Introduction – Taking into consideration the multitude of clauses and terms in contracts, it is presumable that often are they hit by some section of the Indian Contract Act, 1872 or other related statutes. But then, rarely are contracts totally illegal or void; certain parts of them may be entirely lawful in themselves. The question then arises whether such illegal or objectionable part in the contract will render the whole contract unenforceable. The general rule in severability is: “where you cannot sever the illegal from the legal part of a covenant, the contract is altogether void; but where you can sever them, whether the illegality is created by statute or by common law, you may reject the bad part and retain the good.”

Established in the case of Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co Ltd. (where “would not compete with Maxim in any way” was severed from “would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way for a period of 25 years“), the Blue Pencil Rule says where severance is allowed, it must be possible simply to strike out the offending parts, as though by running a blue pencil through it.

Etymology – The term ‘blue-pencil’ comes from publishing and stems from the act of an editor or a sub-editor making corrections or revisions to a written copy.[7] The answer to why ‘Blue’ is that the colour does not show in some lithographic or photographic reproduction processes. Although the actual use of the tool in copy-editing has become rather rare, it continues to exist as a metaphor.

Principles Underlying and Conditions of the Test – According to the Blue Pencil test, for a contract containing unenforceable provisions in order to remain effective, the following conditions are to be satisfied:

1. The unenforceable part of the provision can be removed without the need to add to (or modify) the remaining wording.
2. The remaining promise is supported by adequate consideration.
3. The removal of the unenforceable part does not change the character of the contract so that it becomes a different sort of contract to the one that the parties agreed.

Also, the Courts will not make a new contract for the parties by rewriting the existing contract or by altering its nature; will not rewrite or rearrange the contract; will not sever the unenforceable parts of a contract unless it accords with public policy or where whole transaction is expressly prohibited by a statute or involves grave immorality.

Application of the Rule – The rule finds its application in a various legal arenas:

• Non-Compete Agreements are agreements in which the covenanter agrees for a specific period of time to refrain from competition with the covenantee within a particular area. It is not controvertible that such non-compete agreements are almost invariably drafted in favor of employers wherein employees are prohibited to work for companies rival to the previous employer. In most jurisdictions, the Courts blue-pencil such unreasonable non-compete agreements as determined by multipart tests.
• Arbitration – In a number of arbitration cases, the Courts have explained that the Blue Pencil Rule applies to arbitration also and have put into use the said rule. In the case of Watersweet Limited and Anr. vs. The Fertilisers and Chemicals and Ors., one of the clauses in the contract involved an offending and objectionable part, which made the arbitrator’s determination ‘final and binding between the parties’ and declared that the parties would have waived the rights of appeal or objection ‘in any jurisdiction’. The Court said that the offending part as to the finality and restraint in approaching a court of law can be separated and severed by using a blue pencil.
• General Contracts – Especially within the purview of Section 23 of the ICA, the rule can be applied in general contracts; for example a contract of bailment with regard to gold and gems.

Legal Position in India – The legal position in India is no different. In Babasaheb Rahimsaheb v. Rajaram Raghunath and other cases, when the question as to enforceability came up before the court, the Court utilized the rule to separate the unenforceable parts from the enforceable ones. In the case of M/s. Parekh Brothers v. Kartick Chandra Saha and Others, the Court observed that wrong grammar or spelling may be corrected: words that are merely insensible or that are repugnant or that have been obviously left in by mistake or that have been immaterial and surplusage and even whole provisions may be rejected. But at the same time effect should be given to every word which does not appear to be left in by mistake. Alterations can be done only when clearly required to avoid absurdity, repugnancy or inconsistency.

Rejection of the Rule – Many Courts have advocated the rule of ‘Reasonableness’ against the ‘Blue-Pencil’ rule. It differs in that it allows modification and permits courts to fashion a contract reasonable between the parties, in accord with their intention at the time of contracting. It is also argued that it is a wrong concept, for it is a mechanical exercise, with an overlay of judicial discretion. Also, a new threshold enquiry and a proposal of specificity (provisions specifically for employees; avoiding boilerplate language that invites litigation and abuse) have been made in regards of rejection of this rule.