Non Circumvention Agreements How to avoid getting cut out of the deal and interpreting contracts

Non Circumvention Agreements

Non circumvention agreements are agreements that prevent a party from being cut out of a deal. they are normally found with non-disclosure clauses.

Introduction

The typical scenario is where a party (a “disclosing party”) discloses confidential information about some commercial opportunity to another party (a “receiving party”). A number of different scenarios could then occur: (i) The receiving party discloses the confidential information to a third party, who in turn discloses the information to another party and so on. (ii) The receiving party uses the information to capitalise on the commercial opportunity by approaching a third party circumventing the disclosing party. (iii) The receiving party discloses the confidential information to a third party (or some other party further down the chain) who uses the information to capitalise on the commercial opportunity circumventing the disclosing party.

In the above scenarios there is the duty of confidentiality – protection from disclosure or further disclosure and there is the circumvention, that is, an approach by the receiving party to a third party without the consent of the disclosing party.

Non-circumvention Agreements

Non-circumvention is where one party is introduced to a customer, client or business partner of another party, with a view to some kind of business opportunity, and then the party being introduced makes direct contact in relation to  the business opportunity. The introducer is left out of the loop.

Confidential and non-circumvention relationships are implied at common law (i.e. there is no need for a written contract). They can also be implied in a contract. Finally, they can be expressly provided for by way of a written contract. The courts will take a common sense approach in determining the existence of a non-circumvention relationship in all three circumstances.

The  implied common law confidential and/or non-circumvention relationship is the most difficult to establish. You have to show that both parties intended to enter into a non-circumvention relationship through inference evidence. Having a contract, whether or not it expressly deals with non-circumvention, makes it easier to prove a non-circumvention relationship exists.

The key question is as follows: is the party wishing to establish confidentiality and non-circumvention aware that circumvention might occur, and did they intend that they would be protected against the risk of circumvention?

If there is no contract then some of the factors that can be used as inference evidence are:

Did the receiving party approach the disclosing party for an introduction to the third party? If they did, you will have an easier time proving an implied non-circumvention relationship.

Was it clear you were making a business proposition? If you made it clear that there was a business relationship in return for payment and that circumvention would have a financial cost for you, then you have a stronger case for an implied non-circumvention relationship.

Did circumvention have commercial value? Can you show that by circumvention the receiving party gained financially? If so, this weighs in your favour.

However it is far easier to prove an implied non-circumvention relationship in a confidential relationship where there is a written agreement. It is even better to have an express non-circumvention clause in a written agreement. You may have a non-disclosure and non-circumvention agreement with a clause that obligates the receiving party to procure entering onto a “back-to-back” agreement that imposed obligations of non disclosure of confidential information and non-circumvention on all receiving parties in the chain.

In Dorchester Project Management Ltd v BNP Paribas Real Estate Advisory & Property management UK Ltd [2013] EWCA Civ 176

In the Court of Appeal (CIVIL Division) on appeal from Mr Charles Hollander QC before Lady Justice Arden, Lord Justice Jackson and Lord Justice Beatson. Dorchester Project Management Limited (Dorchester) appealed a decision in lower court as to the interpretation of a written non-disclosure and non-circumvention deed (the “deed”) between Dorchester and BNP Paribas. Dorchester wanted to disclose confidential information about the opportunity to purchase development land to BNP Paribas so that BNP would disclose the information to IKEA, a potential funder.

According to Lady Justice Arden, there were two questions to be decided:

The non-circumvention issue: did the deed impose an obligation on BNP to make sure that there was a back-to-back  agreement with IKEA that would impose the obligations of non-disclosure and non-circumvention on IKEA as that which BNP owed to Dorchester? Yes.

The direct disclosure issue: would the back-to-back agreement apply to Confidential Information supplied to the receiving party by Dorchester, as well as to that supplied by BNP? Yes.

The appeal was allowed.

Conclusion

It is suggested that the following can be taken away from the above case and this article:

(i) At first instance, Mr Charles Hollander QC noted that the deed was badly drafted, and in a case where an agreement is badly drafted then it should be given a businesslike and not an over literal interpretation. The Judge cited Lord Bridge in Mitsui Construction Co Ltd v AG of Hong Kong (1986) 33 BLR 14

Obviously you don’t want the court coming up with its own interpretation of what a clause in your contracts means because it is badly drafted.

In her conclusions Lady Justice Arden stated:

The primary aim of the court in contractual interpretation is to ascertain the meaning of an agreement which the document would convey to a reasonable person having all background knowledge which would reasonable have been available to the parties in the situation in which they were at the time of the contract…..The background enables the court to chose between meanings and to conclude that the parties were using a term in a particular sense or had chosen the wrong words to convey their meaning.

(ii) Lady Justice Arden gives an authoritative insight into how contractual clauses should be interpreted by the courts.  Lady Justice Arden goes on to say that the Judge was right to have in mind a business like meaning from the provisions of the deed, but that that the Judge was not entitled to disregard words in the deed.  She states:

Words can only be disregarded in the rare event that it is not possible to ascribe any sensible meaning to them.

 (iii) Non circumvention agreements clauses in contracts will be upheld by the courts provided that they are properly drafted.

(iv) Whether or not you have a written agreements, it is wise to  think about confidentiality, and non circumvention agreements in your business dealings.

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