Basic concept of Blue pencil Rule

The blue pencil doctrine is a legal concept in common law countries, where a court finds that portions of a contract is void or unenforceable, but other portions of the contract are enforceable. The 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 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.

It is held by Supreme Court in the case of 

Shin Satellite Public Co. Ltd. Vs. Jain Studios Limited AIR 2006 SC 963

"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. 

Union Construction Co. (P) Ltd. v. Chief Engineer, Eastern Command MANU/UP/0012/1960 : AIR1960All72 It is held by Allahabad High court that principle of "blue pencil" test is applicable to arbitration Clause also.This principle was reiterated by Allahabad high court in the case of Sunil Kumar Singhal  Vs.  Vinod Kumar 2007 Indlaw ALL 2702

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How doctrine of blue pencil is applicable for interpretation of agreement?

 In several cases, 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.

In the present case, Clause 23 relates to arbitration. It is in various parts. The first part mandates that, if there is a dispute between the parties, it shall be referred to and finally resolved by arbitration. It clarifies that the rules of UNCITRAL would apply to such arbitration. It then directs that the arbitration shall be held in Delhi and will be in English language. It stipulates that the costs of arbitration shall be shared by the parties equally. The offending and objectionable part, no doubt, expressly makes the arbitrator's determination "final and binding between the parties" and declares that the parties have waived the rights of appeal or objection "in any jurisdiction". The said objectionable part, in my opinion, however, is clearly severable as it is independent of the dispute being referred to and resolved by an arbitrator. Hence, even in the absence of any other clause, the part as to referring the dispute to arbitrator can be given effect to and enforced. By implementing that part, it cannot be said that the Court is doing something which is not contemplated by the parties or by 'interpretative process', the Court is re-writing the contract which is in the nature of 'novatio'. The intention of the parties is explicitly clear and they have agreed that the dispute, if any, would be referred to an arbitrator. To that extent, therefore, the agreement is legal, lawful and 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'.

26. 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. 

IN THE SUPREME COURT OF INDIA

Arbitration Petition 1 of 2005

Decided On: 31.01.2006

Shin Satellite Public Co. Ltd. Vs. Jain Studios Limited

Hon'ble Judges/Coram:

C.K. Thakker, J.

Citation: AIR2006SC963

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What is doctrine of severability of contract as per S 57 of Indian contract Act?

Explaining the doctrine of severability contained in Section
57 of Indian Contract Act, 1872, in B.O.I. Finance Ltd., v.
Custodian and others
, a three Judge Bench of this Court has
held that question of severance arises only in the case of a
composite agreement consisting of reciprocal promises. In Shin
Satellite Public Co. Ltd. V. Jain Studios Ltd.
, this Court has
observed that the proper test for deciding validity or otherwise of
an order or agreement is “substantial severability” and not
“textual divisibility”. It was further held by this Court that it is
the duty of the Court to sever and separate trivial and technical
parts by retaining the main or substantial part and by giving
effect to the latter if it is legal, lawful and otherwise enforceable.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 9151-9152 OF 2015
(Arising out of S.L.P. (Civil) Nos. 34129-34130 of 2014)
Elektron Lighting Systems 
Pvt. Ltd. and Anr.
V
Shah Investments Financial Developments
and Consultants Pvt. Ltd and Ors. Etc.
Dated:November 20, 2015.
Prafulla C. Pant, J.

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