A contract requires consideration to be enforceable. In this case, the Court of Chancery held restrictive covenants were unenforceable where a terminated employee had already forfeited units comprising the only consideration he received under the agreement.
Here, after the defendant resigned and separation negotiations failed, the plaintiff terminated him for cause, resulting in an automatic forfeiture of the units. Post-termination, the plaintiff brought a variety of claims for breach of the restrictive covenants. The defendant moved to dismiss, arguing that the claims failed for lack of consideration because the units—which served as the sole consideration—had been forfeited and, accordingly, the restrictive covenants were no longer supported by consideration.
The Court agreed. The Court held that, by eliminating the units, there was no consideration to support the enforcement of the restrictive covenants on a going forward basis. The Court further rejected the plaintiff’s argument that the agreement was supported by additional consideration because it was belied by the terms of the agreement, which stated that the units “constitute[] adequate and sufficient consideration in support of such covenants and agreements[,]” and cited to nothing else as consideration. Accordingly, the former employer’s attempt to enforce the restrictive covenants failed, and the Court dismissed its claims.
