What Are Covenants and Contracts?
At their core, covenants and contracts are both legally binding obligations or promises. That said, there are some fundamental differences in how we define them. For the purposes of this article, we will focus on how these definitions affect claims we make in contract law litigation. To that end, "covenant" as used in legal terms means a promise to do something or refrain from doing something. The promise can be both written and verbal and creates a new obligation on the part of one or both of the parties . A "contract," on the other hand, exists when a set of mutually agreed upon promises form the basis of a business agreement. Contracts usually involve the giving and receiving of money or other forms of value. Contracts are typically in writing although oral contracts can be enforceable. Whether verbal or written, contracts require the mutual agreement of all parties involved so that the promises are considered reciprocal, and enforceable.
Distinct Characteristics
Covenants and contracts are both legally binding agreements, but they function in very different ways and serve different purposes. The primary distinction between the two is that a covenant is a promise that governs the use of land, whereas a contract is a promise that governs the relationship between parties who are entering into an arrangement. While they may have common elements in their execution and appearance, stating that they are both "contracts" is not entirely correct.
The purpose of a covenants is to limit the use of land because the covenant serves the property rather than the people who own the property. For example, the owner of a piece of land may agree not to build any further structures on it, not that they will not do business with any other particular person or company. Carmack v. Bossier case has discussed how some covenants serve merely a space, not a person, while contracts serve to benefit specific people.
The most important difference between covenants and contracts is that a covenant cannot be subjectively determined to be fulfilled. Suppose an agreement is considered a contract because it specifies a person’s obligations to another. An agreement can still be considered a contract even if it does not cover all aspects of the exchange. Even a contract that appears to be incomplete can still be binding.
Covenants, on the other hand, are not performance based. Instead, covenants might protect the interests of the grantor of the covenant, but they do not care about the parties or their businesses. A covenant is concerned with the land, and a court should not have to consider the business interests of the current or former owners of the land when the covenant is being enforced.
A court should not consider a party’s subjective intentions regarding the covenant they signed. Any intent, unreasonable or otherwise, should be completely irrelevant to the court when making its determination about the covenant at issue. If the covenant is enforceable, it must be enforced as written, whether a party is being reasonable or not.
Different Types of Covenants
Covenants are typically found in contract documents, mortgage documents, commercial leases and declarations establishing homeowner associations and condominium associations. However, there are different types of covenants – affirmative and restrictive – and different consequences for a failure to honor them.
Affirmative Covenants
An affirmative covenant is a promise by which a party agrees to do an act. An example of an affirmative covenant is the obligation to construct or build a structure within a particular timeframe. Depending on the terms of the covenant, it obligates the covenantor (the person agreeing to do the act) to do something.
Restrictive Covenants
A restrictive covenant is a legally enforceable promise in a deed or lease restricting the use of the property in some way. An example of restrictive covenant is a promise not to use a property for particular purposes. A restrictive covenant may appear in a commercial lease as a clause that prohibits a tenant from using the leased property for particular purposes.
Types of Contracts Explored
Many Different Types of Contract
Contracts come in a variety of forms. For simplicity’s sake, the law has created categories of contract in order to more easily apply the seemingly endless forms of agreement that exist. The categories can be boiled down to essentially four main types: bilateral, unilateral, express, and implied.
Bilateral contracts are those in which each party to the contract makes a promise to perform a specific act. If one party fails to do what he or she promised, then the other party is not obligated to perform his or her promise.
Unilateral contracts are somewhat similar to a bilateral contract in that there is still a promise to perform, however, there is now an incentive for the other party to perform an act. If one party does not perform the act, then nothing happens and both parties have fulfilled their contract obligations.
Express contracts are those where the parties have clearly set forth the terms of performance or duty. A written contract is the most common form of an express contract.
Implied contracts are, on the other hand, are those that are formed by the actions or conduct of the parties.
Legally Binding
The legal enforceability of a covenant will depend on the applicable legislation, the common law and the drafting of the covenant itself. Generally speaking, breach of covenant will give rise to a right to claim damages from a covenantor, as well as a right to seek an injunction against a covenantor to stop a breach of covenant.
In order to secure an injunction, the covenant must be properly backed by consideration, and must not be contrary to public policy, and must be validly exercised i.e. it must not be exercised in an unreasonable manner. A covenant may otherwise be enforceable at law if it can be judicially construed as a contract. Broadly, this depends on whether the covenant is enforceable against a third party and whether it goes beyond the proper interest of the covenantor. Whether a covenant can be judicially construed as a contract will depend on the nature of the covenant and the manner of its enforcement. For instance, it has been held that a restrictive covenant under s.55 9(4) of the South African Companies Act 1973 (Companies Act) is capable of being construed as a contract because such a provision is actually enforceable as a contract and not, for example, an equitable interest between a debtor or creditor and a third party.
To determine whether a covenant goes beyond the proper interest of the covenantor, the nature of the liens on the property of the covenantor will have to be considered. In particular, it will need to be determined whether the covenant goes beyond any real rights or positive obligations that can reasonably be placed on the covenantor, and whether the covenant has any adverse impact on the financial position of the covenantor. In this regard, it is worth noting that courts have come to the conclusion that actors falling within the film and TV industry will generally not have a sufficient interest in their image to warrant protection against the use of their image.
These criteria as to whether a covenant is enforceable at law are fairly vague and flexible and lawyers will argue, and the courts will decide, on a case-by-case basis whether a covenant does not go beyond the covenantor’s interests, and whether it is not contrary to public policy.
As stated above, breach of a covenant will give rise to a right to claim damages, as well as a right to seek an injunction. As a practical matter, in the event that a breach of a covenant is alleged, the aggrieved party might demand the cessation of the breach and/or seek damages, however, where significant damages are claimed in a civil suit, it is fairly unlikely that the aggrieved party will seek an interdict, and would rather seek damages for the breach. This may also be in part because an interdict remedy is discretionary, in contrast to the remedial right to seek damages, which is judicially created.
Application in the Real World
The legal distinction between a covenant and a contract is not just of academic interest. Rather, it applies in many different types of real life scenarios. In real estate, for example, a covenant running with the land may impose a legal obligation. An example of a covenant running with the land is the deed restriction imposed on a lot within a common-use development, such as a condomium or an apartment complex, obligating the owner of that lot to pay homeowner association dues. In business, it is common for a separate writing to validate an otherwise valid oral contract , and this writing is a document imposing on one or more parties, obligations enforceable by a court of law. Employees of many companies are asked to sign a covenant not to compete that limits the time period in which they can work for particular competing businesses, as well as the geographical area in which their new employer can be located, if it competes with the old employer. In each of these examples, the distinction between a covenant and a contract is significant, and bears careful consideration.
Deciding on a Covenant Or Contract
Deciding whether to utilize a covenant or a contract generally comes down to the specific requirements of your situation. One critical factor to consider is the level of mutual benefit that will be achieved through the agreement; a covenant is much more appropriate for parties looking for a solution that will provide either a specific benefit or a significant benefit, whereas a contract may adequately suit those needing an agreement to help one party achieve something beneficial.
Also, if you are planning on offering a covenant to a party, you should evaluate whether or not you feel that you will actually need to hold them to their end of the deal. If you feel that there is a good chance you will not be able to actually enforce the terms of a covenant, it would probably be best to refrain from using one, instead of risking the possibility that the party will rely on the covenant’s terms and then later be surprised when you enforce them.
Common Myths Dispelled
As is the case with many legal concepts, there are certain misconceptions associated with covenants and contracts. Exploring some of these common misunderstandings can illuminate the basic elements of these two agreements.
● Contracts involve exchange of goods and services only. While a contract is indeed an agreement involving the exchange of something, it does not always have to be money. Covenants are often used to prevent/restrict a party from taking a certain action or doing a certain thing. In essence, both contracts and covenants are agreements between two or more parties for consideration. Consideration does not always have to be monetary and can also be other forms of value such as a promise to do something, refraining from doing something, etc.
● Contracts and covenants have the same effect on parties. While all covenants are contracts, not all contracts are covenants. A contract is where an agreement is made between two or more parties. A covenant is a contract, but it is also a legally enforceable promise typically in a deed of a real property to perform a certain activity. Simply put, covenants are contracts that restrict/limit one party from doing something.
● Contracts are only legally binding if signed by all parties in the presence of witnesses. All contracts and covenants need to be in writing to be legally enforceable. While it is a good practice to have all contracts signed and witnessed, a witnessed signature is not required for a contract to be legally binding.
● Contracts are only lucrative when they are lengthy. Contracts of all sizes, from 1 page to 100 pages, can be legally binding and enforceable. It is not the length of a contract but the terms of the contract that determine its legality. This includes the consideration exchanged, the terms of the contract, and the acceptance of the contract by both parties.
● Contracts need to be explicit and detailed. A contract can often be ambiguous or vague in nature, which is why it is the role of the courts and the judge to interpret the meaning of a contract when there is a dispute. While it is ideal for contracts to be clear, concise and unambiguous, vague contracts can also be legally binding and enforceable.
Expert Advice
In deciding whether to include a covenant in your contract, it is essential to clearly identify the interests you are looking to protect and any potential issues with enforcing that protection. Consider, for example, the situation where "the Promisor promises not to sell widgets". What are the interests being protected? If you are only interested in protecting your own commercial interests, as long as the promise not to sell widgets can be suitably defined in the contract, then it is arguably sensible to include it as a covenant. If, however , the jurisdiction you are in provides (or you are seeking) protection from a competing sale of widgets by any party, then a promise as to your own sales may not provide adequate protection. This is because, by using a containment warranty, you do not get the benefit of any express protection for those of your rivals who make their living from manufacturing and selling widgets.
The most important point is to consider the appropriate enforceability tools available, both in terms of length of time for which protection is sought and jurisdiction, against the interests to be protected and the potential damages resulting from a breach.