Many business owners, including experienced ones, might never have heard of a non-circumvention clause, however, if your commercial lawyers advise you to include one in any contract you create with your clients or customers, then we highly recommend that you follow their advice.
The reason for that is a non-circumvention clause can help to prevent damage to your business, including maintaining revenue levels and subsequently profits, especially if you are in a highly competitive market sector or location. As for what a non-circumvention clause is, how they are used within the commercial world, and their importance, then please read on and we will explain all.
Non-Circumvention Clauses Explained
The simplest explanation we can give you of a non-circumvention clause is that it places a restraint on another party which you are doing business with that prevents them from bypassing your business, and instead dealing with those companies and other entities which either supply you or provide a service for you.
A simple example would be a company that supplies local car repair companies with spare parts for cars. They could include a non-circumvention clause to prevent their clients from going directly to the manufacturing company which makes the car parts from which they purchase wholesale and then sell on a retail basis.
Non-circumvention clauses will have several key elements within them, with the most common being:
- Parties: This will specify which parties the non-circumvention clause applies to e.g. company name, individuals
- Timescale: This will state the length of time the non-circumvention clause is valid e.g. 6 months, 1 year, no time limit
- Scope: An outline of what actions are covered by the non-circumvention clause e.g. purchasing specific goods and services, seeking discounts from your suppliers
- Exclusions: Identifies in which circumstances the non-circumvention clause will not be applicable e.g. purchasing bespoke or customisable products
When To Use Non-Circumvention Clauses
It is certainly wise to refer to your commercial lawyers if you wish to know when to include a non-circumvention clause in a commercial contract. The most common occurrence is within non-disclosure agreements where they add a further level of protection for your business. However, NDAs are not the only commercial contracts where commercial lawyers will include a non-circumvention clause for you. Other examples are:
Supply Agreements: The simplest to understand as they prevent the party that is contracting you to supply them with goods from bypassing you and going directly to the company that supplies you. This is especially important if the contract is substantial, meaning the potential losses are significant if your customer circumnavigates your business.
Joint Ventures And Collaborations: Commercial parties commonly enter ventures with each other on a collaborative basis or as a formal joint venture. The non-circumvention clause protects a signatory to the agreement being ‘cut out’ should the other party or parties decide to go alone without them.
Referral Agreements: Often associated with ‘finders fees’ when one party will pay another for referring clients and customers to them. In circumstances where commissions are also paid should a sale occur, a non-circumvention clause can prevent the company that is making profits from those sales from not paying commissions due to the referring party.
Non-Circumvention Clause Breaches
Non-circumvention clauses are legally binding on any party who is a signatory to them, and that is especially so if they are present within a legal and properly documented commercial contract. This is one reason why we strongly advise you to check with commercial lawyers before creating or signing any contract, whether you are the supplier or the client.
As for what can occur if a non-circumvention clause is not adhered to by one party to a contract, then the other party can instruct their commercial lawyers to begin breach of contract proceedings. The consequences for the party breaching the clause can include financial penalties such as damages and this can include any financial benefits they accrued as a result of the breach.
