Restat 2d of Contracts, § 184

• Restatement of the Law, Second, Contracts
• Chapter 8- Unenforceability on Grounds of Public Policy
• Topic 1- Unenforceability in General
• § 184 When Rest of Agreement Is Enforceable

(1)  If less than all of an agreement is unenforceable under the rule stated in § 178, a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange.
(2)  A court may treat only part of a term as unenforceable under the rule stated in Subsection (1) if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing.

Comment:

a.  Refusal to enforce a promise.  Under the rule stated in the preceding Section, an agreement may be unenforceable as to corresponding equivalents on each side but enforceable as to the rest. If it is not possible to apportion the parties' performances in this way so that corresponding concessions are made on both sides, a refusal to enforce only part of the agreement will necessarily result in some inequality. If the performance as to which the agreement is unenforceable is an essential part of the agreed exchange, the inequality will be so great as to make the entire agreement unenforceable. Under Subsection (1), however, if that performance is not an essential part of the agreed exchange, a court may enforce all but the part that contravenes public policy. For example, a promise not to compete that is unreasonably in restraint of trade will often not invalidate the entire agreement of which it is a part. Whether the performance is an essential part of the agreed exchange depends on its relative importance in the light of the entire agreement between the parties. A party who has engaged in such serious misconduct that the entire agreement is unenforceable cannot take advantage of the rule stated in Subsection (1). See Comment d to § 178.

Illustration:

1. A employs B as head bookkeeper of his retail clothing store under an employment agreement in which B promises not to work in the retail clothing business in the same town for three years after the termination of his employment. B works for A for five years but does not deal directly with customers and acquires no confidential information in his work. Although B's promise is unreasonably in restraint of trade and is unenforceable on grounds of public policy, enforcement of the rest of the employment agreement is not precluded on those grounds. See Illustration 8 to § 188.

b.  Refusal to enforce part of a term.  Sometimes a term is unenforceable on grounds of public policy because it is too broad, even though a narrower term would be enforceable. In such a situation, under Subsection (2), the court may refuse to enforce only part of the term, while enforcing the other part of the term as well as the rest of the agreement. The court's power in such a case is not a power of reformation, however, and it will not, in the course of determining what part of the term to enforce, add to the scope of the term in any way. A court will not exercise this discretion in favor of a party unless it appears that he made the agreement in good faith and in accordance with reasonable standards of fair dealing. Compare §§ 157, 205. For example, a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so broad as to offend public policy by redrafting the agreement so as to make a part of the promise enforceable. The fact that the term is contained in a standard form supplied by the dominant party argues against aiding him in this request. Whether a particular dispute involves a single term, so that it comes under Subsection (2), or separate terms, so that it comes under Subsection (1), will be determined from the substance of the agreement as well as from its language.

Illustrations:

2. A, who is engaged in business as a baker and confectioner, sells the business to B, and as part of the bargain promises not to engage in the business of "baker, confectioner, or other business" within the same town for three years. The provision is fairly bargained for. A's promise is so broad as to be unreasonably in restraint of trade because A's business is only that of baker and confectioner. Although part of A's promise is unenforceable on grounds of public policy (§ 188), it is enforceable with respect to the business of baker or confectioner.

3. A sells his grocery business to B and as part of the agreement promises not to engage in that business "within the city where the business is situated or within a radius of fifty miles." The provision is fairly bargained for. A's promise involves an unreasonable restraint of trade because the business extends within the city and over a radius of only twenty-five miles. Although part of A's promise is unenforceable on grounds of public policy (§ 188), it is enforceable with respect to the city and twenty-five miles.

4. A and B make an agreement for A to repair B's building under which B promises not to hold A liable for a "willful or negligent breach of duty." The provision is fairly bargained for. Although part of B's promise is unenforceable on grounds of public policy (§ 195), it is enforceable with respect to negligence.

5. A lends B $ 10,000, taking a promissory note for that sum plus interest. In calculating the rate of interest, the parties make an error so that the amount of interest exceeds the highest permissible legal rate. Although part of B's promise to pay the stipulated interest is unenforceable on grounds of public policy, it is enforceable up to the highest permissible rate. If A knew when he made the loan that the amount exceeded the highest permissible legal rate, B's promise to pay interest would be unenforceable in its entirety.

This Section is derived from former § 518. See also former §§ 537, 603. It differs from former § 518 in two respects. First, the present rule is stated so as to apply to terms generally, whereas the former version was limited to promises in restraint of trade. Second, and more important, this Section rejects the so-called "blue-pencil rule" of former § 518, under which a promise in restraint of trade was unenforceable in its entirety if the restraint imposed exceeded what was reasonable and the terms of the agreement indicated no line of division. This rule is rejected because it is now contrary to the weight of authority and has been strongly criticized by scholarly writers. See, e.g., Beit v. Beit, 135 Conn. 195, 63 A.2d 161 (1948); Ceresia v. Mitchell, 242 S.W.2d 359 (Ky. 1951); Bess v. Bothman, 257 N.W.2d 791 (Minn. 1977); Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265 (1977) (citing the Tentative Draft of this Section); Williston & Corbin, On the Doctrine of Beit v. Beit, 23 Conn. B.J. 40 (1949); Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 681-83 (1960). That the rule permitting the court to enforce part of an agreement will not be applied where there was bad faith in the negotiating process, see H & R Block, Inc. v. Lovelace, 208 Kan. 538, 493 P.2d 205 (1972). For the potential incentives it will give employers to bargain in bad faith in the future, see Richard P. Rita Personnel Services Int'l v. Kot, 229 Ga. 314, 191 S.E.2d 79 (1972). As to divisibility generally, see 6A Corbin, Contracts §§ 1390, 1520 (1962 & Supp. 1980); 14 Williston, Contracts §§ 1647B-48 (3d ed. 1972); 15 id. § 1779.

Comment a.  Illustration 1 is new; see also Mailand v. Burckle, 20 Cal.3d 367, 143 Cal. Rptr. 1, 572 P.2d 1142 (1978).

Comment b.  Illustration 2 is based on Illustration 2 to former § 518. Illustration 3 is based in part on Illustration 1 to former § 518; Eastern Distrib. Co. v. Flynn, 222 Kan. 666, 567 P.2d 1371 (1977). Illustration 4 is supported by former § 574 and Illustration 1 to that section. Illustration 5 is based on Illustration 1 to former § 537.

ALR Annotations:

Enforceability of warrant of attorney to confess judgment against assignee, guarantor, or other party obligating himself for performance of primary contract. 5 A.L.R.3d 426.

Digest System Key Numbers:

Contracts 137