Introduction

Covenants and contracts—two words you might hear thrown around a lot, especially in legal and business settings. It’s easy to mix them up, but they aren’t the same thing. While both involve promises and agreements, they serve different purposes and carry different legal weight.

Understanding the difference is key if you’re dealing with contracts, because covenants often exist within contracts and play a unique role. Whether you’re drafting a deal, reviewing one, or just trying to make sure you understand your obligations, knowing how covenants differ from contracts can save you from a lot of headaches. Let’s break down these two terms and make it clear how they relate.

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What is a contract?

A contract is basically an official grown-up version of "pinky promise"—except it's often two serious parties and a lot more paperwork. At its core, a contract is an agreement between two or more people (or companies) that’s legally enforceable. You know, the kind of promise that, if broken, might end with someone standing in a courtroom explaining themselves.

Contracts can be simple, like agreeing to pay someone to fix your sink, or more complex, like a multi-million-dollar business deal. Sales agreements, employment contracts, and rental leases are all examples of typical contracts—just think of them as different flavors of the same "legally-binding" ice cream. Some are vanilla, some are rocky road, but they all follow the same basic rules.

So, what makes a contract legit? It’s built on four key elements offer, acceptance, consideration, and mutual intent. Let’s break that down with a bit more detail.

Offer

It all starts with an offer—one party saying, "I’ll do this thing for you." It could be as simple as, "I’ll mow your lawn for $50." This offer needs to be clear so everyone knows exactly what’s on the table. You can’t have a contract if no one knows what they’re agreeing to. Imagine if someone just said, "I’ll do a thing for you for some money"—that’s not going to cut it. The terms need to be specific enough that both sides know what’s expected.

Acceptance

Next comes acceptance. This is when the other party says, "Deal!" But it has to be an actual acceptance—no half-hearted "maybe" or "let me think about it." It needs to be a definitive yes to the offer as it stands. Any changes or conditions introduced at this stage would technically be a counteroffer. So if the homeowner responds with, "How about $40 instead of $50?"—that’s not acceptance; it’s starting negotiations all over again. Once there’s a clear “yes” to the original terms, we have acceptance.

Consideration

Consideration is the heart of a contract. It’s what each party is bringing to the table. For a contract to be valid, both sides need to get something of value. This could be money, services, goods, or even a promise.

In our lawn-mowing scenario, the homeowner gets a freshly cut lawn, and the mower gets $50. If only one side is getting something (like if you decide to mow your neighbor’s lawn just to be nice), it’s more of a favor than a contract, and the law tends not to enforce favors. Both parties need to have some "skin in the game," even if it’s something as symbolic as a dollar.

Mutual intent

Finally, both sides need to genuinely mean it. This is called "mutual intent." It means both parties are seriously agreeing to the terms and fully understand the nature of the deal. No one can be joking around or under duress. If someone’s agreeing to a contract because they’re being threatened or tricked, that’s not mutual intent. Both sides have to clearly understand they’re entering into a legal relationship that comes with responsibilities.

These four elements—offer, acceptance, consideration, and mutual intent—are the magic ingredients that turn a regular promise into a legally enforceable contract. Without them, your "agreement" is more like a suggestion—something that might be nice to do but isn’t enforceable if one side changes their mind.

Read: I signed a contract but changed my mind—what can I do?

What is a covenant?

A covenant might sound like something out of an ancient scroll, but it’s really just a promise made within a legal agreement. While contracts are full-fledged agreements between two parties, covenants are more like clauses within those contracts—specific commitments that one side makes to the other.

There are two main types of covenants: positive covenants and negative covenants.

Positive covenants

These are the "do something" promises. A positive covenant requires one party to perform an action. Imagine you’ve taken out a loan, and the bank says, "You must maintain insurance on this property while you’re paying off the loan." That’s a positive covenant—the borrower is actively required to do something (keep up insurance).

In business contracts, positive covenants can also include obligations like delivering goods on time or maintaining certain operational standards.

Negatives covenants

Negative covenants, on the other hand, are the "don’t do something" promises. They restrict a party from engaging in specific actions. Think of it like a parent telling their kid, "No eating cookies before dinner." A common example is a non-compete clause in an employment agreement, where an employee agrees not to work for a competitor for a set period after leaving the company. It’s all about preventing specific behaviors to protect the interests of the other party.

Read: When should I hire a lawyer for my contract?

Examples of covenants in legal agreements

Mortgage covenants

When you take out a mortgage, you’ll likely see both types of covenants. For example, the lender might include a positive covenant requiring you to keep the property in good repair (because the bank wants to protect their collateral). A negative covenant might restrict you from transferring the property without their approval.

Non-compete clauses

As mentioned, a non-compete clause is a classic example of a negative covenant. It’s there to prevent someone—usually an ex-employee—from jumping ship and immediately using the company’s trade secrets to help a competitor.

Financial covenants in loan agreements

In business loans, lenders often include covenants to protect their investment. For instance, they might require the company (the borrower) to keep a certain debt-to-equity ratio (a positive covenant), or they might restrict the borrower from taking on more debt (a negative covenant) without prior approval.

Covenants are the guardrails of contracts. They help define specific behaviors that must (or must not) happen, ensuring that everyone plays by the rules. Unlike the broad responsibilities of a contract, covenants zoom in on particular promises—specific commitments that can either keep everything running smoothly or lead to some legal headaches if they’re broken.

Read: How can I amend a contract after signing?

The key differences between a covenant vs a contract

Contracts and covenants might seem similar at first glance—they both involve promises—but they play different roles and have different levels of impact.

Nature

A contract is the whole deal—it’s an agreement where both sides commit to doing (or not doing) something, and it's legally enforceable. A covenant, on the other hand, is more like a smaller promise that exists inside that bigger contract. Think of a contract as a complete roadmap, while covenants are the specific rules along the way, like “Take a left turn here” or “Stop at this checkpoint.”

Contracts are standalone agreements, but covenants are just parts of that bigger picture, setting specific obligations that one party must follow to keep the contract working smoothly.

Legal enforcement

Contracts are binding agreements, meaning if someone breaks their promise, the other party can take them to court and, in many cases, get some form of compensation. When it comes to covenants, the consequences are usually about what happens within the contract itself.

For example, if a covenant is broken, it might not necessarily lead straight to a lawsuit, but it could trigger a penalty or change the conditions of the contract. Imagine borrowing money from a bank—if you break a covenant that says you have to maintain insurance, the bank could increase your interest rate or even demand immediate repayment. So, covenants don’t always have immediate legal consequences, but they definitely come with conditions that can make life harder if you break them.

Examples

Imagine you’re renting an apartment. The rental agreement (that’s your contract) says you’ll pay rent monthly and the landlord will provide a place to live. Pretty straightforward, right? Now, let’s add a covenant: you promise not to paint the walls neon green without permission. That’s a covenant—it’s one specific promise you make to keep the contract working well. If you break it, the landlord could demand you repaint or even withhold part of your deposit to fix it.

Another example: say you get a business loan. The loan agreement itself is the contract, outlining the overall deal. Within that contract, there’s a covenant saying you need to keep a certain amount of cash in the bank to show you’re financially stable. If you fail to do that, the lender might impose a penalty or decide you’re in default, but the whole contract doesn’t necessarily get thrown out right away. It’s just that certain terms change, and things get more complicated.

In short, contracts are the broad commitments between parties, and covenants are the specific promises that help keep those commitments in line. Contracts set the stage, while covenants are the individual acts that make the whole play run smoothly.

Read: AI vs. manual contract review: Which is right for your business?

Conclusion

In a nutshell, contracts are the main agreements that set out what each party is obligated to do, while covenants are the specific promises tucked inside those contracts. Contracts cover the big picture, and covenants handle the finer details—like making sure everyone follows certain rules along the way.

Understanding the difference between the two is crucial when you’re drafting or reviewing agreements. It helps you know exactly what you’re committing to and what specific promises you have to keep. Whether you’re dealing with a simple rental agreement or a complex business deal, knowing the role of contracts versus covenants can make sure you stay on track and avoid any unpleasant surprises.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

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