What is a pact? Definition, meaning, types and examples (2023)

What is an alliance?

In its broadest sense, a covenant is a promise, agreement, or contract between two parties. As part of the agreement, both parties agree that certain activities will or will not take place.

Covenants in finance generally relate to the terms of a financial contract, such as a loan document or bond issue, that set the limits within which the borrower can borrow more. Covenants in religion generally convey the binding relationship between a deity and humanity.



main conclusions

  • Covenants are agreements between multiple parties that create a legally binding agreement on how each party should act.
  • Agreements can promote the occurrence of an activity (positive pact) or prevent an event or condition (negative pact).
  • Debt covenants are the most common, as they impose financial covenants on both the borrower and the lender as part of the loan agreement.
  • Agreements are legally binding clauses and, if violated, will trigger redress or other legal action.
  • Many industries, including finance, real estate, law, and religion, have covenants, although they are used in many different contexts within each group.

Understanding the Covenants

With respect to business, agreements are most often represented in terms offinancial indicesthat must be maintained, such as a maximum debt/asset ratio or other similar ratios. Agreements can cover everything from minimum dividend payments to levels that must be maintained in working capital and key employees remaining with the company.

Once an agreement is breached, the lender generally has the right to cancel the borrower's obligation or take steps to reduce the lender's risk. Generally, there are two types of primary clauses included in contracts: affirmative clauses and negative clauses. In addition, a third type of agreement, financial agreements, is sometimes separated into its own category.

Affirmative Covenants

An affirmative or positive clause is a clause in a loan agreement that requires the borrower to take specific actions. Examples ofaffirmative covenantsinclude requirements to maintain adequate levels of insurance, requirements to provide audited financial statements to the lender, compliance with applicable laws, and maintenance of proper accounting books and credit rating, if applicable.

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Failure to comply with an affirmative agreement generally results in a full default. Certain loan agreements may contain provisions that grant the borrower a grace period to cure the default. If not corrected, creditors have the right to announce default and demand immediate repayment of principal and accrued interest.

negative pacts

Negative agreements are established so that borrowers refrain from certain actions that may result in the deterioration of their solvency and ability to pay existing debts. The most common forms of negative pacts restrict or prohibit something from happening. Common examples include restricting a company from issuing dividends to its shareholders, restricting the payment of management fees to related parties, or restricting the amount of debt a company can carry.

A negative pact can be circumnavigated with the specific approval of the issuer of the pact. For example, imagine a company that wants to embark on a merger but is not allowed to do so due to a negative agreement. If the party opposing the agreement agrees to release the restraint, the company can proceed. This may also be the case during real estate acquisitions, capital investments, or asset disposals.

Numerical or financial agreements

Lastly, an alliance can be tied to a specific numerical metric. This metric is typically financial and can be a single number or a calculation to derive a given value ratio. A financial covenant is often closely monitored over time, as it is the covenant most likely to change suddenly.

It can be argued that a financial pact is actually a positive or negative pact. For example, imagine that a company is required to maintain a certain financial ratio above a certain calculated value. Since this imposes a requirement, it could technically be classified as a positive covenant. However, some view positive or negative conventions as a single result (ie, a company must maintain GAAP records). Meanwhile, financial covenants assess operating performance to ensure the overall health of the entity.

In business, financial covenants are often separated into maintenance covenants or incurrency covenants. Maintenance agreements generally stipulate an operating performance that cannot be violated. An example is theinterest coverage rateto ensure that a business makes enough profit to cover interest assessments. Incurrency arrangements occur when a company takes actions that affect financial performance. For example, a company must maintain itsdebt capital ratioabove 0.40; If you want to contract more debts, you must make sure to comply with the competition agreement.

In finance, lenders often establish covenants to protect themselves from borrower defaults due to financial actions detrimental to them or the business.

Types of Agreements

Different industries and sectors have different types of agreements. In general, it is quite common to see positive and negative clauses in different sectors.

debt agreements

Debt covenants were the most used example in this article. A debt agreement arises when an entity works with a financial institution to obtain a loan. To guarantee the loan, the entity must agree to meet certain criteria, not engage in certain activities, and be in good financial standing.

Debt covenants can also affect the creditor. For example, imagine that a company insures aCredit lineand expects to use this line in the coming years. The company is interested in partnering with a bank that maintains a good financial position and manages operational risk. Therefore, the borrower may impose clauses on the lender as part of the contract to ensure that the borrower has long-term resources to obtain financing.

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property agreements

A property covenant is an agreement between several parties that stipulates howreal estateor the real estate will be used or not. These types of agreements may restrict the owner of the land or require specific actions to be taken. For example, homeowners association agreements often require the property to have trees trimmed to a certain length or describe how the parking spaces will be used.

Some ownership deals"run with the earth" or exist in perpetuity, regardless of who owns it. For example, a property contract may restrict the type or number of livestock allowed on a property. If this contract is transferable to any new owner in the future, the contract is soil binding.

Historically, covenants have been used to discriminate based on race, religion, or sexual orientation. For example, more than 500 of these historic deals have been discovered on 20,000 properties in King County, Washington. Supreme Court decisions and state law now make these discriminatory clauses illegal.

Law Agreements

While covenants are legal agreements by nature, covenants are also simply part of the legal system. Law is a form of covenant, since law covenants are usually negative covenants that restrict an individual or a company from taking certain actions. The law can explain the outcome of what will happen if the covenant (law) is broken. Anycommon lawdesigned to prevent criminal activity is an example of a legal covenant.

religious pacts

Covenants are often found in religion, as a deity usually makes promises or agreements to the people of the world or demands something from humanity. Although examples of religious alliances in the Bible are discussed below, alliances are a common part of Christianity, Islam, Hinduism, and Buddhism.

There are two types of covenants in the Bible. First, conditional covenants are God's promises that certain results will occur. However, in order for God to fulfill his part of the covenant, mankind must first do his part. In the first two chapters of Genesis, God promises Adam that blessings and curses depend on humanity's faithfulness; by eating the forbidden fruit, Adam broke the conditional covenant.

Second, the Bible includes unconditional covenants which are God's promises that he will fulfill an oath with his divine power without strings attached. By creating a rainbow after Noah survived the flood, God basically promised all of humanity that such destruction would never happen again. No additional demands from humanity were needed for this to happen.

Covenant Violations

A covenant breach, often called a covenant breach, is a breach of the agreed terms of a covenant. If a party was unable to execute a positive agreement, performed a task it was not supposed to do as described in a negative agreement, or was unable to maintain certain operational metrics, the contract was breached.

Violations of the Debt Covenant

A bond breach is a breach of the terms of the clauses of a bond. Title covenants are designed to protect the interests of both parties, where the inclusion of the covenant is in the bond deed, which is the agreement, contract, or binding document between two or more parties.

When an issuer defaults on an obligation contract, it is considered to be in good standing.technical standard. A common penalty for breaching a bond covenant is to downgrade a bond, which can make it less attractive to investors and increase the issuer's borrowing costs. For example, Moody's, one of the leading credit rating agencies in the United States, rates the quality of a bond's commitment on a scale of 1 to 5, with 5 being the worst. This means that a title with a rating of five is an indication that covenants are constantly being violated.

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Lenders will often allow remedies on broken agreements. For finance clauses, after a company has breached its clause, it often must:

  1. Get competent financial metrics that deliver on the deal
  2. Maintain these metrics for an agreed period of time

other violations

In general, a party has a legal recourse to seek damages if another party has breached an agreement. For real estate, failure to follow association rules or agreements may result in fines or charges. While an HOA cannot force a homeowner to sell their home, other types of ownership agreements may requireliquidationor transfer of ownership.

Failure to comply with legal covenants results in fines, penalties, fees, or more severe legal penalties. When you park your car on the side of the road, you are bound by an agreement that stipulates that you pay for that space at a specific time. Failure to do so will result in a parking ticket. Any case or court case is an example of a failed pact.

Lastly, different religions advocate different consequences for not adhering to specific teachings. The Qur'an states that if someone strays from belief in Islamic teachings, Allah will never forgive him or guide him "to the right path".

Example of bonds or debt agreements

As part of its 2021 annual report, Amazon.com, Inc. publicly disclosed its bond payment obligation. Due to the possible importance and restriction of the agreements, it was decided to publicly declare that the notes were not subject to any agreement.

Alternatively, Apple, Inc. also reports notes payable, although there are terms and conditions as part of its debt obligation. The following excerpt from its 2021 annual report outlines the exceptions and limitations on additional interest on the notes:

"The Company, subject to the exceptions and limitations set forth below, will pay as additional interest on the Notes such additional amounts ("Additional Amounts") necessary for net payment by the Company or the Company's paying agent. .. is not less than the amount provided in the Bonds as due and payable.”

Apple is also discussing agreements that restrict consolidation or merger activities. Your agreement states that you can do these activities, as long as:

  • "We are the continuing entity, or resulting person, survivor, or assignee (the "Successor") is a person (if such person is not a corporation, then Successor shall include a corporate co-issuer of the notes) organized and existing under the laws of the United States of America, any state thereof, or the District of Columbia and the Successor (if not us) shall expressly assume, by means of a supplemental trust indenture, all of our obligations under the Debt Securities and the Indenture applicable Trust and, for each security that, by its terms, provides for conversion, grants the right to convert such security in accordance with its terms
  • "Immediately after giving effect to such transaction, no default or event of default occurred under the applicable Trust Indenture and continues
  • "In the case of the 2013 Deed of Indenture, the trustee receives from us a certificate of directors and counsel's opinion that the transaction and such supplemental deed, as the case may be, comply with the applicable provisions of the Deed of Indenture. 2013".

What are examples of covenants?

Covenants may relate to finances, property, law, or religion. In business, a loan clause may prohibit a company from acquiring another company, or it may require a certain amount of cash on hand. A lease may require that the lawn be mowed a specified number of times per year. A religious covenant can be a promise from God never again to send a destructive flood like the one Noah experienced.

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What do covenants on a property mean?

Conventions on a property restrict how a property can be used or set precedence over how it should be used. Consider a house that is part of a homeowners association. The HOA can prevent the owner from renting the property or listing the property on Airbnb.

What is an example of covenants in real estate?

Real estate covenants used to restrict who could legally purchase or occupy real estate. For example, consider the agreements in King County (Seattle) that used to restrict race, national origin, or ethnic origin.

Today, real estate contracts are more related to the actual operation and maintenance of a home. Some conventions require certain actions to be taken (ie homeowners must trim their trees), while others restrict the action (ie homeowners cannot build a fence).

What are the terms of a contract?

A contract can outline any agreement that one party wishes to enforce, as long as the other party agrees to its performance. As part of the contracting phase, the two parties must communicate their requirements and negotiate what to include and exclude from a contract. The clauses listed from one contract to another can be totally different, as different parties may want to be protected in different ways.

What is the covenant of the Lord?

According to the Bible, the Lord made several covenants. At the highest level, God promised humanity that he would one day return to earth and grant him eternal life. The Bible also describes several other covenants in which God made a promise to humanity that may or may not require action on humanity's part.


What is a example of pact? ›

We supported a peace pact between the two countries. They made a pact to go to the gym together three times a week.

What's the meaning of pact? ›

/pækt/ a formal agreement between two people or groups of people: a peace pact.

What is an example of the root word pact? ›

-pact-, root. -pact- comes from Latin, where it has the meaning "fasten. '' This meaning is found in such words as: compact, impact, impacted, subcompact.

What is the definition of pact in law? ›

A bargain, compact, or agreement. An agreement between two or more nations or states that is similar to, but less complex than, a treaty. West's Encyclopedia of American Law, edition 2.

What kinds of pacts are there? ›

See also
  • Blood Pact (disambiguation)
  • Compact (disambiguation)
  • Covenant (historical)
  • Gentlemen's agreement.
  • Suicide pact.
  • Trade pact.
  • Contract.
  • Treaty.

How does pact work? ›

A Pact simulated consumer then replays each request against the real provider, and compares the actual and expected responses. If they match, we have verified that the simulated applications behave the same way as the real applications.

What does pact mean in school? ›

A Pre-Admission Content Test (PACT) can be used for admission to an alternative certification or post-baccalaureate educator preparation program (EPP).

What does pact stand for in communication? ›

The PACT acronym stands for the four essential values that are expected in all leadership communication, and indeed, as centric elements of organizational strategy—pride, accountability, commitment, and trust.

What's the difference between pact and pact? ›

Pack is also used to mean to carry a firearm. Related words are pack, packs, packing. Pack is derived from the German words pak and pakken. A pact is a covenant or an agreement between two parties.

What is a secret pact? ›

A secret treaty is a treaty (international agreement) in which the contracting state parties have agreed to conceal the treaty's existence or substance from other states and the public. Such a commitment to keep the agreement secret may be contained in the instrument itself or in a separate agreement.

Can you make a pact with yourself? ›

If you achieve something significant you must make a PACT with yourself. Otherwise, you're simply dreaming. Plan, Act, be Consistent, and then let Time unfold. It's that simple.

Is pact a noun or verb? ›

Noun. An agreement; a compact; a covenant.

Is a pact an agreement? ›

A pact is a formal agreement between two or more people, organizations, or governments to do a particular thing or to help each other. Last month he signed a new non-aggression pact with the country.

What are the two types of agreements? ›

Express and Implied Contracts

These are the kinds of contracts that most people think of when they think of contracts. Implied contracts, on the other hand, have terms that must be inferred by actions, facts, and circumstances that would indicate a mutual intent to form a contract.

What are legal agreements called? ›

A contract is an agreement between parties, creating mutual obligations that are enforceable by law.

What is the nearest meaning of pact? ›

noun. an agreement, covenant, or compact: We made a pact not to argue any more. an agreement or treaty between two or more nations: a pact between Germany and Italy.

What is the synonym of pact? ›

agreement. noundocument of concurrence, contract.

What are synonyms for pact? ›

Synonyms of pact
  • treaty.
  • alliance.
  • accord.
  • convention.
  • covenant.
  • deal.
  • contract.
  • compact.

Why is pact used? ›

Pact is most valuable for designing and testing integrations where: You (or your team/organisation/partner organisation) control the development of both the consumer and the provider. The consumer and provider are both under active development.

Who uses pact? ›

Consumer Driven Contracts​

Pact is a code-first consumer-driven contract testing tool, and is generally used by developers and testers who code. The contract is generated during the execution of the automated consumer tests.

What is pact plan? ›

The Family Planning, Access, Care, and Treatment (Family PACT) Program is administered by the California Department of Health Care Services, OFP and has been operating since 1997 to provide family planning and reproductive health services at no cost to California's low-income (under 200% federal poverty level) ...

Does pact mean promise? ›

Meaning of pact in English. a formal agreement between two people or groups of people: The United States and Canada have signed a free-trade pact.

What does pact mean in US history? ›

The full name of the law is The Sergeant First Class (SFC) Heath Robinson Honoring our Promise to Address Comprehensive Toxics (PACT) Act. The PACT Act will bring these changes: Expands and extends eligibility for VA health care for Veterans with toxic exposures and Veterans of the Vietnam, Gulf War, and post-9/11 eras.

How is the word pact formed? ›

The word pact comes from the Latin pactum, meaning "something agreed upon." In Roman times, one kind of pact was the marriage pact you signed when you got married.

What language is pact? ›

Introduction to Pact​

Pact is an open-source programming language for writing smart contracts. It's designed from the ground up to support the unique challenges of developing solutions to run on a blockchain. Pact empowers developers to create robust and high-performance logic for transactions.

What does a defensive pact do? ›

A defense pact (or defence pact in Commonwealth spelling) is a type of treaty or military alliance in which the signatories promise to support each other militarily and to defend each other. In general, the signatories point out the threats in the treaty and concretely prepare to respond to it together.

Are secret treaties illegal? ›

They are also prohibited under international law. At the Treaty of Versailles, marking an end to World War I, Woodrow Wilson proposed to include a prohibition against secret treaties by proposing that that all treaties should be made through the League of Nations.

Why are pacts made? ›

A pact is a precommitment to an outcome that acts as a firewall against distraction. You can think of it as a sort of “habit bet.” This technique nearly guarantees you'll follow through on any commitment you choose to make.

Can a gun be a pact weapon? ›

Eldritch Firearm

You can use any weapon you summon with your Pact of the Blade feature as a spellcasting focus for your warlock spells. In addition, you gain access to a limited amount of firearms you are able to conjure as your pact weapon, based on your warlock level.

Can you give your pact weapon to someone else? ›

Can you give it to someone else? Sure, as long as they stay within 5 feet of you.

What is the opposite of pact? ›

Our site contains antonyms of pact in 3 different contexts. We have listed all the opposite words for pact alphabetically. disagreement. altercation. animosity.

How do you use pact in a sentence? ›

  • We supported a peace/free-trade/nonaggression pact between the two countries.
  • They made a pact to go to the gym together three times a week.

Are pacts legally binding? ›

Under international law, a treaty is any legally binding agreement between states (countries). A treaty can be called a Convention, a Protocol, a Pact, an Accord, etc.; it is the content of the agreement, not its name, which makes it a treaty.

What are the three types of agreements? ›

Types of Agreements
  • Letter of Intent (LOI) A Letter of Intent (LOI) is a non-binding statement that acknowledges intent to explore the possibility of collaboration. ...
  • Memorandum of Understanding (MOU) ...
  • Memorandum of Agreement (MOA)

What is an agreement between two parties called? ›

A contract is a legally enforceable agreement between two or more parties that creates an obligation to do (or not do) a particular thing.

What are the 5 basic types of contracts? ›

Federal government contracts are commonly divided into two main types, fixed-price and cost-reimbursement. Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts.

What are common agreements? ›

Common contracts are the business contracts you are most likely to encounter in the operation of a small business. Like all contracts, they are legally binding written or oral agreements between two or more parties designed to fulfill certain agreed upon terms.

What are main agreements? ›

WHAT IS THE MAIN AGREEMENT? The Main Agreement is a collective agreement between the employer organisations and trade unions that constitute the Metal and Engineering Industries Bargaining Council.

What are the 7 elements of a contract? ›

For a contract to be valid and recognized by the common law, it must include certain elements— offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.

What are the four types of legal contracts? ›

There are four types of contract classifications: Formation. Nature of consideration. Execution.

What types of agreements contract are illegal? ›

Examples of an illegal contract include:
  • Those for the distribution or sale of drugs, drug paraphernalia, and other types of controlled substances.
  • Those for illegal activities, such as gambling or prostitution.
  • Those that hire underage employees.
  • Those that are against fair dealing principles and/or public policy.

What is a pact between friends? ›

A pact is a treaty or other agreement between parties, and it's usually written. Countries can have pacts or you can make a pact with your friends, promising each other that you'll all show up for the spelling bee. A pact is a formal agreement.

What is friendship pact? ›

A treaty of friendship, also known as a friendship treaty, is a common generic name for any treaty establishing close ties between countries.

What is a pact between countries? ›

Under international law, a treaty is any legally binding agreement between states (countries). A treaty can be called a Convention, a Protocol, a Pact, an Accord, etc.; it is the content of the agreement, not its name, which makes it a treaty.

What is secret pact? ›

A secret treaty is a treaty (international agreement) in which the contracting state parties have agreed to conceal the treaty's existence or substance from other states and the public. Such a commitment to keep the agreement secret may be contained in the instrument itself or in a separate agreement.

When you make a pact with someone? ›

A pact is a formal agreement between two or more people, organizations, or governments to do a particular thing or to help each other. Last month he signed a new non-aggression pact with the country.

What are the three types of friends? ›

One of the most common defines three types of friendships: confidants, constituents and comrades. Knowing about the three types of friends can be valuable for fostering meaningful social connections, but it can also provide a foundation for further studies in social work, such as in an online degree program.

What are the 4 levels of friendship? ›

Here are the four levels of friendship, and how each can provide value in your life:
  • Essential friends. ...
  • Collaborators. ...
  • Associates. ...
  • Mentors and mentees.
Jul 29, 2021

What are the 3 C's in friendship? ›

A different way of categorizing friendship is by applying “The Three C's”. There are three basic types of people with whom you interact: Constituents, Comrades, and Confidants.

What are pact goals? ›

PACT is a goal setting technique and stands for Purposeful, Actionable, Continuous, and Trackable. Compared to other methods that focus on outcome, PACT goals focus on output. By focusing on output, some people have found that PACT goals allow them to track progress towards achieving a goal and creating new habits.

What is pact in history? ›

Warsaw Pact was a treaty that established a mutual-defense organization. It was composed originally of the Soviet Union and Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania. Later Albania withdrew from the pact in 1968 and East Germany withdrew in 1990.


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