Section 24 of the Indian Contract Act 1872 provides that where any part of a consideration in a contract is unlawful, then the contract is void. Section 27 provides that any restraint on lawful profession or trade is void to that extent. The Blue pencil doctrine was initially used in non-compete agreements and was later given a broader application for other portions of a contract.
The case of Shin Satellite Public Co. Ltd. v. Jain Studios Limited, AIR 2006 SC 963, is a significant case in the applicability of the blue pencil doctrine. The Court put emphasis on “substantial severability” and not “textual divisibility”. This means saving the main or substantial portion of the contract by striking out the trivial and unnecessary portions. For the doctrine to be applied to a contract, substantial severability is necessary, and it is the duty of the Court to assess the contract.
VALID PARTS
The proper test for deciding the validity or otherwise of an agreement or order is ‘substantial severability’ and not ‘textual divisibility’. It is the duty of the Court to sever and separate the 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 of 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 affirmative, the doctrine of severability would apply, and the valid terms of the agreement could be enforced, ignoring invalid terms. Thus, the Indian Court affirmed the views of Lord Bridge that, for the application of the Blue Pencil Rule, substantial severability is necessary.
