Severability clauses: their importance for contracts
A severability clause is a boilerplate provision that sets out the parties' intention that any invalid or unenforceable provision(s) shall be severed from an agreement, so that the remainder of the agreement continues to be valid and enforceable. So, rather than treat the entire contract as unenforceable, a severability clause is the expression of the parties’ agreement that the contract shall remain valid and binding on the parties, but without the “offensive” provision, as long as the contract is capable of expressing the primary commercial deal of the parties without the problematic clause.
It should be noted, though, that a severability clause cannot obviously save an agreement that is tainted, for example, as an illegal provision of financial assistance, but it might be helpful in preventing the whole contract being invalid if, for example, the interest provision was held to be a penalty, or the arbitration agreement included therein was held by a court as invalid. For this reason, it is relatively standard to have a severability clause in the boilerplate section of any agreement, as it provides the parties with a level of predictability and security by ensuring that a specific problematic clause cannot render the entire agreement unenforceable, which could be detrimental, especially if the parties have started performing their obligations thereunder.
However, one should note that there are also certain limitations as to how much a severability clause can ultimately do. For instance, even if a severability clause has been put in place, the courts (i) will not proceed to sever an unenforceable part of a contract, if, to do so, would be contrary to public policy and (ii) they will not make a new contract for the parties, neither rewrite the existing contract nor alter its nature.
In particular, in relation to the restriction of “not rewriting the original contract”, it should be noted that the courts will generally apply the 'blue pencil test'. This means that an offending provision will only be severed if it is possible to do so 'by running a blue pencil' through the relevant provision¹ with the remaining provisions making sense without the need to rewrite them.
When applying the blue-pencil test, an unenforceable provision may be severed if the following conditions are met:
(a) such provision is capable of being removed without the need to add to, or modify, the remaining wording;
(b) the remaining terms continue to be supported by adequate consideration; and
(c) the removal of such unenforceable provision does not so alter the character of the contract to such extent that it becomes not the sort of contract that the parties have originally entered into².
