Business contracts generally outline expectations for working relationships. A contract with a vendor may detail pricing and delivery schedules. Contracts with service providers may clarify how long the arrangement should last and the company’s expectations for critical services. Employment contracts can explain compensation and job performance standards.
While contracts often focus on the working relationship between parties, they may also impose restrictions on certain types of behavior. Restrictive covenants, such as nondisclosure and noncompete agreements, can help protect businesses from unfair competition and the misuse of valuable trade secrets.
What types of contracts may need to include restrictive covenants?
Employment contracts
Many people associate noncompete agreements with employment contracts in particular. However, employers can also require that workers sign nondisclosure or nonsolicitation agreements as a condition of their employment.
Preventing workers from misusing what they learn while working at a company or the relationships they develop during their tenure at the business can limit the likelihood of unfair competition harming the company later.
Acquisition, merger or franchise agreements
When one company seeks to acquire another, the organizations may share private information. The same is true in situations where leaders at two organizations discuss the possibility of a merger. Restrictive covenants can take some of the risk out of large business transactions, especially if they fail.
Companies offering franchise opportunities often require that franchisees sign contracts with restrictive covenants as well. The goal is to protect any trade secrets that the franchisee could learn while running a franchise location that they could use to compete against the franchisor later.
Partnership agreements
People who do business with one another are often privy to critical company secrets. Restrictive covenants can prevent business partners from starting competing companies, poaching top talent or disclosing critical trade secrets.
Vendor and service provider agreements
Outside businesses assisting with the daily operations of a company often have access to critical information about the organization. They could theoretically abuse the access and information that comes from a functional business relationship.
Appropriate restrictive covenants can help companies protect their trade secrets and competitive advantages. Drafting custom contracts that address a company’s needs can be a critical component of establishing and maintaining a profitable organization.