Enforceability of noncompete clauses

Last month, on July 3rd, the U.K. Supreme Court decided a matter – Tillman vs. Egon – which gave the employers a certain level of comfort and assurance that even if the contracts with their employees had, for some reasons, a few words or phrases which were not fitting properly, or would give a different meaning altogether, the courts could use the long established blue-pencil doctrine and simply score out the unwanted words or phrases, without changing the intention of the parties at the time of entering into the contract. This is a positive development and needs to be used more often in employer-employee contracts, even in India.

The basic principle of a contract is that both parties have a mutual understanding voluntarily, and an offer made by one party has to be accepted, as it is, by the other party, and in case any changes have been suggested while accepting the offer, it doesn’t become an unconditional acceptance; and it is treated as a counter offer which gives an option to the first party whether to accept it or reject it or suggest certain modifications; which again would become a counter offer, and it goes on like this, till the time it is accepted unconditionally.

Knowing the desperation of most of the prospective employees, particularly for their first job, it is quite natural that with almost zero bargaining power they are in no position to suggest any changes to whatever the draft agreement is given to them by the prospective employer to sign. In such a situation, the employer is in a commanding position and may include certain terms and conditions which, to any normal and prudent person, will obviously appear to be unreasonable, impractical and onerous. However, as the contract has been signed, it becomes a binding document and with the passage of time the employee – after attaining a little bit of stability and experience, and also offers from competitors – may rue the day when he had signed it.

Something similar happened in the Tillman case when a consulting firm Egon had hired Tillman with the noncompete clause using the words, “…directly or indirectly engage or be concerned or interested in any business carried on in competition…”. The law in the UK, and in most of the evolved jurisdictions, tries to find a balance between the validity of a noncompete clause and the right of an individual to work so as to earn a livelihood. For a long time, the UK law has fine-tuned the principle that any clause in restraint of trade would be void, if found to be unreasonable. The word “interested” used in the clause can be interpreted to include even minor share holding and that could not be the intention of the parties at the time of signing the contract.

While weighing the two options of either declaring the entire contract void or simply deleting the unwanted word – the practice is known as blue pencilling – the UK Supreme Court decided that it was quite practical simply to score of the word interested and proceed ahead with the enforcement of the contract. It is truly delightful for the employer that the entire contract has not been thrown out this because of one single word, and, in a sense things have been unbundled and only the unwanted word has been thrown out without even changing the real meaning of the contract. The spirit of the contract remains intact, and that is truly important for the parties.

There are often similar employer-employee contracts in India, and, though there is not much litigation on this issue, because of obvious reasons of extremely low bargaining power of employees, there is tremendous pressure on the employees to abide by each and every word in the contract. This is not practical.

Following the blue-pencil doctrine will help in getting a practical solution to the satisfaction of both parties.

The author is a professor at IIM-A, 
akagarwal@iima.ac.in