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

"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."5

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:

"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."10

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions