The Sanity Clause: "Drafting a Better Severability Clause"

In this monthly column, Pillsbury partner Eric Fishman examines contract issues faced by in-house counsel. This month he and partner Robert James tackle severability clauses.

Boilerplate clauses are most useful when they make a needed change to the background law for the contract or clarify how that law will be applied. A candidate for improvement on this standard is the common severability clause.

One of the most frequently used variations declares:

“If any term of this Agreement is to any extent invalid, illegal, or incapable of being enforced, such term shall be excluded to the extent of such invalidity, illegality, or unenforceability; all other terms hereof shall remain in full force and effect.”

Parties understandably want to address the uncertain status of a contract in the event a term has been invalidated or cannot otherwise be enforced. But we question whether this clause is an improvement on background principles.

As an initial matter, in many special cases there is a fallback provision provided by law when a term in a contract fails. If, for example, a liquidated damages provision is deemed a penalty, the injured party may nonetheless usually recover its actual damages. (See, e.g., UCC § 2-718). If, to take another example, a limited and exclusive remedy “fails of its essential purpose”—as when the seller’s warranty is limited to repair, but the warranted good cannot, in fact, be repaired—the law permits the buyer to resort to any other available remedy. (See, e.g., UCC § 2-719). In these types of situations, the severability clause really serves no purpose.