-interest of each Party, and none of the Parties shall have the right to assign this Agreement without the express written consent of the other Parties."

Here is a sample definition for "Affiliate":

"Any Person that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the Persons specified. Affiliates shall additionally mean the Parties' present and future related parties, including, but not limited to, partners, directors, officers, managers, equityholders, associates, agents, representatives, assignees, employees, contractors, successors, and any other Persons contractually bound in any instance by them."

Note that the definition for "Person" used in the agreement should cover any business entity, trust, or natural person.

Optional Provisions

It's quite common for non-circumvention agreements to have supplementary provisions regarding confidentiality, non-competition, and non-solicitation. You can find discussions of these topics in the following Nolo resources: Sample Confidentiality Agreement (NDA), Understanding Noncompete Agreements, and How to Protect Your Company's Goodwill in an Employment Separation Agreement. Feel free to incorporate any of these additional terms, depending on your particular concerns; there should be no downside to doing so, unless it would somehow put your own company at risk. Make a note to confirm that your confidentiality section includes a prohibition against any party's disclosure of the contents of the non-circumvent agreement itself.

If you don't have a corporate attorney to help you prepare your non-circumvention agreement, then see How to Draft a Letter Agreement or an MOU and Ten Tips for Making Solid Business Agreements and Contracts for guidance on how to draft your own contract. The vast majority of non-circumvent agreements are very simple documents that are no longer than a few pages.