On February 3, 2026, the Delaware Supreme Court, sitting
en banc, reversed a decision from the Delaware Court of Chancery that had dismissed claims for breach of restrictive covenants and breach of the implied covenant of good faith and fair dealing brought by a company against a former employee.
N. Am. Fire Ultimate Holdings, LP v. Doorly, No. 142, 2025, 2026 WL 274647 (Del. Feb. 3, 2026). The Court ruled that consideration must be measured at the time a contract was formed, not at the time of its enforcement, and thus the automatic forfeiture of the stock units granted in consideration did not nullify the covenants.
While employed by plaintiff, defendant entered into an Incentive Unit Grant Agreement that contained several restrictive covenants, including a confidentiality provision, a noncompete, and a non-solicitation provision. Plaintiff alleged that defendant then started a competing company, in violation of the noncompete, and thereafter terminated defendant for cause. The for-cause termination resulted in the automatic forfeiture of defendant’s vested and unvested units under the Incentive Unit Grant Agreement. Plaintiff then brought claims for breach of contract and breach of the implied covenant of good faith and fair dealing against defendant, seeking to enforce the restrictive covenants.
In March 2025, the Delaware Court of Chancery dismissed the contract claims, holding that the restrictive covenants became unenforceable when the units were forfeited because the units were the only consideration defendant received under the Agreement. The Delaware Supreme Court disagreed, finding that the lower court had erroneously measured consideration at the time of enforcement, rather than at the time of formation. The Court emphasized that courts must examine whether adequate consideration was received at the time the contract was formed and that any subsequent diminishment in the value of the benefit does not negate consideration. Notwithstanding that the value units were “somewhat contingent” at the time they were awarded, the Court found that value was not “illusory.” Accordingly, the Court reversed the Court of Chancery’s decision and remanded the case for further proceedings.
Doorly was the first of two decisions from the Delaware Supreme Court in February involving the enforceability of restrictive covenants. A discussion of the second decision, Fortiline, Inc. v. McCall, No. 300, 2025, 2026 WL 369934 (Del. Feb. 10, 2026), can be found here.
