The arbitrary-or-capricious test is a short-hand term for the scope-of-judicial-review provision in section 706(2)(A) of the APA directing reviewing courts to invalidate agency actions found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."

This test applies to all agency action, specifically the review of the factual basis for agency rulemaking. In this context, reviewing courts have overturned agency rules if the underlying policy judgments, reasoning, or asserted factual premises of the action are so unreasonable as to be arbitrary.

A different test, the "substantial evidence" test, is required by the APA to be used in decisions made after formal hearings (i.e., formal adjudications and formal rulemakings). But court interpretations of these two tests have indicated that there is not much difference between their application.