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Understanding The Blue-Pencil Rule Of Severability Under Contract Law

Many a times, parties to a contract find, much to their dismay, that some parts of their contracts are not legal and valid and, therefore, unenforceable. In such a situation, the question that arises is: whether the taint attaches to the entire contract (and the entire contract falls); or the bad (illegal) can be severed from the good (legal) and tossed away, while retaining the remaining contract and giving effect to the intention of the parties. When is the Court to pick up a scalpel (Blue-Pencil) and amputate the diseased limb (illegal part of the contract), to heroically save the patient (the contract itself).

Cutting straight to the chase : the act of severance, in contractual law parlance, is known as Blue Penciling or the application of the Blue Pencil Rule. The phrase owes its origin to an editor's act of cutting out/editing portions of a text while proof-reading, by a Blue Pencil. According to Black's Law Dictionary the Doctrine of Blue Pencil is a Judicial standard for deciding whether to invalidate the whole contract or only the offending words.

Blue-Pencil Rule allows the legally-valid, enforceable provisions of the contract to stand despite the nullification of the legally-void, unenforceable provisions. However, the Caveat is that the revised version must represent the original meaning; the rule may not be invoked, for example, to delete the word “not and thereby change a negative to a positive.

The general Rule of Law of contracts is that the illegal parts of a contract are illegal and hence unenforceable. But there are many contract containing one part or a clause as illegal and rest of the other parts as legal. The court in such cases strikes out the illegal part and enforces the legal one when the parts are severable. This is known as the concept of severability. This is done when the rest of the contract effectuate the intention of the parties.

The doctrine of severability created some problem i.e. it does not give power to the court to modify a restrictive covenant in jurisdiction. Based on the doctrine of severability, a new concept was evolved in 1843 in the case of [Mallan Vs. May, (1844) 13 Meeson & Welsby 511], which later came to be known as Blue Pencil. The Blue Pencil Doctrine is mostly applied in cases where the non-compete agreement is a matter of dispute.

Any contract in restraint of trade is void. But the Courts have started taking different approach and validate such contract if reasonable. In case some clause is overbroad, then the Court can strike down that part by running a Blue Pencil. Under the Blue Pencil Rule, the first approach is to read out the separable unreasonable clauses of the contract and then severing the part by running a blue pencil over it. The Courts had widened the scope of application of Blue Pencil Rule by rewriting the overbroad clauses. The Rule of Blue Pencil can be applied only if the valid stipulation is not affected by the illegality of the other part then the valid part remains intact.

In Halsbury's Laws of England (4th Edn. Vol.9), P.297, Para 430, it is stated that a contract will rarely be totally illegal or void and certain parts of it may be entirely lawful in themselves. The question, therefore, arises whether the illegal or void parts may be separated or severed from the contract and the rest of the contract enforced without them. Nearly all the cases arise in the context of restraint of trade, but the following principles are applicable to contracts in general. [Beed District Central Co-operative Bank Limited Vs State of Maharashtra & Ors. MANU/SC/4348/2006 Para 7]

The Courts have started using the Blue Pencil test in contracts, whereby, the Court may strike the part of the non-compete covenants in order to make the covenant reasonable. This was done to make an unenforceable covenant enforceable.
Evolution Of Blue Pencil Rule
 
The Blue Pencil test is sought to be introduced into public law from that field of private law which is concerned with the enforcement of contracts, in particular of contracts in restraint of trade.7

The doctrine of Blue Pencil was evolved by the English & American Courts. This Rule was established in the case of [Nordenfelt Vs. Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] A.C. 535], wherein, the Court held that that the covenant is valid so far as it relates to the trade or business of a manufacturer of guns, gun mountings or carriages, gunpowder explosives or ammunition but was wide in its application for 25 years. Thus, the Court struck down the part by running a Blue Pencil over it. The term Blue Pencil was used by Lord M. R. Sterndale in the case of [Attwood Vs. Lamont (1920) 3 K.B. 571], when he observed that the part of a contract can be severed by running a Blue Pencil over it.

In this case, Justice Bailhache observed:
Covenants of this kind are severable where the severance can be effected by striking out restrictions which are excessive with respect to area or subject matter or classes of customers, provided any such restriction is so expressed that it can be dealt with as a separate negative obligation, but the Courts will not split up a single restriction expressed in indivisible terms. As Mr. Matthews put it, the Courts will sever in a proper case where the severance can be performed by a Blue Pencil but not otherwise.

All States have not adopted the Rule of Blue Pencil. The States that use this doctrine to enforce the not compete contracts have distinct approaches in its application. There are some States that follow the strict Rule of Blue Pencil and some follow liberal Rule of Blue Pencil. The strict Blue Pencil Rule does not allow Courts to rewrite overbroad non-compete agreements. Instead, the strict approach allows courts only to strike overbroad provisions and enforce what is left of the agreement. Whereas the liberal approach allows rewriting of the overbroad provisions.

The Court in the case of [Mason Vs Provident Clothing & Supply Co. Ltd., 1913] AC 724] observed that:
Blue Pencil severance may be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant.

The Rule of Blue Pencil should be applied when the true construction of the clause cannot stand the test of reasonability without writing in or deleting some word from the clause14 and should not be use in such a manner so as to change the whole meaning. A Three Fold Test was should be applied in order to see the applicability of the Blue Pencil Rule: [Beckett Investment Management Ltd & Ors Vs Glyn Hall & Ors, [2007] EWCA Civ 613]

  1. The unenforceable provision can be severed without the necessity of adding or modifying the wording of what remains.
  2. The remaining terms continue to be supported by adequate consideration.
  3. The severance of the unenforceable provisions does not distort the parties' bargain so much that it materially differs from the contract the parties entered into (does not so change the character of the contract that it becomes not the sort of contract that the parties entered into at all).

There were many interpretations to this rule of blue pencil. In the case of [Daymond Vs. South West Water Authority (1976) 1 All E.R. 39] Lord Bridge had observed that an appropriate test of substantial severability should be applied. Nonetheless, on his approach there would appear to be at least two forms of the substantial severability test.

  1. First, when textual severance is possible, the test takes this form: is the valid text unaffected by, and independent of, the invalid text?
  2. Secondly, when textual severance is not possible so that the Court must modify the text in order to achieve severance, the Court may do this only if it is effecting no change in the substantial purpose and effect of the impugned legislation.18 Whereas in the case of [Dunkley Vs. Evans, (1981) 1 W.L.R. 1522], Lord Lowry had a different view and observed that:
    an instrument that was on its face ultra vires could be upheld by using Blue Pencil only if textual severance could occur and if what was left also passed the substantial severance test.

 
Application Of Blue Pencil Rule In India
Looked at from the perspective of the Indian Contract Law regime: A part of the consideration/object of a contract being illegal and unlawful, renders the entire agreement void.  This is the clear mandate of Section 24 of the Indian Contract Act, 1872, which reads as under;

24. Agreements void, if considerations and objects unlawful in part.-If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.

Illustration:
A promises to superintend, on behalf of B, a legal manufacturer of indigo, and an illegal traffic in other articles. B promises to pay to A salary of Rs. 10,000 per annum. The agreement is void, the object of A's promise, and the consideration for B's promise, being in part unlawful.

However, is not an absolute proposition and without exceptions. In the above illustration, the good (legal) cannot be separated from the bad (illegal) since they are so inextricably intermixed.
A class of cases which can be considered as truly severable and, therefore, capable of being Blue-Pencilled would be cases covered under Section 57 of the Indian Contract Act, 1872, which reads as under;
57. Reciprocal promise to do things legal, and also other things illegal.—Where persons reciprocally promise, firstly to do certain things which are legal, and secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement.

The illustration attached to the Section 57 of the Indian Contract Act, 1872, is instructive in this regard:
Illustration to Section 57:
A & B agree that A shall sell B a house for Rs. 10, 000/- but that, if B uses it as a gambling house, he shall pay A Rs. 50, 000/- for it. The first set of reciprocal promises, namely, to sell the house and to pay Rs. 10, 000/- for it, is a contract.  The second set is for an unlawful object, namely, that B may use the house as a gambling house, and is a void agreement.

Section 57 reads as under:
Another illustration, and an example of the inclusion of the Blue Pencil Rule within the statute can be found in Section 58 of the of the Indian Contract Act, 1872, which reads:
Section: 58. Alterative promise, one branch being illegal:
In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.
Illustration : A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium.

In the case of [Babasaheb Rahimsaheb Vs. Rajaram Raghunath, (1931) 33 BOMLR 260] the Court observed the application of Blue Pencil Doctrine in Indian contracts as well be holding that:
In an agreement if different clauses are separable, the fact that one clause, is void does not necessarily cause the other clauses to fail.

The Court applied this principle by holding that:
the sub-clause making the award final and conclusive was clearly separable from the main clause which made reference to an arbitrator imperative. The existence of the sub-clause or the fact that the sub-clause appears to be void does not in any way affect the right of the parties to have recourse to arbitration and does not make a reference to an arbitrator any the less an alternative remedy.25

In the case of [D. S. Nakara Vs. Union of India, AIR 1983 SC 130], the doctrine of severability was applied so as to retain the beneficial part of the relevant memorandum and make the same applicable to the pensioners irrespective of date of their retirement.

Supreme Court of India in the case of [Shin Satellite Public Co. Ltd. Vs. Jain Studios Limited, (AIR 2006 SC 963)] elaborated a bit on the principle. In this case, the parties had entered into a contract, which had an arbitration clause. So far so good; however, one of the clauses in the contract presented some difficulty; it provided that the arbitral award (delivered by the arbitrator) would be final and could not be challenged by either party, in any court or forum.

This particular part of the contract was potentially illegal, being in restraint of legal proceedings, and having the practical effect of giving the arbitrator a complete carte blanche (license) to pass any decision, without any redress against it.

Such an agreement, as students of contract law would reckon, would not pass judicial muster, being illegal and also against public policy. (Parties cannot opt out of/derogate from basic legal principles and remedies of Indian Law). The Court was faced with a predicament and called upon to decide whether this particular restraint would infect and render the whole contract bad; or could easily be amputated, like a diseased limb, to save the patient.

The Court went on with the latter view, saved the contract as well as the arbitration clause by running a blue pencil over the portion which excluded judicial remedies and jurisdiction of the Court. The Court must have felt that throwing away the whole contract for this rather trivial (and at any rate, something that goes to the root of the matter) would be tantamount to ‘throwing the baby away with the bathwater‘.

While doing this, the Supreme Court did recognise the limitations of this rule : A contract has to be severed by caution (lest the Courts be accused of re-writing bargains). Only if ‘severability' is substantively possible and contract capable of surviving post the surgical operation, that this exercise of running a blue pencil down should be embarked upon.

The Supreme Court held:
“the proper test for deciding validity or otherwise of an agreement or order is ‘substantial severability' and not mere ‘textual divisibility'. It is the duty of the court to severe and separate trivial or technical part by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable.

In India, the Blue Pencil Doctrine is not only applicable on covenants dealing with restraint of trade or the non-compete covenants but is also applicable to Arbitration clauses. In the case of [Sunil Kumar Singhal & Anr. Vs Vinod Kumar, 2007 Indlaw ALL 2702], It was held that the Offending part in the arbitration clause can be severed or marked by the Blue Pencil. The Courts have applied this doctrine to contract where some clause was redundant, unnecessary and opposed to public policy.

The Court held that if contract for sale of property with eight flats is illegal and void being contrary to building regulations and master plan, the agreement for sale of property with lesser number of flats, if permitted under Section 12, is enforceable.

Conclusion
The Blue Pencil Doctrine is a legal concept in common law countries, where a Court finds that a portion of contract is void or unenforceable, but the other part of the contract is enforceable. In that case the Court may order the parties to follow the enforceable part and can delete the voided portion. The Courts have held that partial invalidity in contract will not ipso facto make the whole contract void or unenforceable. Wherever a contract contains legal as well as illegal parts and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending parts.

valid parts 
The proper test for deciding validity or otherwise of an agreement or order is 'substantial severability' and not 'textual divisibility'. It is the duty of the Court to severe and separate trivial or technical part by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable. The Court must consider the question whether the parties could have agreed on the valid terms of the agreement had they known that the other terms were invalid or unlawful.

If the answer to the said question is in the affirmative, the doctrine of severability would apply and the valid terms of the agreement could be enforced, ignoring invalid terms. Thus, the Indian Court affirm the views of Lord Bridge that for application of Blue Pencil Rule, substantial severability is necessary.

Written By: Dinesh Singh Chauhan, Advocate
J&K High Court of Judicature, Jammu.
Email: [email protected], [email protected]

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