When a Contract Goes Too Far, Will a Court Fix It?

You put a noncompete in a contract. You make it five years, cover half the country and add a few restrictions for good measure.

Then someone challenges it.

Will the court enforce it? Throw it out? Or rewrite it into something reasonable?

The answer is: it depends. And increasingly, the answer depends on how unreasonable you were in the first place.

A contract does not necessarily rise or fall as a whole. A court may sever an unenforceable provision, enforce the rest, narrow the offending language or refuse to enforce the provision at all.

Here is how the pieces fit together.

Sometimes the Court Just Cuts It Out

The simplest solution is severance.

If one provision is unenforceable but the rest of the contract works without it, a court can strike the bad provision and enforce everything else.

That is why most commercial contracts contain a severability clause. It tells the court that the parties would prefer to keep the rest of the deal alive if one provision fails.

But a severability clause is not a magic eraser. It is evidence of the parties’ intent, not an instruction the court must follow. If the offending provision was central to the bargain or the illegality infects the agreement, the court may refuse to salvage it.

And severance does not solve every problem.

Suppose your two-year noncompete is too long, but a one-year restriction would be enforceable. Deleting the two-year provision does not leave you with a one-year noncompete. It leaves you with no noncompete.

That is where the blue pencil comes in.

The Blue Pencil Can Be a Very Sharp Pencil

Under the strict blue-pencil rule, a court can cross out language but cannot rewrite the contract.

Imagine a covenant prohibiting competition in “New Jersey, New York and the United States.” A court might be able to cross out “and the United States” and enforce what remains.

But suppose the problem is the five-year duration. There may be nothing to cross out. If the court cannot add words or change the number, the provision fails.

New Jersey and New York take a more flexible approach to partial enforcement. New Jersey’s approach is reflected in the New Jersey Supreme Court’s decision in Solari Industries, Inc. v. Malady. New York followed a similar path in BDO Seidman v. Hirshberg, where the court limited an accounting firm’s restrictive covenant to clients the departing employee had actually served.

But there is an important catch.

A court is more likely to help a party that drafted a reasonable restriction that turned out to go slightly too far than one that deliberately asked for the moon.

New York courts, for example, consider whether the employer engaged in overreaching or coercive use of bargaining power. An employer that imposed an obviously excessive covenant on a take-it-or-leave-it basis may lose the covenant altogether.

Delaware Is Less Interested in Saving Your Bad Drafting

Startups often choose Delaware law for operating agreements, equity documents and other corporate agreements.

That does not mean Delaware will rescue every restrictive covenant a sophisticated party puts in a contract.

The Delaware Court of Chancery has repeatedly been reluctant to narrow overbroad restrictive covenants. The concern is straightforward: if courts routinely turn unreasonable restrictions into reasonable ones, there is little downside to asking for too much.

In Sunder Energy, LLC v. Jackson, the Delaware Supreme Court affirmed the refusal to blue-pencil a noncompete in an LLC agreement. It also declined to adopt a bright-line rule for when blue-penciling is appropriate.

So a Delaware choice-of-law clause is not insurance against an aggressive covenant failing completely.

Don’t Assume a Reformation Clause Will Save You

Contract drafters sometimes try to solve the problem in advance with a reformation clause.

The clause typically says that if a restriction is unenforceable as written, a court should modify it to the maximum extent permitted by law.

That can help. In a state that permits partial enforcement, it gives the court a clear statement that the parties would rather have a narrower restriction than none at all.

But it cannot force a court to rewrite the contract.

And it certainly does not give the drafter permission to overreach.

There is another drafting technique worth considering: the step-down provision.

Instead of asking the court to choose a reasonable restriction, the contract provides alternatives. A restriction might last 24 months, dropping to 18 months if 24 months is unenforceable and to 12 months if 18 months is also too long.

A strict blue-pencil court can potentially strike the invalid alternatives and leave the surviving one.

Still, elaborate contractual ladders can make a court suspicious. They should be used carefully.

This Is Not Just About Noncompetes

The same issues arise in other parts of a contract.

An arbitration provision may contain an unfair fee allocation or an unusually short deadline. A court may sever the offending provision and enforce the rest.

But if the unfair terms reflect a broader attempt to tilt the arbitration process, the entire clause may be at risk.

A limitation-of-liability provision may try to eliminate liability for fraud or intentional misconduct. That portion may fail while the rest of the limitation survives.

The question is often not simply, “Is this provision enforceable?”

It is also, “What happens to the rest of the deal if it isn’t?”

Draft Like Someone Is Actually Going to Read It

The best strategy is not to count on a judge to fix your contract.

If you are imposing a restriction, make it fit the business.

The duration should make sense. The geographic territory. The restricted activities and customers. And the restriction should be tied to a legitimate business interest you can actually explain.

Then give the court a clean way to preserve the rest of the agreement if something goes wrong.

Severability and reformation clauses are useful. Careful drafting is better.

And pay attention to governing law. A provision that a court might trim in New Jersey could face a very different fate in Delaware.

The blue pencil is not your editing service.

If you are a startup or growing company, this is the sort of issue that belongs in the contract review process, not in litigation after the contract has failed. I works with startups and emerging companies on founders’ agreements, equity, governance and commercial contracts, and with companies on corporate, securities and M&A matters. For ongoing legal needs, I can provide a continuing legal resource without the cost of building an in-house legal department.