Is your company using severability clauses in standard contracts? These provisions are often considered boilerplate language to ensure that your contracts are protected should one or more provisions be found to be unenforceable by the courts.
In most cases, courts forced to review a contract will view the contract only as solid as its weakest point. If the court determines that a single material provision within the contract is unenforceable due to law or is unconscionable, then the entire contract will be invalid without a severability clause. A material clause is one that would cause at least one of the parties to not have entered into the contract if it were not valid – basically, it is just an important term.
Defining a Severability Clause
Severability clauses in contracts state that the terms of the contract are independent of each other. This means if one term falls short or is not legally binding, then the rest of the contract still holds up.
These clauses are standard in real estate, business purchase and sale agreements, loans, mortgages, employment agreements, and in a number of other business or legal realms. But, because of the implications of severability, it’s imperative that both parties understand and agree to the language of the clause before proceeding.
Severability Clauses Create Risk for Both Sides
The courts often take severability clauses at face value. If a provision in a contract is found to be illegal or unenforceable, the court will simply order that this specific provision be stricken from the deal and the rest of the contract holds up.
If this happens to you, you could be forced to fulfill a contract even after certain terms have been nullified by the court. For example, a clause we often see in business purchase and sale agreements is a non-compete clause, which prohibits the seller from competing against the buyer within a period of time and geographic region. However, if the non-compete clause is invalid (due to the term being too long and/or the geographic scope being too broad), then the entire agreement could be invalidated without a severability clause. However, if the non-compete clause is stricken because it is invalid and there is a severability clause in the agreement, the rest of the agreement will continue to be valid – this means that the seller can immediately compete with the buyer – even next door or down the street!
Additional Language Closes the Severability Loophole
Severability clauses expose both parties to risk because they fail to consider the context of negotiations. Certain provisions in a contract are dependent on other elements of the deal. If one element is removed by the court then the contract no longer holds the same value to both parties.
If your contracts include severability clauses, they also need to include language that defines what happens if important clauses are impacted by the court. For example, if your non-compete clause is held invalid and you are buying a business, an attorney can assist in crafting a detailed severability clause that will require a judge to redraft the terms to provide the largest coverage possible for the non-compete clause under applicable law. At The Law Offices of Tyler Q. Dahl, we regularly help businesses and vendors review and enforce their contracts. Contracts are the backbone of good business, so a thorough review of your contract language protects your bottom line and the work you do every day. Contact our team to look over the language of contracts you have in place or the standard language of contracts you plan to implement in the future.
Dahl Law Group
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