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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