Severability Clauses: To Sever, Modify, or Invalidate?
It has been almost half of a century since I first picked up a violin. I took private lessons for 15 years, attended music camps and festivals in the summers, and obtained a degree in violin performance. Yet, I recently started violin lessons again.
My goal in taking lessons was to get back in top shape so that I could perform at a high level when I am an empty nester in a few years. I knew that my technique needed adjustment, because I was feeling tension in my left hand. At my first lesson, I realized that I needed to adjust my basic technique–including how I hold the violin.
It had been decades since I had a violin lesson. When I have played I assumed that I knew the basics–how to hold the violin and bow and to execute basic movements. I hadn’t thought about that part of my technique. In the process, I had overlooked some small changes in my technique. These changes not only hurt my sound quality and intonation, They also added tension to my playing and created a risk of injury.
Contracting parties sometimes do the same thing with contract provisions. Assuming that they are “boilerplate,” the parties may go through several drafts without carefully reading those provisions.
However, like small changes in violin technique can create noticeable changes in a performance, overlooked contract provisions can change the meaning of the contract. What worked months ago might not be right in the current situation. And, just as improper violin technique can injure a violinist, improperly crafted “boilerplate” provisions can harm contracting parties.
This article is one of several discussing contract “boilerplate” provisions and why those provisions are important. In this article, we will explore severability clauses.
What is a Severability Clause?
A severability clause tells what happens when part of a contract is unenforceable. Most basic severability clauses state that if one part of a contract is unenforceable, then that clause will be “severed” from the contract. The result is that the unenforceable clause goes away, but the rest of the contract will remain in effect.
A simple severability clause might read as follows:
If any provision of this Agreement is determined to be invalid, illegal, or unenforceable, it shall not affect the enforceability of any other provision of this Agreement. Rather, the invalid, illegal, or unenforceable provision shall be deemed severed from this Agreement, and this Agreement shall be enforced as if the Agreement did not contain the invalid, illegal, or unenforceable provision.
Some severability clauses go a step further and allow a court to modify the unenforceable provision so that it is enforceable. An example of this type of severability clause follows:
If any provision of this Agreement is determined to be invalid, illegal, or unenforceable, it shall not affect the enforceability of any other provision of this Agreement. Rather, the invalid, illegal, or unenforceable provision shall be modified to the extent necessary so that it is valid, legal, and enforceable.
Some severability clauses go a step further yet. Instead of providing that the unenforceable provision is to be modified just to the extent necessary to make it enforceable, those causes require a court to modify the clauses to accomplish the parties’ intention. For instance:
If any provision of this Agreement is determined to be invalid, illegal, or unenforceable, it shall not affect the enforceability of any other provision of this Agreement. Rather, the invalid, illegal, or unenforceable provision shall be modified so that it is valid, legal, and enforceable and to the fullest extent possible, reflects the intention of the parties.
Why are Severability Clauses Important?
Most parties intend their contracts to be enforceable and don’t intend to include unenforceable provisions. However, neither contracting parties nor their attorneys have a crystal ball or can see into the future.
The law is dynamic and changing. A contract provision that the parties believed was enforceable might later be changed by a statute or court decisions. Other times, the line between an enforceable and unenforceable provision may be blurry. Or the factual context may change so that a contract term, which on its face is acceptable, is unenforceable as applied to a particular situation.
In some jurisdictions, if just one provision in a 50-page contract is unenforceable, then the entire contract will become unenforceable. This may seem like overkill. Yet, a contract consists of mutual promises. Removal of a single, significant clause from a contract might well upset the balance of the contract in favor of one.
Other times, it might be inappropriate to invalidate an entire contract because a minor provision is invalid. Severability clauses allow the parties, rather than a court, to decide what happens if a contract provision is unenforceable.
For example, a contract for monthly services might provide state that balances not paid within 30 days of invoice are subject to interest at the rate of 18% per annum. In some states, that 18% rate might be usurious[1] and not be enforceable.
Without a severability clause, this one illegal clause could invalidate the entire contract. With a severability clause, the interest provision might be eliminated or the interest rate might be lowered to a legal rate.
However, if the unenforceable interest rate were in a promissory note, it would be central to the transaction. It might be unfair to the lender to reduce or eliminate the amount of interest under those circumstances.
When Should a Party Negotiate the Severability Clause?
Although severability clauses may be considered “boilerplate,” they do not always meet the parties’ needs. The parties should review the severability clause. Plus, they should consider how the situation might play out under different circumstances. That way all parties can determine if the severability meets the needs of all parties under the most likely scenarios.
When an invalid clause is a key contract term or forms the basis of one party’s consideration[2] for the contract, then the parties may well want the contract to be completely invalidated if that clause fails. Otherwise, the parties could find themselves on unequal footing operating on terms quite different from those they negotiated.
For instance, in a business sale a critical provision may be a noncompete clauses restricting the seller’s ability to compete with the business for a period of time after the sale. After all, the buyer does not want to purchase a thriving business only to have the seller immediately to form a competing business and draw customers away from the business the buyer has purchased. A noncompete clauses might be geographically limited to the area in which the business operates and would last for enough years to allow the buyer to develop its own relationships with the customers, so they are less likely to jump to a new business later started by the seller.
If a court were to invalidate the noncompete clause, that might change the value of the business purchased by buyer. This type of change could alter the transaction so that it is not fair to both parties.
In this situation, rather than modifying the parties contract to remove the noncompete clauses, the buyer might well prefer that the entire contract be invalidated. That would allow the buyer and seller to go back to step one and renegotiate price and other terms to restore fairness to the transaction.
How to Review a Severability Clause
Contracting parties should review every severability clause to determine how it addresses invalid provisions. Are they severed/removed from the contract? Modified to be valid? Or is the contract, itself invalid?
From that vantage point, the contracting parties should evaluate whether the severability clause makes sense for each important contract provision. It may well be that for some provisions, modification is acceptable. However, for others, the parties may prefer that the clause be removed or even that the contract be invalidated.
Just because a severability clause worked in one contract or in one transaction does not mean it is appropriate for a different contract or transaction. Just as it is important for Musicians to pay close attention to their technique over time to prevent injury, paying close attention to a severability clause and adapting it as needed can prevent injury to contracting parties.
© 2018 by Elizabeth A. Whitman
DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information contained in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless and until a written contract is signed by all parties and any conditions in such contract are fully satisfied
[1] Usurious is the adjective form of the noun usury. Usury occurs when a lender charges an interest rate above that allowed by law. The interest rate considered to be excessive or usurious varies from state-to-state and may vary depending upon the nature of the transaction. For instance, it is not uncommon for there to be no maximum lawful interest rate for large commercial transactions, but there commonly is a maximum lawful rate in consumer transactions.
[2] A basic legal requirement is that every contract have consideration. Each party has to give (and receive) something for the promises. If one party to a contract has all of the obligations and the other party does nothing in return, then the contract is invalid due to lack of consideration.