Contract Clauses: Severance

Severance clauses are inserted into contracts with the intention of allowing a contract to continue to have effect where particular provisions or parts are held to be illegal or otherwise enforceable. In other words, they aim to avoid an entire contract being held to be void in the event that one of its terms is found to be unenforceable or illegal.

Severance clauses are commonly found in liquidated damages clauses, which stipulate an agreed sum is a genuine pre-estimate of loss to be paid by a defaulting party to the contract. Severance clauses are also commonly found in restraint of trade clauses which stipulate a restriction in time, geography, or in some other respect upon a party in the conduct of their trade, profession, or business. In this context, severance clauses aim to sever the unenforceable component of a restraint of trade clause so that the restraint remains in place.

Where a severance clause is missing

Severance clauses are preferable, particularly in the circumstances described above. Nonetheless, the party should ensure that they are not seeking to avoid otherwise applicable concepts of unenforceability or illegality by the use of severance causes.

Drafting considerations

The courts may refuse to enforce a severance clause where the void or unenforceable terms alter the fundamental nature of the contract.

When drafting a severance clause, the party should consider whether its operation will alter the fundamental nature of the contract. Severance clauses should be clear in their intended operation and effect.

 

Who to Contact for More Information

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