Most contracts focus primarily on what obligations each party signing the agreement has to the other. Employment contracts discussed wages and benefits as well as job expectations. Vendor contracts set prices and delivery schedules. Agreements with service providers help lock in specific costs and ensure consistent support for outsourced work, like accounting services.
The contracts that a company negotiates can have a major impact on the organization’s operations. The more customized terms a business integrates into its contracts, the more effective they may become. Companies can impose late fees for missed payments due to contractual inclusions or limit their liability in unusual circumstances. Businesses may also want to prevent potential future misconduct that could affect their operations.
Some contracts include restrictive covenants, which are special clauses or addendums to the contract prohibiting certain behaviors, often even after the primary contract ends. Why do companies frequently include restrictive covenants in new contracts?
Restrictive covenants can help protect trade secrets
One of the most common reasons for adding restrictive covenants to a contract is to protect non-public information about how a business operates. Trade secrets help companies establish a niche, reduce their costs or offer something that their competitors cannot. Those with access to those secrets could share them with others, potentially damaging the company in the process.
Employees, service providers and vendors could theoretically use what they learn about a business for personal profit. The actions of a former employee or a vendor familiar with the raw materials used to manufacture certain products could lead to unfair competition. Restrictive covenants help businesses prevent the misuse of information about a company’s trade secrets.
Non-compete agreements can prevent workers from starting a competing business or taking a job with a local competitor. Non-solicitation agreements could prevent employees and other parties from approaching workers, suppliers or clients that do business with one party to a contract. Non-disclosure agreements can help prevent the public release of private information about a business.
When properly utilized, restrictive covenants can decrease the risk of a company’s private information or operational secrets becoming public knowledge or influencing how competitors operate. They are one of many resources available to organizations that want to retain their competitive edge. Drafting bespoke contracts and focusing on long-term organizational protection may help preserve the resources that help to set a business apart from its competitors.