Monday, October 22, 2012

Severability Clauses

I had a question on my LinkedIN group about when was the best time to add a severability clause. I thought it would be a good topic for the blog.

A severability clause is one that allows an individual clause or section of a clause to be severed from the agreement, if that clause or subsection is subsequently unenforceable at law. It allows the contract to remain in effect and operate without the clause that was severed. An example of a severability clause would be: "If any term in this contract is found by competent judicial authority to be unenforceable in any respect, the validity of the remainder of this contract will be unaffected, provided that such unenforceability does not materially affect the parties’ rights under this contract."

In the above clause several things are required:
1.The decision on enforceability needs to have been made by a competent judicial authority. It doesn’t require the specific language of the contract be reviewed. There could be prior case precedent making the concept included in the clause be unenforceable.
2.It’s severability cannot materially affect the parties rights under the agreement. This means the impact must got to the heart of the agreement and have a material impact on either party’s rights.

The answer to the individual question about when to include the severability clause is when you are initially drafting the contract. In fact many companies have standard boilerplate legal terms and the severability clause is usually one of those standard clauses. The reason why you would include a severability clause in the agreement from the beginning is that without it, if there was a term in the agreement that was found unenforceable, either party could argue that they are excused from performance under the agreement because of the unenforceable term. That would be an easy way to get out of a bad deal.

When you include it, it places a different standard on the parties. Not only does the term need to be unenforceable at law, it also needs to materially affect the party's rights. It it didn't materially affect either party’s rights, the agreement would remain in effect without that term. In the event of a dispute between the parties a court may determine a reasonable, substitute for that term in interpreting the contract.

What are “unenforceable terms”? They may terms requiring illegal or subsequently illegal acts. They can include terms or acts prohibited by statute. They may be terms that would be considered void as against public policy. Finally they can also be terms that would make a contract voidable such as duress, undue influence, or unconscionable.

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