Restrictive Covenants - Detailed Analysis
Last Updated: October 2022
(a) Breach of a Covenant that Attracts Financial Consequences
Where the financial consequence arises by reason of a breach of a covenant, i.e. a prohibition on some form of competitive activity, the court, regardless of whether it is in a jurisdiction that follows the formalist or functionalist approach, may be called upon to determine whether that consequence is a penalty and, if so, whether it is enforceable. The word “may” is used because the court may first decide that the prohibition on competitive activity is not enforceable under the usual tests and determine it therefore need not assess the enforceability of the financial consequence.
If it is determined the prohibition on competitive activity is reasonable, then the court often will be asked by the litigants to assess the enforceability of the financial consequence. See the further discussion below in this section under “Judicial Approach to Stipulated Remedy Clauses.”