Restrictive covenants come in many forms; they can be stand-alone agreements, such as a confidentiality agreement, or they can be included in various types of contracts, such as noncompete or nonsolicitation provisions in employment contracts, asset purchase agreements or stock purchase agreements.

Many industries that rely on relationships to generate sales utilize restrictive covenants to protect these relationships. Further, companies often rely on restrictive covenants to protect trade secrets and confidential information integral to those particular businesses' operations.

The construction industry should be no different. However, often, general contractors and subcontractors are unaware that a carefully crafted covenant not to compete or nonsolicitation clause can preclude other subcontractors or employees from leaving the company and taking business or soliciting referral sources, and oftentimes do not require employees and other contractors to enter into confidentiality agreements to protect trade secrets. Further, attorneys in the construction industry tend to focus on other important aspects of construction contracts, such as indemnification, insurance issues, dispute resolution and the like.

When done correctly, there is no reason why the construction industry should operate differently than any other industry that effectively utilizes restrictive covenants. This article will provide some guidelines and suggestions on how companies in the construction industry may utilize restrictive covenants more effectively to protect their business.

Restrictive Covenants in General

In New Jersey, restrictive covenants can be effectively utilized in construction contracts to protect trade secrets and sensitive information, customers and customer relationships, geographic territories and work product. Contrarily, restrictive covenants cannot be utilized to protect matters generally known within the construction industry, trivial differences between how companies conduct business, skills of the employee built while employed by the company, and customers and contacts that the employee brought with him or her before employment with the company.

As with all restrictive covenants, construction industry restrictive covenants need to meet certain requirements in order to be enforceable. First, the restrictive covenants should be in writing and signed by the parties. This way, the agreement reached between the parties is memorialized, making each party's obligations clearly defined. A fully executed agreement not only ensures enforceability, but deters those who may consider breaching their agreement, and serves as evidence of efforts the company has made to protect their trade secrets (which could afford the company additional protection under New Jersey's Trade Secrets Act).

Secondly, like all contracts, consideration must be provided by each party in order for the restrictive covenant to be enforceable. In New Jersey, continued employment is sufficient consideration for restrictive covenants, so you can utilize restrictive covenants even with long-standing employees (when presenting restrictive covenants to long-standing employees, consideration must be given to the risk that these employees will leave the company). This is not so under Pennsylvania law, which holds that continued employment is insufficient consideration to support a restrictive covenant.

Thirdly, the restrictive covenant must be reasonable. Indeed, drafting a reasonable covenant is essential to ensuring that it will be enforceable. In order to be reasonable, the restrictive covenant must be narrowly tailored to protect the interests that the company truly desires to protect, it must not impose an undue hardship on the other party, and it must not be injurious to the public. Noncompete agreements also must contain a limit on their duration and on the geographic scope to which they will apply (a prohibition on competing until the end of time and no matter the location will not be enforceable). However, no geographic limitations are required to for a nonsolicitation agreement.

Courts considering restrictive covenants view each on a case-by-case basis, so there is no bright-line rule. Whether a particular restrictive covenant is reasonable will depend on various factors, including the type of business and the interests being sought to protect, and can often be based on a judge's subjective belief as to what is, and is not, reasonable under the circumstances. As an example, in one New Jersey case, a five-year, 10-mile noncompete was held reasonable. In a different case, a two-year, 30-mile restriction was found to be unreasonable and therefore unenforceable.

A primary guiding principle to achieving reasonableness in restrictive covenants is thinking about the specific needs of the client, and then narrowly crafting restrictions to meet those needs.

Varying Restrictive Covenants in Construction Contracts

In the construction industry, contractors and lawyers often limit themselves to what is found in the forms provided by the American Institute for Architects (AIA). While these forms can be useful, there is no reason why restrictive covenants cannot be added to these contracts to protect certain relationships and trade secrets.

In determining what restrictive covenants, if any, are appropriate, consideration should be given to what interest is being sought to protect. For instance, if your client regularly works with a particular commercial property manager, property owner or general contractor throughout the year, you may want to protect these relationships by having employees or subcontractors with whom your client works to execute nonsolicitation agreements. This way, you can prevent them from leveraging these relationships and attempting to steal business from the client. This can be done through an employment agreement, or even by adding a nonsolicitation provision in the contract between the contractor and subcontractor. If possible, specific companies/relationships should be identified in the nonsolicitation provision to avoid any argument as to who is included, and to help narrowly tailor the nonsolicitation provision to help ensure its enforceability.

If a client desires to protect its sensitive business information from being disclosed by employees or contractors with whom it works, a confidentiality agreement is appropriate. In the construction industry, sensitive information could include particular methodologies for performing certain work (such as a unique system for efficiently constructing particular types of roofing systems or building envelopes), or could include pricing strategies and/or cost of materials about which your competition would surely like to know. Again, specifically enumerating the information your client deems confidential will only help avoid confusion and help with enforcement down the road.

Finally, for those partners and high-level employees who could severely damage your client's company if they were to leave and compete, or if your clients are acquiring another construction company, protection may be obtained through a noncompete agreement. As long as the terms, time and geographic scope are reasonable, they can be enforceable.

In conclusion, the construction industry must open its eyes to the benefits of restrictive covenants, and can utilize them by crafting clauses or agreements that are reasonable and narrowly tailored to protect truly critical relationships and sensitive information. If done right, restrictive covenants are worth their weight in gold, and can preclude employees, competitors and other contractors from disclosing confidential information, soliciting critical relationships and unfairly competing.

Effectively Utilize Restrictive Covenants in the Construction Industry.pdf

Reprinted with permission from the October 13, 2014 edition of the NEW JERSEY LAW JOURNAL. © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.  For information, contact 877.257.3382, reprints@alm.com or visit www.almreprints.com. #151-11-14-10

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.