Matthew serves as Deputy Chair of Obermayer’s Litigation Department. He concentrates his practice on commercial litigation and employment law in the state and federal courts of New Jersey and Pennsylvania. Matthew prides...Read More by Author
Restrictive Covenants in the Construction Industry: An Often Overlooked and Underutilized Source of Protection
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, general contractors and subcontractors are often unaware that a nonsolicitation clause or a carefully crafted covenant not to compete 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.
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.
Restrictive Covenants in Contractor Agreements
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
- 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 help avoid confusion and help with enforcement down the road.
Non-compete and Non-solicitation Clauses
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.