India: Doctrine Of Blue Pencil

INTRODUCTION

According to Oxford Dictionary of English, Blue Pencil means to censor or to make cuts in a manuscript, film or other work. Blue Pencil was earlier used by the editors to make corrections in the copy. 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. Under this standard, only the offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them as opposed to changing, adding or rearranging words. The Blue Pencil rule allows the courts only to strike down the offending provisions and enforce the rest of the agreement.

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."¹ The doctrine of severability created some problem i.e. it does not give power to the court to modify a restrictive covenant in jurisdiction.² Based on the doctrine of severability, a new concept was evolved in 1843 in the case of Mallan v. May which later came to be known as Blue Pencil.³ The Blue Pencil Doctrine is mostly applied in cases where the noncompete 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 struck 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."⁴

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.⁶ 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 and American Courts. This rule was established in the case of Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co Ltd 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.⁸ 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 v. Lamont when he observed that the part of a contract can be severed by running a blue pencil over it.⁹ In this case, Justice Bailhache said:

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."¹¹ Whereas the liberal approach allows rewriting of the overbroad provisions.

The court in the case of Mason v. Provident Clothing and Supply co. Ltd.¹² 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."¹³ 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.¹⁵ A three fold test was should be applied in order to see the applicability of the blue pencil rule:¹⁶

(a) The unenforceable provision can be severed without the necessity of adding or modifying the wording of what remains.

(b) The remaining terms continue to be supported by adequate consideration.

(c) 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 v. South West Water Authority¹⁷ 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. First, when textual severance is possible, the test takes this form: is the valid text unaffected by, and independent of, the invalid text? 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 v. Evans¹⁹, 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".²⁰

In various cases, the rule of blue pencil has been criticized and the court held that "the blue pencil test could not apply to an unenforceable definition within a non-compete covenant because the amendment would cause other provisions of the contract to be modified."²¹

APPLICATION OF BLUE PENCIL RULE IN INDIA

The Indian Contract Act, 1872 provides that any part of the consideration or object is unlawful, and then the contract becomes void.²² This section also includes the application of Blue pencil rule.²³ In the case of Babasaheb Rahimsaheb v. Rajaram Raghunath, the court observed the application of blue pencil 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"²⁴. The court has 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 subclause 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 v. Union of India²⁶, 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.

In India, the blue pencil doctrine is not only applicable on covenants dealing with restraint of trade or the noncompete covenants but is also applicable to Arbitration clauses.²⁷ In the case of Sunil Kumar Singhal and another v. Vinod Kumar²⁸, 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.²⁹ 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.³⁰

The Supreme court in the case of Shin Satellite Public Co. Ltd. v. Jain Studios Limited, provides that "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. In such cases, 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."³¹ Thus, the Indian court affirms the views of Lord Bridge and held that for application of blue pencil rule, substantial severability is necessary.

Footnotes

^{1 Tina L. Stark, Negotiating and drafting contract Boilerplate, 2003, ALM Publication, New York, page no. 541}

^{2 Michel S. Sirkin, Lawrence K. Cagney, Executive Compensation, 2006, Law Journel Press}

^{3 John Edwad Murry, Jr., Murry on Contracts, 5th Edition, Lexis Nexis Publication}

^{4 Mallan v. May, (1843)11 Meeson and Welsby 653}

^{5 Beed District Central cooperative bank limited v. state of Maharashtra and ors. MANU/SC/4348/2006 para 7}

^{6 Wharton's concise Law dictionary, Universal law publishing co. https://books.google.co.in/books?id=wLT0Vfh0TQsC&p g=PA120&lpg=PA120&dq=wharton+legal+dictionary+blu e+pencil}

^{7 Thames water Authority v. Elmbridge Borough Council, [1983]1All ER836}

^{8 [1894] A.C. 535}

^{9 Attwood v Lamont [1920] 3 K.B. 571}

^{10 Supranote 8}

^{11 Griffin Toronjo Pivateau, Putting the Blue pencil down: An argument for specificity in non compete Agreements, March 2008, 86 Neb.L.Rev.672(2008), Available at: http://works.bepress.com/cgi?article=1001&context=pivateau .}

^{12 [1913] AC 724}

^{13 Mason v. Provident Clothing and supply co. Ltd, [1913] AC 724}

^{14 The Littlewoods Organisation Limited v. Paul Melvin Harris, MANU/UKWA/0071/1977}

^{15 Polly Peck (Holdings) Plc. and Others v Trelford and Others, [1986] 2 W.L.R. 845}

^{16 Beckett Investment Management Ltd & Ors v Glyn Hall & Ors, [2007] EWCA Civ 613}

^{17 [1976] 1 All E.R. 39}

^{18 Bradley, Judicial enforcement of ultra vires byelaws: the proper scope of severance, P.L. 1990, Aut, 293-300 A.W.}

^{19 [1981] 1 W.L.R. 1522}

^{20 Supranote 11}

^{21 Francotyp-Postalia Ltd v Whitehead, [2011] EWHC 367}

^{22 Section 24, Indian Contract Act, 1872}

^{23 Meena R.L., Texbook On Contract Law Including Specific Relief, edition 2008, Universal Law Publication Co., Page no. 132}

^{24 (1931) 33 BOMLR 260}

^{25 Shin Satellite Public Co. Ltd. v. Jain Studios Limited, AIR2006SC963}

^{26 1983 AIR 130}

^{27 Union Construction Co. (P.) Ltd. v. Chief Engineer, Eastern Command, AIR 1960 All 72}

^{28 2007 Indlaw ALL 2702}

^{29 Cipla Ltd. v. Anant Ganpat Patil and Ors, 2008(1)ALLMR526}

^{30 Canara Bank v. K.L. Rajgarhia, 2009(157)DLT344}

^{31 Supranote 25}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.