Severance clauses: do yours cut the mustard?

By Jamie Doran and Olivia Back
26 Nov 2020
If a severance clause is not drafted carefully, parties could be stuck with a contract that doesn't achieve their aims – or doesn't even exist.

Severance clauses, typically found towards the end of most legal documents with the other miscellaneous boilerplate clauses, may not be as straightforward or user-friendly in their application as you may initially think. For parties drafting severance clauses, it's important to do so in a way that defeats uncertainty, not adds to it.

While the case law and commentary indicate that there is no clear rule(s) for when severance of a clause (or part of a clause) can and cannot validly occur, ultimately it will depend on the relevant circumstances and, most importantly, the intention of the parties. This intention is a question of construction determined objectively considering the contract as a whole and with reference to the usual extrinsic materials.

The case law also indicates that whether the contract is divisible or not (ie. whether the clauses in the contract are so interdependent that severance is impossible) will be relevant to determining whether severance is available to the parties.

What is a severance clause?

Severance clauses are inserted into contracts by parties with the intention that the contract will continue to have effect in circumstances where particular clauses or parts of the contract are considered illegal or otherwise unenforceable.

The doctrine of severance, in the context of contract law, aims to dislocate a void, illegal or uncertain component of the contract – whether it be part of a clause or entire clauses – so as to preserve the validity of the remaining provisions.

Where a clause (or part of a clause) cannot be validly severed, the entire contract will be rendered void.

When does severance validly occur?

The High Court of Australia has doubted that there is "'a single set of readily identified and stable rules' of severance" (SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516).

Nevertheless, the case law indicates that whether severance of a clause of a contract is possible ultimately turns on whether:

  • the intention of the contracting parties, gathered from the instrument as a whole, clearly indicates that the parties intended that severance of the relevant clause would be possible and that the contract should continue to operate in a modified form; and
  • the contract is "divisible" (ie. the clause which is void may be separated from the rest of the contract and this does not affect the contract's overall operation or validity).

The intention of the parties

Sometimes the intention of the parties is easily discernible. In a hypothetical perfectly-drafted contract, there will be an express clause stipulating clearly the exact consequences that follow if a clause is deemed void, illegal or uncertain. However, the issue with a wide-sweeping, generally-worded severance clause that attempts to operate in an all-encompassing way, is that it can suffer from the very same uncertainty and vagueness that it is directed at remedying.

Helpful questions when the intention of the parties is not clear

Where the intention of the parties in relation to severance of a particular clause (or part of a clause) is not clear from looking at the contract, the following questions may assist:

  • is the operation of the contract conditional on the efficacy of the part considered void, illegal or uncertain?
  • is the void, illegal or uncertain part so material and important that it is to be inferred that the parties did not intend to make a contract without it?
  • would severance of the void, illegal or uncertain part mean disregarding the main purpose and substance of the relevant provision, or would alter entirely the scope and intention of the contract entirely?
  • does the part considered void, illegal or uncertain form an "indivisible whole" with the rest of the contract?
  • does eliminating the void, illegal or uncertain part change the extent of the contract only and not its kind?
  • did the parties only intend to contract if effect was given to the void, illegal or uncertain part?

The additional questions that should be considered will depend upon the relevant circumstances as "the tests that have been formulated as useful in particular classes of cases are not always satisfactory for cases of other kinds" (Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 438 per Justice Kitto).

Is the contract able to be severed?

Another relevant consideration in relation to severing a clause, is whether the clause is "so interdependent" with the rest of the contract that divisibility of the contract via severance is not possible.

In Demtear Pty Ltd v Abelian Pty Ltd [2004] QSC 103 a severance clause permitting severance of “any term, covenant or condition” was "invalid or unenforceable". While Justice Muir did not need to make a determination in relation to the validity of severance of certain sub-clauses in the contract, his Honour espoused that, had he needed to do so, he would have determined that severance was impossible because the sub-clauses were "so interdependent" that severance would have greatly altered "the nature and extent of the parties’ bargain".

Key takeaways for drafting severance clauses

If it is the parties' intention to favour severance of a clause over invalidity of the entire contract, it is vital that the parties adopt drafting that expresses this clearly and contributes towards rehabilitation of the remaining contract by outlining their intentions as to what consequences should follow upon the invalidation and severance of a particular clause or clauses.

Conversely, if it is the intention of the parties that certain "essential terms" should not be severed or that certain clauses should not be preserved if a certain clause is severed, this will need to be provided for in the contract.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.