Covenant Not to Sue

What Is a Covenant Not to Sue?

A covenant not to sue is a legal agreement that obliges a party that could seek damages to refrain from suing the party that it has cause against. A covenant not to sue may indicate that the potential claimant will not sue in perpetuity, or may indicate that the claimant may postpone a lawsuit for a defined period of time.

Understanding a Covenant Not to Sue

A covenant not to sue legally obliges a party that could initiate a lawsuit not to do so. The covenant is made explicitly between two parties, and any third party that wants to make a claim is legally allowed to do so.

Covenants not to sue are used to settle specific legal issues outside of the court system. Parties may enter into this type of agreement to prevent a protracted, expensive lawsuit. In exchange for the covenant, the party that could seek damages may be provided with compensation or may be given assurances that the other party in the agreement will conduct a specific action.

Example of a Covenant Not to Sue

For example, imagine the environmental regulatory body of a state government determines that a manufacturing firm is not properly handling hazardous waste products. It could initiate a lawsuit and seek damages from the manufacturer, but instead wants to compel the manufacturer to clean up the hazardous material and ensure that it properly disposes of material in the future.

The environmental regulator can offer a covenant not to sue to the manufacturer but reserve the right to sue if the manufacturer does not change its waste disposal procedures. This is a conditional covenant not to sue and is not issued in perpetuity.

Patent holders may also agree to a covenant not to sue with companies that they license their patents to. The patent holder may agree not to sue the licensee if a third party uses the patent without permission, but may reserve the right to sue any third party itself.

Covenant Not to Sue vs. Release of Liability

A covenant not to sue is quite different from a release of liability. A release is a waiver or relinquishment of a known right. A release of liability will relinquish or destroy the injured party's cause of action.

A covenant not to sue, on the other hand, is not a waiver of a known right; nothing is relinquished or destroyed. A covenant not to sue preserves the existence of the cause of action but places contractual restrictions on the injured party's right to file suit.