Friday, March 25, 2011
A covenant is promise to engage in or refrain from a specified action.
When there is a covenant in a contract the party providing the covenant (covenantor) makes a promise to the party receiving the covenant (covenatee) that they will or won’t take some action in the future.
The most common types of covenants that exist in purchase contracts can be things like a Buyer making a covenant on the use of the purchases or the Supplier making a covenant not to compete. For example, if a Supplier is concerned with a Buyer potentially buying and reselling product directly to third parties without providing additional value added, the Supplier could request a covenant that the Buyer will only use its purchases for its own needs and will not resell the product. For example, if the Buyer make a significant investment in developing a product with the Supplier and wanted to protect that against competition from the Supplier or the Supplier working with a third party that would compete against the Buyer, the Buyer could ask for the Supplier to provide a covenant not to compete.
Any covenant should include specific parameters. For example in a covenant not to compete, it should define the markets, and the period of non-competition. In situations where a covenant is important, as part of that covenant you need to establish what the appropriate remedy would be for breach.
If you want the ability to force the Supplier to comply with the agreed covenant, as a remedy you would want to have the right under equity to injunctive relief so you could go to court to have the Court order compliance with the covenant. If money damages is adequate, you would not need injunctive relief, but you would need to make sure that the damages you could recover are not restricted by the limitation of liability. For example, if the majority of your damages would be lost sales and profits, you can’t have a limitation of liability that excludes recovery for damages associated with lost sales and lost profits.