What it means
In a dispute, both sides generally want certainty. A covenant not to sue gives that certainty by having one side agree in writing that it will not start legal proceedings about a defined matter.
If the promise is broken, the other side can sue for breach of the covenant and may recover damages or legal costs. It is commonly used in intellectual property deals, where an owner of a patent agrees not to sue a company for using the technology.
It also appears in settlements of commercial disputes, employment exits and debt compromises. The key advantage over a licence or a release is flexibility, because it can be limited by time, product, territory or type of claim.
The wording needs care. A good covenant identifies the parties, the claims covered, the period it applies to and any carve-outs, such as claims that arise from future conduct.
It should also say whether it passes to successors and assignees, because a company that is later sold may otherwise lose the protection. For finance teams, the covenant can change the value and risk of a deal.
It may remove a contingent liability (a possible future cost that depends on an uncertain event) from the books, or it may be a condition attached to a payment. Buyers in a takeover often ask for evidence of such covenants to confirm that known disputes are settled.
It is not a substitute for proper legal advice. The enforceability of the covenant depends on its drafting and the governing law, and a poorly worded one may leave the protected party exposed to claims the business assumed were closed.
Timing and consideration (something of value given in exchange for the promise) also matter. A covenant given as part of a settlement is usually supported by the payment or concession made by the other side.
Without that exchange, a promise may be harder to enforce in some legal systems.
In practice
Real-world examples.
Example
A software company settles a patent dispute by paying $400,000. The patent owner gives a covenant not to sue over the disputed features, so the company can keep selling its product. The covenant covers only the named features, so a new product would need fresh clearance.
Example
A supplier and a customer disagree over a late delivery. The customer accepts a $30,000 credit and signs a covenant not to sue about that shipment, though both keep trading. Both sides keep their commercial relationship, which a lawsuit would probably have ended.
Example
A founder leaves a start-up and receives an exit payment. As part of the agreement, he gives a covenant not to sue the company over his departure. The covenant is limited to claims about the departure and does not cover future wages or pensions.
Case study
Seen in the real world.
Silverline Devices is an illustrative, fictional electronics firm that received a letter claiming its charger design infringed a competitor's patent. Litigation could have cost $1,500,000 or more, and the dispute threatened a planned sale of the business. The sale price depended on a clean legal record, so the unresolved claim put millions of dollars of value at risk.
The two sides negotiated a settlement in which Silverline paid $350,000 and the competitor gave a covenant not to sue over the current charger range, expressly binding its successors. A buyer's lawyers later reviewed the covenant during due diligence and accepted it as removing the risk. The competitor agreed because a settled royalty-style payment was more attractive than years of uncertain litigation.
In this illustrative story the sale went ahead on schedule. The clear wording of the covenant, and the fact that it passed to future owners, was what gave the buyer comfort. Silverline's lawyers added a short summary of the covenant to the company's standard due diligence folder.
Watch out
Common mistakes.
- Assuming a covenant not to sue is identical to a full release of all claims.
- Leaving out successors and assignees, so the protection disappears when the business is sold.
- Using vague wording about which claims are covered, which invites a fresh dispute over the scope.
Questions
People also ask.
What happens if someone breaks the covenant?
The protected party can sue for breach, and may recover damages and sometimes legal costs. The remedy depends on the wording and the governing law.
How is it different from a release?
A release extinguishes the underlying claim, while a covenant not to sue only stops the claimant from bringing proceedings on it. The distinction is subtle, so lawyers choose the form carefully.
Does it have to be in writing?
It should be, because a written, signed agreement is far easier to prove and enforce.
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