A covenant, what the hell is that?

Agreements for major transactions often contain one or a few articles entitled or containing the term “covenants”. It is a step up to several blogs on the subject. What are they? That’s what this blog is about. I will not address the background of the term (which can be found in the common law).

Broadly speaking, ‘cov­enants’ are the contractual devices ensuring that a party receives the benefits that it negotiated for in the business deal. In other words, covenants support the achievement of the purpose implied by the key provisions characterising the transaction.

Remedies for breach of a covenant. In most agreements that are subject to a European continental law, it is unnecessary to include a remedy in a covenant. Other than in civil law jurisdictions, the default rule under common law for a breach of contract is that the harmed party is entitled to damages but not a priori to specific performance. In the European continental legal systems, the opposite applies: by default, a party can ask specific performance (and if that is not practicable or adequate, damages can be claimed). Because an entitlement to damages often does not protect the harmed party’s interests adequately, an agreement that is drafted in view of a common law jurisdiction’s law to apply, usually provides for specific remedies in the event of a breach of a covenant. In this paragraph, a brief comparison will be made between covenants as opposed to conditions, various examples of typical covenants in different types of contracts will be discussed (one subparagraph will address M&A-related convenants and another subparagraph will address covenants in financial agreements). This paragraph will finally address how a contract drafter can smoothen the effects of a covenant.

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