Contract Restrictions: Everything You Need to Know
Contract restrictions refer to restrictive covenants, which restrict a party from doing something or involve a promise not to do something.3 min read
Contract restrictions refer to restrictive covenants, which restrict a party from doing something or involve a promise not to do something.
About Restrictive Covenants
These agreements are often called "restrictive covenants" since their purpose is to restrict someone from doing something. In some cases, the agreement offers compensation to the party who agrees to refrain from a specific action.
Various business situations may call for restrictive covenants, such as real estate and land use situations. Restrictive agreements are also common in other business contracts, such as employment contracts. There remains a lot of confusion about the differences in restrictive agreements.
Types of Restrictive Covenants
A restrictive covenant may be part of a larger agreement or it may be a separate agreement. Employment contracts and agreements with independent contractors frequently contain these types of covenants.
They're also common in business purchases. For instance, a selling business owner may be restricted from the following:
- Soliciting employees away from the company he or she is selling
- Competing with the company he or she is selling
- Disclosing confidential information
Types of Restrictive Covenants
There are three kinds of restrictive covenants.
A non-compete clause is used in the following two situations:
- Employment situations when an employer wishes to prevent an employee from leaving the business and then starting a competing company
- Business sales agreements where the owner who's selling promises to not engage in competition with the new owner regarding a specific area and time and in a similar company — the seller is usually compensated to not compete
This restricts a person from soliciting a business's employees or customers. Usually, an employee who is leaving a business promises not to solicit employees from that business to work for him or her. For instance, Tom leaves ABC Manufacturing and wants to take Molly, his administrative assistant, along with him. If he's signed a non-solicitation agreement, he's not allowed to take her with him to his new company.
These types of covenants are often used for professional practices. In many instances, the departing professional is also restricted from soliciting patients, customers, or clients of the practice.
Nondisclosure or Confidentiality
This type of agreement is designed to prevent a person from discussing or stealing proprietary information that provides the owner with a competitive advantage. This type of proprietary information includes inventions, trade secrets, and other confidential information.
Problems with Restrictive Agreements
The various types of restrictive agreements attempt to prevent a person from taking something from a business, such as employees, customers, trade secrets, proprietary products, or business in general. The issue with all of these covenants is enforcement. Once the damage is done — a competitor has destroyed a business or confidential information has been taken — the process to legally recover damages is often lengthy and costly. No one really benefits but the attorneys.
Some states, like California, have struck down non-compete covenants on the grounds that they unduly restrict competition. Before you put any restrictive covenants in a contract, consult an attorney and review your state's laws regarding them.
Employment Contract Restrictions
Employment contract restrictions may be found in employment contracts. They restrict what employees and employers can do during and after their employment relationship. Keep in mind that employment contracts may be legally binding, whether they're implied or express, written or oral. Other company documents like an employee handbook can include binding restrictions on the employment relationship.
Employment contracts may have restrictions on termination that supersede any state law presuming at-will employment. At-will employment refers to an employee or employer being able to terminate employment for any reason or none at all. Legal exceptions are provided by laws that protect employees from discrimination and other illegal practices.
Employment contracts may contain “for cause” restrictions, which don't necessarily mean misconduct but may include a specific reason, such as ongoing incapacity to perform. It will be up to the courts to determine what “cause” means if the term isn't specifically defined in the agreement.
Because contracts are designed to be legally binding documents, you should fully understand the terms and conditions you're agreeing to before you sign. You may want to consult a professional who is experienced in contract law to explain any complex legal language to you.
If you need help with contract restrictions, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.