Key Points

• Timing of Consideration is Key: The Delaware Supreme Court held that consideration for restrictive covenants must be evaluated at the time the contract is formed, not at the time of enforcement, reversing the Court of Chancery's dismissal in North American Fire Ultimate Holdings, LP v. Alan Doorly.
• Forfeiture Does Not Void Restrictive Covenants: Even when an equity forfeiture provision is triggered by a for-cause termination and the employee receives nothing of value, the restrictive covenants remain enforceable if the consideration had value when the agreement was executed.
• Contingent Value is Not Illusory: Following the reasoning in Newell Rubbermaid Inc. v. Storm, the court confirmed that equity grants subject to vesting requirements and other contingencies constitute valid consideration because they hold "actual value" at the time of formation.

The Delaware Supreme Court recently reversed a Court of Chancery decision in a significant ruling that clarifies when courts should evaluate whether consideration exists to support restrictive covenants in employment agreements.

The Feb. 3, 2026 decision in North American Fire Ultimate Holdings, LP v. Alan Doorly reversed the Court of Chancery’s dismissal of North American Fire’s claim to enforce its restrictive covenants against a former executive. The trial court had held that the restrictive covenants failed for lack of consideration when the executive’s for-cause firing triggered the equity forfeiture provision in an incentive unit grant agreement.

It has been said that equity abhors a forfeiture. This decision provides guidance and clarity for enforcing restrictive covenants in the face of a forfeiture provision. The ruling confirms that forfeiture provisions do not invalidate restrictive covenants, even when the employee ultimately receives nothing of value. If the consideration had value at the time the contract was formed — even if that value was contingent on future events — the restrictive covenants will not fail for lack of consideration.

What led to the litigation?

Alan Doorly co-founded a company specializing in life safety systems. In 2021, North American Fire acquired the company and Doorly remained in his position. He received 700,000 common units of North American Fire. In 2022, in connection with a corporate restructuring, Doorly exchanged all his common units for 300,000 Class B units. In connection with the exchange, Doorly executed an Incentive Unit Grant Agreement with restrictive covenants, including noncompete, nonsolicitation, and confidentiality provisions. The Class B units were also subject to time, performance and vesting requirements. The agreement contained a forfeiture provision stating that all vested and unvested units would be forfeiture upon a for-cause termination.

In May 2023, while he was still employed by North American Fire, Doorly formed a competing company. In December 2023, North American Fire discovered this and terminated him for cause. The for-cause termination triggered the automatic forfeiture of his vested and unvested units under the Incentive Unit Grant Agreement.

Why did the Court of Chancery dismiss the claims?

North American Fire brought suit in the Court of Chancery to enforce the restrictive covenants. The court dismissed the claims for failure of consideration. The court reasoned that the units were the sole consideration for the restrictive covenants, but once the units were forfeited, the contract became unenforceable for lack of consideration.

What was the Delaware Supreme Court’s reasoning in reversing the decision?

On appeal, the Delaware Supreme Court reversed. The Court held that consideration must be measured at the time the parties enter their contract, not at the time of enforcement. The court stated that “the diminished value of the economic benefit conferred, or even a complete lack of value, does not result in a failure of consideration.”

The Supreme Court favorably considered Newell Rubbermaid Inc. v. Storm, a 2014 Chancery case involving restrictive covenants tied to restricted stock units. In Newell, the Court of Chancery held that even though the units were subject to forfeiture if the employee was terminated before vesting, the agreement was enforceable because at the time of formation the employee “was granted a benefit that held actual value.” Even though the value was contingent on factors like vesting periods and future employment, it was “not illusory.”

The Supreme Court rejected Doorly’s attempt to distinguish Newell based on the former employee's receipt of dividend equivalents, noting that this was an independent form of consideration and not material to the holding. The court concluded that like in Newell, although the value of Doorly’s units was “somewhat contingent,” it was not illusory at the time of formation. The case was remanded to the Court of Chancery for further proceedings consistent with the Supreme Court's holding.

For more information on this and related topics, contact the author Chaney Hall at chall@foxrothschild.com or 302.622.4276.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the authors and not necessarily this law firm or its clients.