What is a Covenant?

In terms of business applications, a covenant is a written agreement between interested parties that helps for form the basis for some sort of ongoing business relationship. Covenants provide the broad terms of agreement that will exist between the entities that are part of the working relationship, although some covenant documents are somewhat vague while others are very specific. In all cases, there are a few basic elements that are included in the covenant that help to give the business arrangement meaning and function.

Traditionally, a covenant will address five basic issues, either in broad terms or with specific perimeters. First, the covenant will identify the parties that are entering into the agreement. This may include the names of individuals as well as the corporate names and any DBA identities that are employed by any of the parties. Second, the text of the covenant will include at least one clause or section that addresses the main purpose for the creation of the contract. These first two factors address both the essential questions of who is involved and why they are entering into a working relationship.

The remaining three factors in a covenant address how the relationship is anticipated to proceed. Covenants will include data regarding the general conditions that will govern the relationship, such as defining what services will be supplied. The covenant will also consider the terms of payment for the services, any special discounts or exceptions to service delivery that are being agreed upon, and how each party to the covenant will react in the event of an emergency situation. Once the general conditions for deliverables are addressed, the matter of rewards and penalties in the event of the failure of any party to hold up their end of the relationship is defined. A final factor addresses who is authorized to sign the agreement on behalf of each entity, and who will receive a signed original copy of the contract.

As contracts go, a covenant can be either a restrictive covenant or a broad covenant. A restrictive covenant tends to be very specific regarding the expectations for all parties, as well as detailing processes and procedures in very exacting terms. Very little is left to the discretion of any interested parties. In contrast, a broad covenant outlines the perimeters of the relationship, but may leave a number of issues open to the discretion of the concerned parties.