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This precedent has been authored by Ilija Vickovich, Lecturer, Macquarie Law School and updated by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.

Introductory note

Severance clauses, sometimes referred to as severability clauses, are inserted into contracts to assert that if particular provisions or parts of the contract are held to be illegal or otherwise unenforceable, the remainder of the contract should still apply. In its most common form, a severance clause guards against the danger of the entire contract being voided if one of its terms is ruled to be unenforceable or illegal.

There are numerous examples of contractual provisions that are protected by severance clauses, but two common instances are the following:

• liquidated damages clauses, which stipulate an agreed sum as a genuine pre-estimate of loss to be paid to a contracting party by a party who breaches the contract (see Boucaut Bay Co Ltd (in liq) v Commonwealth (1927) 40 CLR 98; [1927] ALR 415; (1927) 1 ALJR 255a; BC2700010 and Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358; 227 FLR 1; [2008] VSCA 26; BC200800882); and

• restraint of trade clauses, which stipulate a restriction in time, area or some other respect upon a party in the conduct of their trade, profession or business. (See Miles v Genesys Wealth Advisers Ltd (2009) 201 IR 1; [2009] NSWCA 25; BC200900906 and WPS Enterprises Pty Ltd v Radford (2009) 22 VR 1; 253 ALR 596; [2009] VSCA 22; BC200901019.)

In both of these examples, there is a possibility that a court will rule the agreed sum to amount to a monetary penalty or the restriction to be an unreasonable restraint that should be voided. It is also possible that the entire contract could be voided as a result. (See Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79; [1914-15] All ER Rep 739; (1914) 83 LJKB 1574; 111 LT 862 and Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; 181 ALR 337; [2001] HCA 45; BC200104556.)

Drafting severance clauses

Although properly drafted severance clauses are common boilerplate provisions that courts generally recognise, it is possible for a court to refuse to enforce such a clause where the void or unenforceable term alters the fundamental nature of the contract. The parties may wish to draft their severance clause so as to provide for such an outcome and make clear their intention that only unimportant non-material provisions may be severed.

Clauses at risk of severance are sometimes expressed as an escalating series of separate covenants so the judge can sever (ie draw a “red line through”) the separate provisions that go too far and are unenforceable but leave clauses operational to the degree the obligation is acceptable. For example, restraint of clauses that separately covenant not to compete for 1, 2, 3, 4 and 5 years.