In a decision issued earlier this week, North American Fire Ultimate Holdings, LP v. Doorly, the Delaware Supreme Court held that consideration for restrictive covenants is measured at the time of contracting and not at the time of enforcement. Case No. 142, 2025 (Del. 2026). The decision reverses a Chancery Court ruling that a post-execution forfeiture of vested or unvested equity invalidated the restricted covenants for lack of consideration.
In Doorly, North American Fire Ultimate Holdings, LP filed a lawsuit against a former employee of one of its affiliates for violating certain restrictive covenants in an incentive unit grant agreement. The agreement granted the employee common units of North American Fire and included confidentiality, non-competition and non-solicitation provisions. The employee subsequently formed a competing business, resulting in the termination of his employment for cause, which triggered the automatic forfeiture of his units (both vested and unvested) pursuant to the terms of the agreement. North American Fire also filed suit to enforce the non-compete and other restrictive covenants. The Delaware Chancery Court dismissed the restrictive covenant claims, holding that the units were the sole consideration for the covenants and that, once the employee engaged in conduct causing the automatic forfeiture of the units, the covenants became unenforceable for lack of consideration.
The Delaware Supreme Court reversed and remanded the case for further proceedings. The Court ruled that consideration is measured at the time of contract formation and is not reevaluated at the time of enforcement. Assuming that the units constituted the sole consideration for the restrictive covenants, the Court determined that the grant of equity was not illusory but had actual value despite being contingent on vesting requirements and covenant compliance. The Court relied upon general principles of contract law that consideration must be measured at the time the parties enter into their contract and that diminished value of the economic benefit conferred, or even a complete lack of value, does not result in a failure of consideration.
The Court also found a prior decision in Newell Rubbermaid Inc. v. Storm instructive. 2014 WL 1266827 (Del. Ch. Mar. 27, 2014). In Storm, a Chancery Court determined that the grant of restricted stock units hold actual value at the time of issuance despite being subject to vesting contingencies. Id. at *8–9 (adding that Delaware courts limit their inquiry into consideration “to its existence and not whether it is fair or adequate”).
Accordingly, the Delaware Supreme Court concluded that the Chancery Court erred in evaluating whether the covenants were enforceable by determining whether there was consideration at the time of enforcement.
This ruling is significant because forfeiture provisions of this type as a contract remedy are common in employee equity award agreements, where the only consideration provided for the covenants is potential equity which may be lost in the event of non-compliance. The Delaware Supreme Court in Doorly reaffirms the viability of these provisions. Consideration, however, is only one aspect of enforceability analysis and Delaware courts continue to apply increased scrutiny of restrictive covenant reasonableness in employment, sale of business and other transactional settings. Thus, while the Doorly decision is notable, careful drafting to ensure narrowly tailored covenants for each set of circumstances remains of equal importance to enforcement.[1]
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