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Protecting future business interests with restrictive covenants

On Behalf of | Feb 5, 2024 | Business Law

Business contracts outline the obligations that companies, vendors and other interested parties have to one another. They clarify employment standards and establish numerous other key terms for business relationships. Contracts serve to formalize agreements and make them enforceable if there are disputes in the future.

Those in leadership roles at organizations may need to invest a significant amount of time in the creation of custom contracts that serve specific purposes. From hiring new employees to solidifying arrangements with vendors, there are many business goals people can accomplish with the right contract inclusions.

Restrictive covenants may play an important role in certain types of contracts. Businesses may need to add these special clauses to various contracts to protect against the potential future misconduct of other parties.

What are restrictive covenants?

Most contracts focus on what obligations one party has to the other. In other words, the terms of the contract focus on the work one party must do or the funds they must provide for services rendered. Restrictive covenants are the opposite. They are contractual clauses forbidding certain types of conduct in the future. They have authority both during and after the formal working agreement between the two parties.

The three most common restrictive covenants are noncompete, non-solicitation and non-disclosure agreements. Noncompete agreements have recently been the focal point of many political discussions. They prevent employees from taking jobs with direct competitors or starting competing businesses. Some federal authorities even support banning noncompete agreements. For the time being, noncompete agreements are still theoretically enforceable in most states.

Non-solicitation agreements and non-disclosure agreements can also be useful in different scenarios. A non-solicitation agreement prevents one party from trying to hire a company’s employees or sell to its clients. A non-disclosure agreement prevents the sharing of non-public information gained through a professional relationship.

When are restrictive covenants useful?

Restrictive covenants often play a role in employment contracts executed when companies initially hire workers. They can also be part of severance agreements. Partnership buyouts, vendor contracts and agreements with outside service providers might all benefit from the inclusion of restrictive covenants as appropriate. A vendor or service provider contract might include non-disclosure and non-solicitation clauses. That way, an outside business that becomes aware of a company’s client roster cannot attempt to do business with those clients later or disclose that list to another interested party.

Adding the right terms to business contracts makes them more enforceable and extends better protection to an organization.