Severability

Found In: Exchange Agreements | Updated: 11/04/2016

A Severability clause states what will happen to an agreement if part of that agreement is declared unenforceable by a court.

Some alternatives stipulate that the potentially unenforceable clause may be rewritten to be enforceable (Rule of Reasonableness). Others allow the clause in question to be rewritten unless the clause addresses an "Essential Purpose" of the agreement. If the clause addresses an Essential Purpose, the clause should not be rewritten and the entire agreement should be held unenforceable.

The Severability clause generally contains two parts, (a) savings language to preserve the remaining agreement in the event a court finds a part to be unenforceable, and (b) reformation language that describes how the parties intend unenforceable parts to be modified to be enforceable, or simply deleted.

Clause Language

Key Question: Without question.  Jump to Standard

Neutral Standard

Severability. If any part of this [agreement /plan] is declared unenforceable or invalid, the remainder will continue to be valid and enforceable.


Discussion

Unenforceable Clauses Under Common Law: Three Possibilities

Under the common law, there are three broad ways a court could react to finding a clause is unenforceable, and this reaction depends on the common law of the jurisdiction governing the dispute.

First, in some jurisdictions, if a court finds part of an agreement unenforceable it simply holds that the remaining agreement is invalid as well. There is no severability between clauses in this case, and the court makes no attempt to save the agreement.

Second, in a jurisdiction that follows the Blue Pencil approach, a court will try deleting the unenforceable part. If, without the deleted part, the remaining clause still makes grammatical and substantive sense, and the remaining Agreement is also enforceable, the clause, and the agreement, will survive.

If, without the deleted part, the remaining clause does not make grammatical and substantive sense, the entire clause will be deleted. If the Agreement cannot be enforced without the deleted clause, the entire agreement is also held unenforceable.

In this case, there is severability between the clauses—it is permissible for the remaining agreement to survive without one of the clauses—but the court only makes a minimal attempt to save the agreement.

Third, in a jurisdiction that follows the more flexible Rule of Reasonableness approach, a court can reform an unenforceable term or clause so that it can be enforced. The Restatement has rejected the Blue Pencil approach in favor of Rule of Reasonableness. Under the Rule of Reasonableness, courts should change the unenforceable part only as much as is necessary to make the clause enforceable; the idea being that the modified clause should represent the parties’ original intent as close as possible.

Michael R. Greco, Caution Required: Severability Clauses in Non-Compete Agreements (accessed July 25, 2016).

Ken Adams, Severability and Tabulation (accessed July 25, 2016).

Severability Clauses and Common Law

The core severability clauses simply says that unenforceable parts will be deleted, but that the remaining agreement is still binding and enforceable. This core clause matches the Blue Pencil approach: because it includes saving language—that the remaining agreement should survive if part of it is unenforceable—this core clause goes further than the first common law approach of holding the entire agreement unenforceable, but, because it only includes minimal reformation language—that the court only go so far as to delete unenforceable parts—it does not go as far as the Rule of Reasonableness approach.

A more robust clause will ask the court to follow the Rule of Reasonableness approach—regardless of the common law approach of the governing jurisdiction. This more robust Severability clause goes farther than the first approach to severability—because it includes saving language—and farther than the Blue Pencil approach—because it has stronger reformation language, asking the court to modify or replace, rather than just delete, unenforceable parts.

Both the basic Blue Pencil and more robust Rule of Reasonableness clauses are used to make sure the agreement survives if one part is found unenforceable. However, sometimes the parties will not want their Agreement to survive the deletion or modification of an essential part of the Agreement.

If modifying or deleting part of their Agreement would defeat an Essential Purpose of the Agreement for one or both parties, the parties should include Essential Purpose language that will let the entire agreement die should an essential part need to be deleted or substantially modified.

When Not To Save An Agreement: Essential Purpose Language

Essential Purpose language states the parties’ intent that if deleting or modifying part of the agreement would defeat an Essential Purpose of the Agreement then the entire Agreement should be held unenforceable, no longer binding on the parties. This language protects against the potential that, after deleting or modifying a clause to save the remaining agreement, one are both parties are left with a bargained-for agreement that no longer delivers what they bargained for, and might even still impose the costs without the benefit.

The parties should define—in a subsection to the Severability clause, in the Definitions sections of the Agreement, or in a separate clause–the Essential Purposes and/or Essential Parts of the Agreement.

Who Modifies?

Some commentators warn against Severability clauses that ask that the Rule of Reasonableness approach is used, but do not indicate who should make the modification: the court, or the parties.

Some courts will be unwilling to do so, especially those in a jurisdictions that otherwise apply the Blue Pencil approach. In this case, the clause should be explicit that the parties can re-negotiate the clause themselves.

There is an obvious issue, however, with the parties re-negotiating the clause. At this point, their relationship is probably strained from the court case between them, and one or both might be unwilling to negotiate, or negotiate fairly.

In this case, the Severability clause may include that if the parties fail to re-negotiate the clause so that the agreement cannot be enforced, the party adversely affected by the failure of the agreement should be compensated to put that party in the position she would have been in had the Agreement been completed.

Of course, if the failure of the Agreement is due to the fraud, misrepresentation, or otherwise illicit conduct by the party that would benefit under this rule, this recovery will not be available.

Eric Fishman and Robert James, Pillsbury Winthrop Shaw Pittman LLP, Drafting A Better Severability Clause (accessed July 25, 2016).

Chadbourne & Parke LLP, Boilerplate Matters: Severability Clauses (accessed July 24, 2016). 

When Not to Include a Severability Clause

Severability Clauses tend to be highly-negotiated, and thus can add substantial transaction costs to an agreement. Therefore, if there are cases when including the clause is not especially important, the parties might prefer not to include one.

First, a Severability clause is most important in agreements with potentially controversial clauses—such as non-compete, non-disclosure, in terrorem, other clauses where public policy concerns might outweigh the parties’ freedom to contract—or with less controversial clauses that include potentially-controversial or unfair terms.

Second, because a Severability clause is typically included to encourage the court to apply the rule of reasonableness approach, when the agreement will be governed by the laws of a jurisdiction that applies the rule of reasonableness under common law, the Severability clause might be superfluous. That said, if the parties do not want unenforceable parts to be modified by the court, and instead intend to terminate the agreement if any part is unenforceable—for example, if it defeats an Essential Purpose—then a severability clause might still necessary to overcome the court’s common law approach of modifying unenforceable clauses.

Effect of a Severability Clause and Language of Intention

U.S. contract law is founded on the freedom to contract, and thus the parties’ intent is often the primary consideration for a court interpreting an agreement. Usually, the parties’ intent will be obvious, especially when a well-drafted clause is included. However, even including a clause does not force a court to respect it as the parties’ intent, and—especially if there is disagreement between the parties—courts will look for other explicit and implicit evidence of parties’ intent.

In this case, the question is whether the parties mean the agreement to be severable—or if the agreement should end if any part is unenforceable—and if it is severable, whether and how severed terms and clauses shall be replaced or modified.

For implicit evidence of the parties’ intent, courts look to all the surrounding facts and circumstances of the agreement, including past and current conduct between the parties.

As for explicit evidence, including a Severability clause is probably as explicit as the parties can be. However, including a Severability clause does not guarantee the courts will respect that clause. Courts can still consider implicit evidence of intent that might contradict the Severability clause, so that including a Severability clause cannot guarantee a court will find that it is severable.


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