Legal Definitions - blue-pencil test

The blue-pencil test is a legal principle used by courts to decide how to handle a contract that contains one or more provisions that are illegal, unenforceable, or against public policy. When a court applies this test, it determines if the problematic part of the contract can be simply removed or "struck out" – much like drawing a line through it with a blue pencil – without changing, adding, or rearranging any other words, and still leave behind a coherent and valid agreement.

If the offending words or clauses can be deleted in this straightforward manner, then only those specific parts are invalidated, and the rest of the contract remains in effect. However, if removing the problematic language would require the court to rewrite, add, or significantly alter other terms to make the contract sensible, then the blue-pencil test would not apply, and the entire contract or a larger portion of it might be deemed unenforceable.

• Example 1: Overly Broad Non-Compete Clause

  Imagine an employment contract includes a non-compete clause stating that an employee cannot work for a competing business "within 500 miles of the company's headquarters for three years, and also cannot work for any competitor anywhere else in the world for any duration." A court might find the italicized phrase, "and also cannot work for any competitor anywhere else in the world for any duration," to be an unreasonably broad and unenforceable restriction on trade.

  Under the blue-pencil test, if the court can simply delete this specific, severable phrase without altering the meaning of the remaining "within 500 miles of the company's headquarters for three years" (which might itself be subject to further review for reasonableness), then only the globally restrictive part would be invalidated. The rest of the non-compete clause, and the contract as a whole, would remain valid and enforceable, with the more limited restriction still in place.

• Example 2: Illegal Provision in a Commercial Lease

  Consider a commercial lease agreement that contains a clause stating, "The tenant agrees to pay for all property taxes, insurance, and utilities, and also agrees to pay a monthly fee of $500 to the landlord for 'administrative oversight,' regardless of actual services rendered." If local laws prohibit landlords from charging such an arbitrary "administrative oversight" fee without providing specific, itemized services, this part of the clause would be illegal.

  A court reviewing this lease could apply the blue-pencil test. Since the illegal portion about the "administrative oversight" fee can be completely removed from the document without affecting the tenant's obligation to pay property taxes, insurance, utilities, or other valid terms of the lease, only that specific, problematic phrase would be invalidated. The remainder of the rental agreement would remain fully enforceable.

• Example 3: Unenforceable Penalty in a Sales Contract

  Suppose a contract for the sale of specialized equipment includes a term that says, "If the buyer defaults on payment, they must return the equipment, forfeit all payments made to date, and pay an additional penalty of $10,000 for each day the payment was late." A court might determine that the "additional penalty of $10,000 for each day the payment was late" constitutes an unenforceable penalty, as it far exceeds any reasonable estimate of actual damages the seller would incur.

  Applying the blue-pencil test, if the court can simply strike out the phrase "and pay an additional penalty of $10,000 for each day the payment was late," leaving the provisions for returning the equipment and forfeiting payments (which might be considered valid liquidated damages), then only the unenforceable penalty would be invalidated. The remaining terms of the sales contract would continue to be binding and enforceable.