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How restrictive covenants can help protect a business owner

On Behalf of | Feb 20, 2024 | Business Law |

Contracts are crucial for the protection of those running businesses. The terms set in a contract establish the responsibilities that one business has to another or to workers within the organization. Contracts can establish clear standards, impose requirements for settling conflict and even prevent misconduct that could damage a company’s profitability.

Those establishing or running businesses often put a lot of thought into the contracts that they sign with outside parties. The terms of those contracts can protect a company or leave it vulnerable. Restrictive covenants are a common inclusion in many modern contracts. They can enhance the protection that executives and business owners derive from signing written agreements with other parties.

What are restrictive covenants?

A restrictive covenant is a clause or addendum to a contract limiting certain future activities. There are three types of restrictive covenants that businesses commonly add to written agreements.

Non-compete agreements prevent one party from working for a competitor or starting a competing company. They are most common between business partners and in employment contracts.

Non-disclosure agreements (NDAs) prevent one party from sharing non-public information with others. NDAs are often important inclusions in employment contracts but may also play a role in vendor contracts, as those who provide materials or services to a business are often privy to private information about how the business operates.

Non-solicitation agreements are also useful in a variety of different contracts. They prevent one party with information about a company’s customers, clients or employees from soliciting those parties to do business with them later. Non-solicitation agreements prevent a former worker from trying to get customers to follow them to a new business or a vendor from trying to hire workers with industry experience gleaned while working for a client.

How restrictive covenants work

A restrictive covenant is typically only valid and enforceable when each party receives something of valuable consideration and the clause is part of a broader, enforceable contract. Restrictive covenants, in particular, usually need to have specific limitations integrated into them to ensure that they do not place an onerous burden on the worker or other business making the concessions about future economic activity.

Businesses seeking to enforce restrictive covenants usually need evidence of a violation and must then take legal action against the outside business or former employee who violated the contract. Restrictive covenants are just one example of the specialized language that people may want to include in customized business contracts.

At the end of the day, adding the right terms to written agreements can protect a company from unfair competition.