What it means
The distinction from a release is the point of the whole device. A release extinguishes the claim itself, so it is gone for everyone; a covenant not to sue leaves the claim alive but binds the promising party not to enforce it against the named person.
If the covenant is broken and a claim is filed anyway, the defence is a breach of contract claim rather than an argument that no claim ever existed. That technical difference has a very practical use where there are multiple wrongdoers.
In some legal systems, releasing one party to a dispute can accidentally release all of them, which would be a costly surprise for a claimant who only meant to settle with one. A covenant not to sue lets a claimant settle with one party while preserving its position against the others.
In commercial life these covenants show up constantly, often buried in longer agreements. Settlement agreements, licensing deals, employment exits, shareholder buyouts and intellectual property arrangements all routinely include a promise by one side not to pursue specified claims, sometimes limited to a defined subject, period or jurisdiction.
Scope is where the money is. A covenant may be limited to known claims or extend to unknown ones, may cover only the signing entity or extend to its group companies, officers and customers, and may be permanent or last only while the other side keeps performing.
Broad wording such as "any and all claims arising from this relationship" reaches far further than a narrow promise about one invoice dispute. Finance teams should treat these clauses as balance sheet items rather than legal boilerplate.
Giving a covenant may allow a provision for a disputed liability to be released; receiving one may reduce a contingent liability that was disclosed in the notes to the accounts. Either way, the auditors will want the document, not a summary of it.
There are limits worth knowing. Courts will not enforce a promise not to report criminal conduct or to obstruct a regulator, covenants extracted under duress or from a party without authority can be challenged, and a promise that purports to cover claims a party could not possibly have known about is sometimes read narrowly.
In practice
Real-world examples.
Example
A software vendor and a customer settle a dispute over a failed implementation. The customer accepts a $250,000 credit and signs a covenant not to sue over that project, while both sides keep their rights on the separate support contract that continues.
Example
A departing sales director signs an exit agreement containing a covenant not to sue the employer over the termination. The employer's finance team can then release the provision it had set aside for a possible tribunal claim.
Example
A component supplier facing a patent dispute obtains a covenant not to sue from the patent holder covering its customers as well as itself. Without that extension, its buyers would have kept demanding indemnities before placing further orders.
Case study
Seen in the real world.
Consider Tidebridge Logistics, an invented haulage business used here as an illustrative scenario. A warehouse fire damaged $1,800,000 of a customer's stock, and the customer believed responsibility sat partly with Tidebridge and partly with the alarm maintenance contractor.
The customer settled with Tidebridge for $700,000. Its lawyers deliberately used a covenant not to sue rather than a full release, because a release might have been read as discharging the underlying claim altogether and taking the maintenance contractor off the hook alongside Tidebridge. The covenant let the customer close one front while continuing to pursue the other.
Tidebridge's finance director wanted certainty in return, and negotiated wording that covered the company, its subsidiaries and its drivers, and that extended to any related claim arising from the same fire, whether known at signing or discovered later. That last clause proved valuable when a smoke damage claim surfaced eight months afterwards, and in this fictional example it was the drafting rather than the settlement amount that decided the outcome.
Watch out
Common mistakes.
- Treating a covenant not to sue and a release as interchangeable. They usually reach the same commercial result between the two signatories, but only one of them risks discharging other parties to the same dispute.
- Signing a narrow covenant and assuming the matter is closed. If the wording covers only the specific claim in front of you, a related claim from the same facts can still arrive later.
- Forgetting to name the right parties. Covering the contracting entity but not its subsidiaries, directors or customers leaves obvious routes for a claim to be brought against someone who will then ask you to indemnify them.
Questions
People also ask.
Does a covenant not to sue stop a regulator or prosecutor?
No, private parties can only give up their own claims, and no covenant can prevent a public authority from acting.
Is money always required for it to be binding?
Generally some form of consideration is needed, but it need not be cash; a mutual promise, a discount or continued trading can suffice depending on the jurisdiction.
Should this be disclosed in the accounts?
If it removes or creates a material contingent liability, yes, and the finance team should keep the signed document with the audit evidence for that judgement.
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