Monday, September 12, 2005
In the US, some courts follow the red pencil approach when looking at a non-compete agreement. So if one clause is bad in law, the entire agreement with all its other safeguards, is also struck out. In effect, the contract is read in invisible ink.
Non-compete law in India and the US is enmeshed in public policy. So when a non-compete clause finds itself in court, interesting things happen. One of these involves how the court chooses to read the disputed contract.
Other jurisdictions 'blue-pencil' parts of the non-compete contract which are valid, and strike out the rest. Still others use a hybrid approach so if they find the contract made in good faith, or reasonable, then the blue-penciling rule is followed.
This issue is noticed often in stock forfeiture contracts. When a forfeiture of stock options clause is challenged in court, and this clause happens to reside in a non-compete agreement (as opposed to the incentive plan for instance) then a lot depends on which pencil the court uses to read the contract.
Red-pencilling is the more extreme form of reading a contract. For the party in a contract for whom enforcing the non-compete matters more- most likely the employer, or the bigger company, depending on the context- it would therefore be a good idea to ensure that the applicable law of contract is not a red-pencilling jurisdiction. That way, even if a clause or two of the non-compete agreement are hacked off by the court, atleast the rest remains.