A restrictive covenant is a class of legal “promise” imposing a restriction on one party for the benefit of another. When drafted correctly, restrictive covenants are an invaluable tool to protect your business.
There are three main types of restrictive covenants:
- Non-competition agreements;
- Non-solicitation agreements; and
- Confidentiality agreements.
The most demanding are the non-competition agreements because they preclude the contracting party from engaging in a business that competes with the business of the other party. In the employment context, non-competition agreements are frequently used to prevent a departing employee from immediately setting up a business that is in competition with the employer.
Non-solicitation agreements allow competition, but control the manner of competition. They preclude a contracting party from competing by soliciting business from or through the clientele, employees or suppliers of the other contracting party.
Lastly, confidentiality agreements place limits on the disclosure of certain information and are often used in conjunction with non-competition or non-solicitation agreements. They can help preserve intellectual property, client information, trade secrets and strategy.
The problem we most often encounter with restrictive covenants is enforceability. Restrictive covenants are considered to be in “restraint of trade” and therefore difficult to enforce unless implemented correctly and properly drafted. A properly drafted restrictive covenant is reasonable, specific, clear and limited in scope.
By: Parveen Shergill, Pushor Mitchell LLP
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