Every new business arrangement comes with a certain degree of risk. Companies hiring new employees have to consider the possibility that workers might misuse non-public company information for personal gain.
Leaders negotiating new vendor contracts may need to consider whether the vendor could reverse engineer a company recipe or production process with the information shared between the businesses. Outside service providers assisting with payroll or information technology could have access to private information about how the organization operates.
One of the ways that business leaders avoid unfair competition and other forms of misconduct is through contracts. Integrating the right details into contracts can help protect the business from certain forms of misconduct. Restrictive covenants can play an important role in limiting the harm that vendors, employees and service providers might cause.
What is a restrictive covenant?
Restrictive covenants are special contract inclusions that prohibit certain types of activity. Frequently, restrictive covenants remain in effect for a specific amount of time after the end of the working relationship between the two parties, not just during the contractual relationship.
For example, a newly-hired member of the executive team may have to sign a non-compete agreement as a condition of their employment. They agree not to work for any direct competitors in the area or to start a competing business for a specific amount of time after they end their employment with the company. Non-compete agreements help protect employers from scenarios in which people use non-public information for personal gain after leaving a position at a company.
Non-disclosure agreements are also very common, especially in vendor and service provider contracts. They prevent either party from sharing non-public information about the business or the working relationship between the two parties. Non-solicitation agreements are also somewhat common. They prevent parties with information about a company’s vendors, clients or employees from trying to do business with those parties later.
Frequently, restrictive covenants must include very clear terms to ensure that they are valid and enforceable. They may also feature penalty clauses that impose specific financial consequences for violations of the restrictive covenant.
Including the right terms in business contracts and being ready to go to court to enforce those contract terms via business litigation can help protect organizations as they expand their operations. Restrictive covenants are valuable contract inclusions in a broad range of different scenarios.