Pros and cons of using a noncircumvention agreement

If you are collaborating in a business venture with one or more other businesses or individuals, you won't want another party to go behind your back and cut you out of the deal. To protect your interests, you may want to consider a noncircumvention agreement.

Suppose you have a computer repair business and Bill has a software development business. You become aware that many of your clients have a need for software that is tailored to their business and is not commercially available. You and Bill agree to cooperate in a joint venture that uses your customer contacts and Bill's software development abilities to meet the needs of your customers. Once Bill has your customer list, you wouldn't want him to cut you out of the process and just deal directly with your customers. In such a situation, a noncircumvention agreement may help protect you.

Noncircmvention and related agrreements

Whether you are hiring employees or independent contractors or are engaging in business transactions or joint ventures with other companies, you need to be aware of these three types of agreements:

• Confidentiality agreement. This prohibits one party from disclosing another party's confidential information to third parties. It may also be called a nondisclosure agreement. For example, the Acme Corporation hires Madeline to develop a new widget, a project that requires Madeline to have access to Acme's confidential information. With a confidentiality agreement, Madeline promises to keep Acme's information private and not disclose it to any outside parties.
• Noncompete agreement. Such an agreement prohibits one party from going into business in competition with another party. For example, the Acme Corporation hires James as an assistant manager. With a noncompete agreement, James promises not to leave Acme and start his own company as a competitor of Acme. This is often used for an employee but can also be used with another business entity or an individual, such as an independent contractor.
• Noncircumvention agreement. This prohibits one party from entering into any type of business deal with an individual or company that it was introduced to by another party. Let's say that Roadrunner Realty LLC, a commercial real estate broker, introduces Acme Properties Corporation to Coyote Construction Company for the purpose of Acme and Coyote engaging in a joint business venture to develop a subdivision. With a noncircumvention agreement, Acme promises not to go behind Roadrunner's back and deal directly with Coyote, thereby cutting Roadrunner out of the deal. Roadrunner and Coyote may also have a separate noncircumvention agreement, or there may be a single document that is signed by all three parties.

A noncircumvention agreement can be a stand-alone document or part of a comprehensive document that also includes nondisclosure and noncompete provisions. These types of agreements can either be a unilateral agreement, meaning that they only restrict one of the parties, or a mutual agreement, meaning that they restrict both parties. With a mutual noncircumvention agreement, both parties can be restricted from entering into any similar type of arrangement with outsiders.

Benefits of a noncircumvention agreement

A party being protected by a noncircumvention agreement benefits by receiving legally binding assurance that their business secrets or their position as an intermediary such as a broker will not be compromised. If the agreement is violated, the protected party can file a lawsuit against the other party and may be able to obtain a court injunction or monetary damages.

The benefit to the party being restricted by a noncircumvention agreement is not so direct. The benefit is merely the business venture itself. Without the noncircumvention agreement, the party enforcing the restriction may not be willing to proceed with the deal.

Drawbacks of a noncircumvention agreement

The disadvantages of a noncircumvention agreement fall mostly upon the party being restricted. These can include significant inhibition of future business activities if the time period of the agreement's restriction is excessively long or if the agreement covers business activities over a wide geographical area. An agreement that restricts activities over a wide geographical area can also subject the restricted party to lawsuits anywhere in that area.

Since most noncircumvention agreements also apply to the restricted party's officers, directors, and employees, it can be difficult to control the actions of all of these people, especially after they end their association with the business.

Noncircumvention agreements are complicated and usually lengthy, complex documents. They need to be entered into with both parties fully understanding the agreement. Both preparation and understanding are likely to require professional legal assistance.