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On February 3, 2026, the Delaware Supreme Court issued a short but highly anticipated order in North American Fire Ultimate Holdings, LP v. Doorly, reversing the Chancery Court's dismissal of contract claims seeking to enforce restrictive covenants against a former senior executive. The decision clarifies that the existence of consideration supporting restrictive covenants must be evaluated at the time the parties enter into their agreement—not at the time of an alleged breach or at the time the employer seeks enforcement.
Background
As part of a 2021 acquisition, the plaintiff North American Fire granted common equity units to Alan Doorly, a co‑founder of the acquired company. Doorly later exchanged those units for incentive units subject to time‑ and performance‑based vesting under an Incentive Unit Grant Agreement, which contained various restrictive covenants, including confidentiality, non‑solicitation, and non‑competition provisions.
By 2023, Doorly had formed a new competing entity in violation of his non-compete. Upon discovering these activities, North American Fire terminated Doorly for cause, triggering a contractual forfeiture of both his vested and unvested incentive units under his agreement. North American Fire sued Doorly, seeking among other things to enforce his restrictive covenants. The Chancery Court dismissed the contract claims, holding that the covenants lacked consideration because the incentive units—framed by the court as the sole consideration for Doorly's agreement to abide by the covenants—had been forfeited by the time enforcement was sought.
The Supreme Court's Decision
The Supreme Court reversed, holding that the Chancery Court applied the wrong legal framework. The Supreme Court reaffirmed a "general principle of contract law" that consideration is assessed at the time the parties form their contract, not at the time of breach or enforcement. In other words, the forfeiture of Doorly's incentive units after formation did not retroactively eliminate the consideration that existed when he entered into the agreement.
The Supreme Court found that the Chancery Court's reliance on the forfeiture of Doorly's vested and unvested units "at the time of enforcement" was improper and emphasized that the units, though contingent, had "actual value" at the time of contract formation. In doing so, the Supreme Court analogized to earlier Chancery Court precedent involving restricted stock units, where contingent equity awards were held to constitute valid consideration despite time or performance conditions to vest.
The Supreme Court remanded the case for further proceedings on the contract claims. The Court did not address North American Fire's claim that the restrictive covenants were supported by consideration other than the incentive units, apparently finding it unnecessary to address that issue in light of its determination that the question of consideration should be measured at the time of contract formation, notwithstanding the later forfeiture.
Context: Delaware's Evolving Approach to Restrictive Covenants
Although narrow in scope, the decision arrives as Delaware continues to refine its approach to restrictive covenants in both the employment and M&A contexts. Recent decisions and commentary have signaled an increased willingness by the Chancery Court to closely scrutinize post‑employment restrictions. However, Doorly follows other decisions from the Delaware Supreme Court that have reaffirmed Delaware's stated policy of freedom of contract that has been in tension with certain rulings by the Chancery Court (see some of our prior discussions here and here).
Against this backdrop, Doorly fits into a larger trend: Delaware courts continue to enforce restrictive covenants when they reflect bargained‑for exchange and reasonable scope, but the Chancery Court has shown an increased readiness to challenge enforceability of such covenants.
Takeaways
While the law continues to evolve, Doorly and its predecessors offer some guidance to businesses that continue to use Delaware law to govern restrictive covenants agreements (whether in the employment context or in the sale of a business):
- Under Delaware law, the forfeiture of equity after contracting does not retroactively invalidate the consideration that existed when the agreement was executed.
- Contingent equity awards can be valid consideration for restrictive covenants. Delaware continues to view such equity awards as non‑illusory, even if they are tied to performance or time vesting.
- Drafting matters. Businesses relying on restrictive covenants should carefully structure grant agreements to reinforce that the award itself—regardless of future vesting or forfeiture—constitutes consideration.
- Restrictive covenants are being subjected to much greater scrutiny for reasonableness in scope, time and geography than ever before.
- The broader landscape remains in flux. Delaware courts continue to scrutinize restrictive covenants in both employment and M&A settings, and alternative mechanisms such as forfeiture‑for‑competition clauses may ultimately prove to be a more attractive option for businesses to enforce restrictive covenants in the "First State."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
