The term “covenant” may have religious connotations and certainly sounds archaic, but legally speaking, it has relevance in modern business transactions. But what is a “covenant”? A covenant is a promise or an agreement to do, or, in the case of restrictive covenants, not to do a particular act. Unlike a mutual agreement where the remedy for a breach generally relates to the validity of the agreement itself, the remedy for a breach of a covenant may be monetary damages or injunctive relief.
Restrictive covenants are found in many contexts, such as contracts for employment, deeds to real property, and the sale of a business. In such contexts, the restrictive covenants must be signed contemporaneously with the transaction in order to be valid. If the covenant is made subsequent to the contract or sale, is not supported by valid consideration, or is not ancillary to the contract, the covenant may constitute an illegal restraint on trade and, therefore, be void as against public policy.
A restrictive covenant in an employment contract usually takes the form of a promise not to compete. This simply means that upon termination of employment, the employee agrees not to work for a competitor of the employer, or in any other manner compete with the employer. Employers find covenants not to compete to be useful tools in protecting their interests, especially in confidential business matters such as trade secrets, intellectual property, and client lists.
In general, courts subject covenants not to compete in employment contracts to a stringent test of reasonableness. They tend to construe the covenants strictly in accordance with the language of the instrument, and are reluctant to extend them by implication. In determining the enforceability of such a covenant, a court will consider the possibility of undue hardship on the employee, any special training or skills of the employee, and the need for protection of the employer. Furthermore, if the restrictive covenant does not contain limits on time or territory in which the employee may not compete, it may be unenforceable.
If the restriction is reasonable in duration and geographical area, the contract likely will be enforced. However, if a court finds that the restraint is overbroad, not reasonably necessary for the protection of the employer, or imposes an undue hardship on the employee, the covenant may be struck down or modified by the court. Thus, to ensure enforceability, it is critical that restrictive covenants be drafted with care, taking into account the body of case law that has evolved over the years in this area.
Restrictive covenants are found in many contexts, such as contracts for employment, deeds to real property, and the sale of a business. In such contexts, the restrictive covenants must be signed contemporaneously with the transaction in order to be valid. If the covenant is made subsequent to the contract or sale, is not supported by valid consideration, or is not ancillary to the contract, the covenant may constitute an illegal restraint on trade and, therefore, be void as against public policy.
A restrictive covenant in an employment contract usually takes the form of a promise not to compete. This simply means that upon termination of employment, the employee agrees not to work for a competitor of the employer, or in any other manner compete with the employer. Employers find covenants not to compete to be useful tools in protecting their interests, especially in confidential business matters such as trade secrets, intellectual property, and client lists.
In general, courts subject covenants not to compete in employment contracts to a stringent test of reasonableness. They tend to construe the covenants strictly in accordance with the language of the instrument, and are reluctant to extend them by implication. In determining the enforceability of such a covenant, a court will consider the possibility of undue hardship on the employee, any special training or skills of the employee, and the need for protection of the employer. Furthermore, if the restrictive covenant does not contain limits on time or territory in which the employee may not compete, it may be unenforceable.
If the restriction is reasonable in duration and geographical area, the contract likely will be enforced. However, if a court finds that the restraint is overbroad, not reasonably necessary for the protection of the employer, or imposes an undue hardship on the employee, the covenant may be struck down or modified by the court. Thus, to ensure enforceability, it is critical that restrictive covenants be drafted with care, taking into account the body of case law that has evolved over the years in this area.
– Denise Turner