Reasonableness of covenants: Overview, definition, and example
What is the reasonableness of covenants?
The reasonableness of covenants refers to the fairness, necessity, and proportionality of the obligations and restrictions placed on a party within a contract or agreement. In legal terms, covenants are promises or clauses in a contract that bind one or more parties to certain actions or behaviors. For these covenants to be enforceable, especially in contract law, they must be reasonable in scope, duration, and geographic area.
Reasonableness is a standard often applied in assessing whether a covenant—such as a non-compete agreement, confidentiality clause, or restrictive covenant—is overly burdensome or unjust. For example, a non-compete clause in an employment contract may be deemed unreasonable if it lasts too long or applies to too broad of a geographical area, restricting the individual’s ability to work or earn a living.
Why is the reasonableness of covenants important?
The reasonableness of covenants is crucial because it ensures that contracts are fair and that the obligations placed on parties are not unduly restrictive or harmful. In the case of employment agreements, for example, covenants should not unfairly prevent an employee from finding work or pursuing a career after leaving a company.
The reasonableness standard helps protect individuals and businesses from entering into agreements that could be considered oppressive or overly broad by courts, which could lead to unenforceability or legal disputes. For businesses, ensuring that covenants are reasonable can help protect proprietary information, relationships, and investments without unnecessarily stifling employee mobility or competition.
Understanding reasonableness of covenants through an example
Imagine an employee signs a non-compete agreement with their employer that prohibits them from working in any capacity in the same industry within a 500-mile radius for five years after leaving the company. A court may determine that this covenant is unreasonable because the geographic scope and duration are too broad and restrictive for the employee, making it difficult for them to find new employment in their field. Therefore, the court might decide to limit the enforceability of the covenant, adjusting it to a more reasonable timeframe or geographical area.
In another example, a company might include a confidentiality covenant in a contract with a supplier. The supplier agrees not to disclose certain business strategies or proprietary information. However, if the confidentiality clause is written in an overly broad manner—such as indefinitely applying to all information, even unrelated to the contract—this might be considered unreasonable. A reasonable covenant would limit the duration and scope of the confidentiality obligations to only cover sensitive or proprietary information directly related to the contract.
An example of a reasonableness of covenants clause
Here’s how a reasonableness of covenants clause might appear in a contract:
“The Employee agrees that for a period of two years following the termination of their employment with the Company, they will not engage in any business activities within a 50-mile radius of the Company’s primary place of business. The Employee acknowledges that this covenant is necessary to protect the Company’s legitimate business interests but agrees that the duration and geographic scope of this restriction are reasonable.”
Conclusion
The reasonableness of covenants is a key principle in contract law that ensures obligations and restrictions placed on parties are fair and proportionate. By evaluating the scope, duration, and necessity of covenants, both businesses and individuals can avoid overly restrictive agreements that may be deemed unenforceable. Ensuring the reasonableness of covenants helps maintain balance in contractual relationships, protecting the interests of both parties while promoting fairness, mobility, and opportunity.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.