The Puzzling Persistence of Unenforceable Contract Terms
36 Pages Posted: 7 Apr 2009 Last revised: 18 Dec 2013
Date Written: April 6, 2009
Contracts frequently contain clauses that are not enforceable – at least, not enforceable as written. While mistake may explain some such clauses, invalid terms are frequently used by sophisticated actors who are well aware that they are unenforceable as written. Presumably, this is because such clauses have utility for those who impose them, and the most obvious reason is that the other party to the contract (or, conceivably, some third party) does not realize the clause is unenforceable as written or is not willing to risk the resources needed to establish its invalidity.
The phenomenon seems especially acute in the employment context where, among other instances, it surfaces in connection with overbroad noncompetition clauses and arbitration agreements containing invalid waivers of substantive or procedural rights. It seems likely that large numbers of employees work under agreements that, if challenged, would be found unenforceable as written.
The Article demonstrates that, contrary to some claims, the phenomenon is not constrained by market forces on employers, including the costs of lost opportunities, reputational harms, foregone transactions, or increasing the price of labor. This market failure is in large part due to the judicial approach to such clauses. Once having declared them unenforceable as written, the courts generally proceed to tailor the terms so that they pass judicial muster. The result is to remove the major incentive the law could offer to draft permissible clauses - the risk that the entire clause will fail.
This Article surveys some of the possible solutions to the problem, concluding that none is satisfactory. It urges, however, that a strong step in the right direction would be for courts, once they found a clause to have unenforceable provisions, to widen the angle of their review to consider not only doing justice between the parties before them but, more broadly, considering the interests of uninformed nonparties who are saddled with such provisions.
Keywords: noncompete, noncompetition, postemployment restraint, arbitration, contract, waiver, public policy, unenforceable, clause, voidable, reputational, labor market, transaction costs, blue pencil, severability, covenant, invalid, overreaching, employment, sever, employ, opportunity costs
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