Consider This — Delaware Supreme Court Clarifies Timing Of When Consideration Is Necessary For Restrictive Covenants

On February 3, 2026, the Delaware Supreme Court issued a decision reiterating the well-settled contract principle that courts should consider the adequacy of consideration for restrictive covenants at the time of contract formation, not at the time ofenforcement. The case is North American Fire Ultimate Holdings, LP v. Alan Doorly.¹

As we have previously written, although the Federal Trade Commission (FTC) recently walked away from its multi-year effort to ban employee noncompete covenants altogether, states like Delaware are still making it harder to enforce noncompetes that do not contain reasonable temporal, geographic, or scope of activity restrictions. Employers thus need to remain vigilant and ensure that their employee restrictive covenants meet the necessary requirements for enforcement.

One often overlooked element of contract formation in the restrictive covenant space is the existence of adequate consideration. Many employers take for granted that their agreements with employees contain sufficient consideration to support the reciprocal promise to abide by post-employment restrictions. A common form of consideration in such agreements is stock or incentive units, which sometimes can be forfeited under specific conditions, and the Doorly decision addressed one critical aspect of this arrangement: when does a court assess the adequacy of consideration where the consideration is forfeited?

In Doorly, an employer and employee entered into an incentive unit grant agreement where, in exchange for the employer's issuance of common units that would vest over time, the employee agreed to, among other things, abide by certain noncompetition and non-solicitation covenants. The unit agreement further contained a clause that required forfeiture of all vested and unvested units if the employee was terminated for cause, which the employer triggered when it terminated the employee for cause because he formed a competitive entity during employment.

The employer subsequently filed a lawsuit in Delaware Chancery Court seeking to enforce the restrictive covenants, and the employee responded by filing a motion to dismiss, arguing in part that the forfeiture of the units made the contract unenforceable for lack of consideration. The Delaware Chancery Court granted the motion to dismiss, holding that the units were the sole consideration for the restrictive covenants, and thus, once the employer terminated the employee for cause and declared the forfeiture of the units, the consideration disappeared. In other words, the Chancery Court said, "no consideration means no enforceable contract."

The employer appealed this decision, arguing that consideration existed at the time of the contract's formation, and thus that the Chancery Court erred by analyzing the consideration element after forfeiture, i.e., at the time of enforcement. The Delaware Supreme Court agreed with the employer, concluding that the determination of whether valid consideration exists should be assessed at the time of contract formation, not at the time of enforcement. The Delaware Supreme Court did not, however, reach the issue of whether forfeitable incentive units constitute valid consideration at the time of formation, instead sending the case back to the Chancery Court to reconsider this issue as well as the other arguments raised by the parties in the case below.

The Doorly decision reminds us that restrictive covenants are essentially just clauses in a contract, and Delaware law follows the bedrock contract principle that the existence of consideration is a necessary element for contract formation. It is also a warning to all employers that utilize Delaware choice of law clauses — which are popular in stock award agreements like the unit agreement in Doorly — to review their agreements to ensure the adequacy of consideration given in exchange for the promise to abide by the restrictive covenants. This is doubly true if the incentive units are forfeitable under various conditions, and employers should consider specifying other or additional consideration for the restrictive covenants to ensure the adequacy of the consideration, even in the event of forfeiture.

Footnote

1.C.A. 142, 2026 WL 274647 (Del. Supr. Feb. 3, 2026)

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