Negative undertakings: Overview, definition, and example
What are negative undertakings?
Negative undertakings are contractual obligations where a party agrees not to take certain actions or engage in specific activities. Essentially, a negative undertaking is a promise to refrain from doing something, rather than a promise to perform a particular task. These types of clauses are common in various legal agreements, such as contracts, loans, and corporate governance documents, to protect the interests of the parties involved.
Negative undertakings are often used to prevent a party from acting in ways that could harm the other party’s business interests, reputation, or financial stability. They may restrict actions like competing with the business, disclosing confidential information, or taking certain financial actions without prior approval.
Why are negative undertakings important?
Negative undertakings are important because they provide safeguards and set boundaries to protect against actions that could undermine the terms of the contract or the interests of the parties involved. These provisions help ensure that one party does not take actions that could jeopardize the financial or operational stability of the other party.
For businesses, negative undertakings are a crucial tool for maintaining control over sensitive aspects of the business, such as intellectual property, competitive positioning, and financial management. They provide clarity on what is prohibited, helping to prevent legal disputes or conflicts between parties.
Understanding negative undertakings through an example
Imagine a company, XYZ Corp., enters into a loan agreement with a bank. The bank agrees to lend XYZ Corp. a substantial amount of money, but as part of the loan agreement, XYZ Corp. agrees to certain negative undertakings, such as:
- Not incurring additional debt beyond a specified amount without the bank's consent.
- Not selling significant assets of the business without the bank’s approval.
These negative undertakings protect the bank’s interests by ensuring that XYZ Corp. does not take actions that could endanger its financial position or ability to repay the loan.
In another example, an employee enters into a non-compete agreement with their employer. The agreement includes a negative undertaking, where the employee agrees not to work for or start a competing business within a certain geographic area and time frame after leaving the company. This prevents the employee from taking actions that could directly compete with the employer’s business interests.
An example of a negative undertakings clause
Here’s how a negative undertakings clause might appear in a contract:
“The Borrower agrees that, without the prior written consent of the Lender, the Borrower will not incur any additional indebtedness exceeding $1,000,000, sell any of its significant assets, or make any major changes to its business operations during the term of the loan.”
Conclusion
Negative undertakings are contractual clauses that obligate a party to refrain from taking specific actions that could harm the interests of another party. They provide protection, clarity, and boundaries in various agreements, ensuring that each party’s rights and expectations are respected.
For SMB owner-managers, understanding the role of negative undertakings is crucial in managing risks, protecting business interests, and ensuring compliance with contractual terms. Whether in loans, employment agreements, or partnerships, negative undertakings help establish clear limits on business actions to safeguard both parties' interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.