Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
Contents
- What Is a Covenant in Law? Understanding the Basics
- Covenant Law: Why Does It Matter for Australian Businesses?
- Where Do Covenants Appear in Business?
- What Happens If You Breach a Covenant?
- How Can I Proactively Manage Covenants In My Business?
- Are There Any Pitfalls With Covenants in Law?
- How Can You Make Sure Your Covenants Are Enforceable?
- What About Changing or Removing Covenants?
- Key Takeaways: Covenants in Law for Your Business
Starting or running a business in Australia is filled with exciting opportunities - and essential legal responsibilities. One area that often confuses business owners is the concept of a covenant in law. While these legal agreements can seem technical, understanding how covenants work is crucial to managing your risks, complying with contracts, and securing your business’s future.
If you’re launching a new venture or growing your existing business, keep reading for a practical guide to covenants in law, what they mean for your contracts, the legal obligations you might encounter, and how you can make sure you’re fully protected from day one.
What Is a Covenant in Law? Understanding the Basics
Let’s start simply: a covenant in law is a promise or obligation contained in a legal agreement. If you’ve ever signed a contract - whether it’s a lease, supply agreement, or partnership arrangement - chances are you’ve encountered covenants, even if you didn’t recognise them by name. Here’s how the term breaks down:- Covenant (Legal Definition): A formal promise to do (or not do) something, usually set out as a clause within a contract.
- Covenant meaning in law: Legally, it means more than a loose promise - once agreed, you’re bound to uphold the obligation or risk legal consequences such as damages or termination.
Covenant Law: Why Does It Matter for Australian Businesses?
Australia’s contract law is clear: when you sign a contract, you’re agreeing to its terms - including any covenants it contains. These legal promises form the backbone of many business relationships. Here are some sector examples where covenants can have a direct impact:- Retail or office leases (e.g. covenants to pay rent or not make alterations without permission)
- Supplier agreements (e.g. covenants to purchase a minimum quantity, or only buy from a certain source)
- Employment contracts (e.g. non-compete covenants or confidentiality obligations)
- Shareholder and partnership agreements (e.g. covenants not to compete, or to contribute capital)
Types of Covenants: What Should I Watch Out For?
Covenants come in many shapes and sizes, but most business owners will encounter two broad types:1. Positive (Affirmative) Covenants
These require a person or business to do something. For example:- Pay rent on a certain date each month.
- Maintain business insurance according to a minimum coverage level.
- Carry out maintenance or repairs in leased property.
- Meet specified performance targets or reporting requirements.
2. Negative Covenants (Restrictive Covenants)
A negative covenant is an obligation not to do something. These are very common and often the subject of disputes:- A promise not to run a competing business within a defined area (restraint of trade).
- A promise not to disclose confidential information about your business.
- A restriction on making unauthorised changes to premises or assets.
- A commitment not to assign (transfer) rights or duties under a contract without consent.
Where Do Covenants Appear in Business?
Covenants can pop up all over the place in typical business operations. Here’s where you’re likely to find them:- Commercial Lease Agreements: Landlords and tenants are usually bound by long lists of covenants to maintain the property, pay outgoings, not make structural changes, and more. You can read about commercial leases in Australia here.
- Shareholder and Partnership Agreements: Covenants may require co-owners not to compete, to contribute capital, or to stay for a minimum term. Learn more about shareholder agreements.
- Employment Contracts: Commonly include restrictive covenants (restraints) preventing staff from working for competitors or poaching clients post-employment. Find out about non-compete agreements.
- Service Agreements & Supply Contracts: Often packed with covenants - like minimum orders, delivery timelines, or exclusivity promises. Explore more about goods and services agreements.
What Happens If You Breach a Covenant?
If you break a covenant in law - meaning you fail to carry out a promised action or you do something you’ve promised not to - you could face:- The other party ending the contract (termination), especially for serious breaches.
- Claims for financial compensation (“damages”).
- Injunctions - a court order to make you stop (or start) doing something.
- Long-term business consequences, such as damaged reputation or loss of key trading relationships.
How Can I Proactively Manage Covenants In My Business?
The good news is that you can take steps to manage and monitor covenants before they become a problem. Here are some practical tips:- Read Every Agreement Carefully: Before you sign, read every word (or have a legal expert review it). Don't gloss over boilerplate clauses - covenants may be hidden in the detail. Need contract support? Sprintlaw has a guide on contract review.
- Negotiate Clauses You’re Not Happy With: Covenants can often be negotiated or amended before a contract is signed. Don’t assume standard terms are “set in stone.”
- Keep a Register of Your Key Covenants: Track ongoing obligations and important dates (like renewal, notification, or expiry periods).
- Communicate Clearly With Other Parties: If an issue arises, discuss it early to avoid escalation. Changes to covenants should always be agreed in writing.
- Seek Professional Advice for Complex Covenants: Especially in areas like employment, shareholder rights, or commercial property, get legal guidance early. Sprintlaw’s corporate governance guides can help set you on the right path.
Are There Any Pitfalls With Covenants in Law?
Yes - here are some of the most common issues to watch for:- Overly Restrictive Covenants: For example, a restraint clause that’s too broad may be invalid and unenforceable. Australian courts tend to limit covenants to what’s “reasonably necessary” to protect business interests.
- Failure to Update Covenants: If your business evolves - say, by expanding or entering new markets - it’s important that your covenants reflect your current operations.
- Ambiguous Language: Vague promises in a contract can lead to disputes down the track. Clarity is key.
- Not Following Statutory Requirements: Some contracts (like leases or franchise agreements) may have covenants mandated by law - these can’t be “contracted out of,” and failing to meet them can have serious legal consequences.
How Can You Make Sure Your Covenants Are Enforceable?
There’s more to a legally binding covenant than simply writing it down. Here’s what makes a covenant in law enforceable in Australia:- The contract is properly executed (signed according to the legal requirements, by all necessary parties).
- The promise or restriction is clear, specific, and not unreasonably broad.
- The covenant serves a legitimate business interest (e.g. protecting confidential information or customer relationships).
- It’s supported by “consideration” - usually, each party is providing value (for example, a business buys goods and agrees not to resell competing products).
- It does not seek to impose obligations that are unlawful or contrary to public policy.
What About Changing or Removing Covenants?
Circumstances change - sometimes covenants need to be updated or even removed altogether. This typically requires both parties’ agreement (in writing), or, in the case of “implied covenants” in leases or other longstanding arrangements, a formal variation via deed. If you’re unsure about the process, Sprintlaw offers support for amending contracts or modifying agreements by deed.Key Takeaways: Covenants in Law for Your Business
- Covenants in law are legally binding promises contained in contracts - understanding them is essential to managing your business risks.
- Covenants may require you to do, or refrain from doing, certain things - breaching these promises can trigger legal and financial consequences.
- Well-drafted covenants protect your business and enable you to build strong, secure relationships with landlords, clients, suppliers, and partners.
- Most businesses should have solid legal agreements covering key areas like leases, supply, employment, and ownership to manage covenants effectively.
- Always read contracts closely, negotiate unclear or unreasonable covenants, and get legal advice before signing.
- If your business changes or you’re unsure about your obligations, review and update your covenants as needed - the right legal support can make this simple and safe.
