Business Covenants In New Zealand: What They Are And When You Need Them

If you’re running a business, you’ll eventually share something valuable with someone else.

That might be your customer list, pricing model, supplier terms, marketing strategy, product roadmap, or even just the “how we do things here” knowledge that makes your business work.

This is where business covenants come in.

In New Zealand, covenants are commonly used in commercial contracts, sale of business deals, employment arrangements, and shareholder/founder relationships to help protect your business from avoidable risk. Done well, they can help you protect revenue, preserve goodwill, and reduce the chance of a messy dispute later on.

Below, we’ll break down what covenants are, the most common types of covenants for small businesses, and when you should be thinking about putting them in writing.

What Are Covenants (And Why Do They Matter For Small Businesses)?

A covenant is essentially a promise written into a legal document.

In business, covenants usually take the form of a “you will do X” or “you will not do Y” commitment. The most common covenants are used to:

• protect confidential information and trade secrets;
• stop someone from poaching your clients or staff;
• prevent unfair competition after a relationship ends (for example, after a contractor finishes a project or a shareholder exits); and
• set clear ongoing obligations between business partners (like reporting, approvals, and compliance commitments).

They matter because small businesses often rely on a few key assets that are easy to copy or take, such as:

• a tight customer base;
• relationships with suppliers;
• your “secret sauce” processes;
• your brand positioning and pricing; and
• key staff or contractors who know how everything works.

Without the right covenants, you might find yourself in a position where someone leaves your business relationship and immediately uses what they learned to compete against you.

And while you may still have some legal protections (for example, through contract law, equitable obligations of confidence, and privacy law in relation to personal information), practical protection usually starts with putting the right covenants into the right agreement from day one.

Common Types Of Covenants Used In New Zealand Business Agreements

Not all covenants are the same. Some are about confidentiality, some are about competition, and some are about positive obligations (like maintaining insurance or meeting reporting requirements).

Here are the most common covenants we see NZ businesses use.

Confidentiality Covenants

A confidentiality covenant is a promise to keep certain information secret and to only use it for the permitted purpose.

For example, you might require a contractor to keep your:

• customer lists and lead data confidential;
• pricing and margin information confidential;
• supplier terms confidential; and
• templates, processes, and internal documents confidential.

Confidentiality covenants often sit inside a broader commercial contract, but for early discussions (like when you’re sharing information before signing a deal), a standalone Non-Disclosure Agreement can be a clean starting point.

Non-Compete Covenants (Restraints Of Trade)

A non-compete covenant (often called a restraint of trade) is a promise not to compete with your business for a defined period, in a defined area, and sometimes in a defined industry or role.

These covenants can be useful, but they need to be drafted carefully. In NZ, restraints that go further than reasonably necessary to protect legitimate business interests can be difficult to enforce.

From a business owner’s perspective, the key is getting the scope right. The covenant should protect what you genuinely need to protect (like goodwill and client relationships), without trying to “lock someone out” of earning a living entirely.

Non-Solicitation Covenants (Clients, Customers, Staff)

Non-solicitation covenants are often more practical than broad non-compete clauses.

These covenants usually stop a person from:

• approaching your clients/customers to move their business away from you;
• inducing your employees or contractors to leave; or
• using inside knowledge to target your pipeline.

For example, if you hire a sales contractor who builds relationships using your brand, you may want a covenant that they won’t poach those clients when the contract ends.

These covenants can be included in an Employment Contract (where appropriate), or in contractor/commercial agreements.

Non-Disparagement Covenants

Non-disparagement covenants are promises not to damage the other party’s reputation (for example, by making negative public statements).

They’re commonly used in settlement contexts or sensitive breakups of business relationships. They can also appear in some commercial deals where reputation is a big part of value (like in service-based businesses).

They’re not a replacement for good dispute resolution processes, but they can reduce the risk of reputational harm when things go sideways.

Positive Covenants (Do’s, Not Just Don’ts)

Many business owners think “covenants” only means restrictions. But covenants can also be positive obligations, like promises to:

• maintain certain insurance policies;
• comply with particular laws and industry standards;
• deliver reports, financials, or KPIs by set dates;
• get consent before entering into high-value commitments; or
• keep proper records and accounts.

You’ll often see these in shareholder/founder arrangements, lending arrangements, and longer-term commercial relationships.

When Do You Need Covenants? Key Business Scenarios

Covenants aren’t just “nice to have” legal language. If your business relies on relationships, information, or reputation, you’ll usually benefit from putting the right covenants in place early.

Here are some common scenarios where covenants are especially important for NZ small businesses.

1. When You’re Hiring Staff Or Engaging Contractors

If you’re bringing people into your business, you’re also giving them access to your clients, systems, and know-how.

That’s not a bad thing (it’s how you grow), but it does mean you should think about:

• confidentiality covenants (what they can’t share);
• IP ownership (what the business owns if they create something);
• non-solicitation covenants (who they can’t approach after leaving); and
• restraint clauses (only where reasonable and genuinely needed).

For employees, these protections are often built into your employment documentation, like an Employment Contract and well-drafted policies.

For contractors, it’s usually handled through a contractor agreement or broader Service Agreement.

Practical example: Let’s say you run a small digital marketing agency. A contractor account manager might have deep access to client relationships and campaign performance data. A confidentiality covenant alone may not stop them from walking away and directly approaching those same clients next week. A tailored non-solicitation covenant can be the missing piece.

2. When You’re Going Into Business With A Co-Founder Or Shareholders

When you bring on a co-founder, shareholder, or investor, you’re not just sharing upside - you’re also sharing control, decision-making, and (often) information.

This is where covenants can help reduce “founder fallout” risk, especially around:

• what happens if someone exits;
• whether they can start a competing business after they leave;
• how confidential information will be handled; and
• how decisions will be made and what approvals are required.

These covenants are typically documented in a Shareholders Agreement, and sometimes supported by a Company Constitution depending on how the company is structured.

Practical example: If one shareholder is responsible for sales and relationships, and they leave with the client network, the company’s value can drop fast. A properly scoped restraint/non-solicitation covenant tied to a shareholder exit can help protect the goodwill you’ve built.

3. When You’re Selling Or Buying A Business

In a sale of business, the buyer isn’t just buying assets - they’re often paying for goodwill (the likelihood customers will keep coming back).

This is one of the clearest situations where covenants matter. A buyer will typically want covenants from the seller such as:

• not competing with the business for a period of time;
• not soliciting customers/suppliers; and
• helping with a transition period (sometimes documented as positive covenants).

If you’re the seller, you’ll want these covenants to be reasonable and clear so you don’t accidentally agree to restrictions that are wider than necessary.

This is also why a properly drafted Business Sale Agreement (and appropriate advice before you sign) matters so much.

4. When You’re Entering Into Long-Term Commercial Relationships

If you’re working with key suppliers, distributors, affiliates, or strategic partners, covenants can help ensure the relationship stays stable and predictable.

Depending on the deal, you might use covenants to cover things like:

• exclusivity obligations;
• minimum performance requirements;
• how IP can be used (and what happens if the agreement ends);
• confidentiality and data handling; and
• non-solicitation of staff and customers.

This is especially common when your business depends on a single partner relationship for leads, product supply, or distribution access.

Are Covenants Enforceable In New Zealand? What Makes A Covenant “Reasonable”

A covenant is only useful if it has a real chance of being enforceable.

In New Zealand, whether a covenant is enforceable is highly fact-specific and depends heavily on:

• the purpose (are you protecting a legitimate business interest, like confidential information or goodwill?);
• the scope (does it go further than necessary?);
• the timeframe (is the restriction period reasonable?);
• the geographic area (does the area match where your business actually operates?); and
• the role/relationship (for example, senior employees with strong client influence may justify stronger restraints than junior staff).

This is why “copy and paste” covenants can cause problems. If you use a generic clause that’s too broad (for example, “no competition anywhere in NZ for 5 years”), it may be challenged, and you could end up with a covenant that’s partially enforceable, unenforceable, or expensive to argue about.

In some cases, courts may modify or “read down” an unreasonable restraint to make it reasonable, but you shouldn’t rely on that - getting the drafting right up front is usually far cheaper than trying to fix it in a dispute.

A well-drafted covenant typically does three things:

• clearly defines what’s being protected (for example, which clients or what confidential information);
• sets boundaries that match your real commercial risk; and
• fits the agreement it’s in (employment covenants are not the same as sale-of-business covenants).

It can feel frustrating to hear “it depends”, but from a business owner’s perspective, this is actually good news: with the right drafting, covenants can be tailored to your business model and risk profile rather than being a blunt instrument.

How Do You Draft Covenants Properly (Without Overcomplicating It)?

If you want covenants that are actually useful, the goal is to be specific, commercial, and realistic.

Here are the key drafting considerations we usually recommend businesses think through.

Be Clear On What You’re Protecting

Start with the “why”. For example:

• Are you protecting confidential information that gives you an advantage?
• Are you protecting client relationships and goodwill?
• Are you protecting your team from being poached?

If you can’t explain the business reason for the covenant in one sentence, it’s often a sign the covenant is too broad (or that it’s trying to solve the wrong problem).

Match The Covenant To The Relationship

Covenants should reflect what’s fair and necessary in context.

• Sale of business covenants are often stronger, because the seller is being paid for goodwill.
• Employment covenants generally need to be narrower, because the employee still needs to be able to work and earn a living.
• Contractor covenants sit somewhere in the middle and should align with the contractor’s exposure to your clients and systems.

Use Practical Definitions (Not Vague Concepts)

Instead of broad terms like “you must not contact any clients”, a well-drafted covenant might define:

• who counts as a “client” (current clients? past clients? leads?);
• what counts as “solicitation” (direct outreach? indirect? targeted ads?); and
• what exceptions apply (for example, if the client approached them first).

This kind of clarity can prevent disputes and makes it easier to enforce if you ever need to.

Make Sure The Rest Of The Agreement Supports The Covenants

Covenants don’t live in isolation. They need to fit with the rest of the contract, including:

• termination rights and notice provisions;
• confidentiality and IP clauses;
• dispute resolution processes; and
• privacy and data handling terms (especially if customer data is involved).

For example, if you collect personal information from customers, your broader compliance approach (including a Privacy Policy) should align with how you allow staff, contractors, and partners to access and use that data.

Don’t Rely On A Template For High-Stakes Covenants

It’s tempting to grab a generic clause online and hope for the best.

But covenants are one of those areas where “close enough” can become expensive later - especially if you’re trying to enforce a restraint, protect your client base, or preserve goodwill in a sale.

If the covenant is important to your revenue, it’s worth getting it drafted (or at least reviewed) so it actually fits your business and has the best chance of being enforceable.

Key Takeaways

• Covenants are written promises in a contract that help protect your business, commonly covering confidentiality, non-solicitation, and (in some cases) non-compete obligations.
• Small businesses often rely on assets that are easy to take or copy (like client relationships and internal know-how), so covenants can be a practical way to protect your business from day one.
• The most common covenants in NZ business agreements include confidentiality covenants, non-solicitation covenants, restraint of trade (non-compete) covenants, and positive covenants like reporting and compliance obligations.
• Covenants are especially important when hiring staff, engaging contractors, bringing on shareholders/co-founders, and selling or buying a business.
• Enforceability often comes down to reasonableness - the covenant should protect a legitimate business interest and not go further than necessary in time, geography, and scope.
• Generic templates can create covenants that are unclear or too broad, so it’s usually worth getting key covenants drafted or reviewed to match your specific business risks.

This article is general information only and does not constitute legal advice. If you’d like help putting the right covenants in place for your business (or reviewing covenants before you sign), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.