Severability Clauses: What Happens When One Part of a Contract is Unenforceable?

Introduction

In the world of contracts, severability clauses (also known as salvageability or separability clauses) act as a safety net. They ensure that if one part of a contract is found to be unenforceable, the rest of the agreement remains intact. While this sounds straightforward, the application of severability clauses can be complex and nuanced. In this article, we’ll explore the legal principles behind severability clauses, examine case studies where they played a critical role, and provide practical tips for drafting and negotiating these clauses effectively.

What is a Severability Clause?

A severability clause typically states that if any provision of the contract is found to be invalid or unenforceable, the remaining provisions will continue in full force and effect. For example:

“If any provision of this Agreement is held to be invalid, illegal, or unenforceable, the remaining provisions shall remain in full force and effect.”

This clause is particularly important in contracts where certain terms may be challenged, such as non-compete agreements, indemnification clauses, or liquidated damages provisions.

When Severability Clauses Come into Play: Case Studies

1. Case Study 1: Non-Compete Agreements
   In Restaurant Law Center v. United States Department of Labor (2020), a non-compete clause in an employment contract was found to be overly broad and unenforceable under state law. However, because the contract included a severability clause, the court upheld the rest of the agreement, including confidentiality and non-solicitation provisions.Takeaway: Severability clauses can save the enforceable parts of a contract even if other provisions are struck down.
2. Case Study 2: Unconscionable Terms
   In Armendariz v. Foundation Health Psychcare Services, Inc. (2000), a California court found that certain terms in an arbitration agreement were unconscionable. However, the severability clause allowed the court to strike down the offending terms while preserving the overall arbitration agreement.Takeaway: Severability clauses can help courts “blue-pencil” (edit) contracts to remove unfair or illegal terms without invalidating the entire agreement.
3. Case Study 3: Illegal Provisions
   In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985), the U.S. Supreme Court upheld an arbitration agreement despite arguments that some provisions violated antitrust laws. The severability clause ensured that the illegal provisions did not render the entire agreement unenforceable.Takeaway: Severability clauses can prevent the entire contract from being voided due to isolated illegal provisions.

Legal Analysis: How Courts Interpret Severability Clauses

1. Intent of the Parties
   Courts look at the intent of the parties when interpreting severability clauses. If the clause is clear and unambiguous, courts are more likely to enforce it. However, if the unenforceable provision is central to the contract, courts may rule that the entire agreement is void.
2. Blue-Pencil Doctrine
   Some jurisdictions allow courts to “blue-pencil” or modify unenforceable terms to make them enforceable. This is common in non-compete agreements, where courts may reduce the scope or duration of the restriction.
3. Public Policy Considerations
   Courts will not enforce severability clauses if doing so would violate public policy. For example, if a contract contains multiple illegal provisions, a court may rule that the entire agreement is void, regardless of the severability clause.
4. Doctrine of Mutuality
   In some cases, courts may find that severing an unenforceable provision disrupts the balance of the contract, rendering it unenforceable under the doctrine of mutuality. This is more likely if the unenforceable provision is a key part of the agreement.

Practical Tips for Drafting and Negotiating Severability Clauses

1. Use Clear and Comprehensive Language
   Ensure the severability clause is broad enough to cover all types of unenforceability, including invalidity, illegality, and unconscionability. For example:“If any provision of this Agreement is held to be invalid, illegal, or unenforceable, the remaining provisions shall remain in full force and effect. The invalid, illegal, or unenforceable provision shall be replaced by a valid and enforceable provision that most closely reflects the intent of the parties.”
2. Address the Centrality of Provisions
   If certain provisions are critical to the contract, consider including language that specifies the consequences of their unenforceability. For example:“If any provision of this Agreement is held to be invalid, illegal, or unenforceable, the remaining provisions shall remain in full force and effect, provided that if the invalid, illegal, or unenforceable provision is central to the purpose of this Agreement, the entire Agreement shall be void.”
3. Consider Jurisdictional Differences
   The enforceability of severability clauses can vary by jurisdiction. For example, some states in the U.S. have strict rules about modifying non-compete agreements. Consult local legal counsel to ensure compliance.
4. Include a Savings Clause
   A savings clause can provide additional protection by allowing courts to modify unenforceable provisions to make them enforceable. For example:“If any provision of this Agreement is held to be invalid, illegal, or unenforceable, the court shall modify the provision to the minimum extent necessary to make it valid, legal, and enforceable.”
5. Test the Clause During Negotiations
   During contract negotiations, consider how the severability clause would apply in different scenarios. For example, ask:
   • What happens if a non-compete clause is struck down?
   • What happens if an indemnification clause is found to be unenforceable?
     This exercise can help you identify potential risks and strengthen the clause.

Conclusion

Severability clauses are a critical tool for preserving the enforceability of contracts, but they are not a one-size-fits-all solution. Their effectiveness depends on careful drafting, an understanding of legal principles, and consideration of jurisdictional differences. By learning from case studies and incorporating practical tips, you can draft severability clauses that provide maximum protection for your contracts. Always consult legal professionals to ensure your agreements are robust and enforceable.