ALL COMMERCIAL LAWYERS are familiar with the standard (or boilerplate) clause in commercial agreements that, in English, is called a ‘severability’, ‘severance’ or ‘invalidity’ clause and, in Chinese, is called ‘可分割性条款’.
Such a clause confirms the intention of the parties that if a provision in the contract is held to be invalid or unenforceable for any reason, it may be severed (or separated) from the contract and the remaining provisions in the contract will continue to be valid.
The concept that a provision – or a part of a provision – may be severed without affecting the validity of the rest of the contract is relevant in a broad range of circumstances, many of which have been discussed by earlier columns of Lexicon: non-complete clauses (see China Business Law Journal volume 6 issue 3: ‘Non-compete clauses’); exclusion clauses (see China Business Law Journal volume 6 issue 10: ‘Exclusion clauses’) and jurisdiction clauses (see China Business Law Journal volume 5 issue 9: ‘One-sided jurisdiction clauses’).
A number of interesting questions arise in respect of severability clauses, including the following: what is the impact of not including such a clause in a contract? How do courts determine whether an invalid provision can be severed from the rest of the contract? Can a court modify the terms of a contract itself? This column considers and compares the nature and effect of severability clauses in common law jurisdictions and under Chinese law.
COMMON LAW JURISDICTIONS
A typical severability clause in a contract governed by English law appears below:
1.1 If any provision in this Agreement is held to be illegal, invalid or unenforceable, in whole or in part, the provision will apply with whatever deletion or modification is necessary so that the provision is legal, valid and enforceable and gives effect to the commercial intention of the parties.
1.2 To the extent it is not possible to delete or modify the provision, in whole or in part, under Clause 1.1, then such provision or part of it will, to the extent that it is illegal, invalid or unenforceable, be deemed not to form part of this Agreement and the legality, validity and enforceability of the remainder of this Agreement will, subject to any deletion or modification made under Clause 1.1, not be affected.
In common law jurisdictions, the question of severability is determined primarily by the contract that the parties have entered into, although there are some statutes that provide that invalid contractual provisions may be severed from certain contracts.
Because the question is primarily a matter of contract law, a court will consider various factors in determining whether an invalid provision may be severed. First, the court will consider whether the parties intended the contract to continue if the invalid provision were severed or, alternatively, whether the parties intended that the contract operate as a single, indivisible agreement. A severability clause is useful as it confirms the intention of the parties in this regard, even though the clause usually does not make reference to specific provisions in the contract and does not specify what should happen if any provision is held to be invalid or unenforceable.
It is interesting to note that it is generally accepted that a court has the power under the common law to sever an invalid provision, even if the parties did not expressly include a severability clause in the contract.
Secondly, the court will consider whether the remaining provisions in the contract continue to be supported by consideration (for a discussion about consideration and its relevance to simple contracts, see China Business Law Journal volume 5 issue 1: ‘Consideration’ and China Business Law Journal volume 2 issue 2: ‘“Contract” or “agreement” – which is correct?’). If the remaining provisions are not supported by consideration, the whole contract will be invalid.
Thirdly, the court will consider the importance of the relevant provision. If the invalid provision is an essential term of the contract such as price, the removal of the provision would deprive the contract of a term that is necessary for its validity. Consequently, it is not possible for the remaining provision to remain in effect (for a discussion about essential terms and their role in the formation of a binding contract, see China Business Law Journal volume 3 issue 3: ‘LOI or MOU’?). In addition, courts in common law jurisdictions are usually not willing to amend or rewrite a contract on their own initiative as this would change the nature of the bargain or contract that the parties had agreed to.
Finally, the invalid provision must be capable of being severed without affecting the meaning of the remaining provisions. This has led to contractual provisions such as non-compete clauses being drafted in a manner that enables certain parts to be severed from the contract without affecting the meaning of the remaining parts. The ability to sever invalid parts without affecting the other parts is known as the ‘blue pencil’ test.
A recent example of an English court applying the ‘blue pencil’ test is the case of Goodlife Foods Ltd v Hall Fire Protection Ltd  EWHC 767 (TCC). In this case, an exclusion clause purported to exclude any consequence (including personal injury or death) arising from the sale and use of a product. Instead of declaring the whole clause invalid on the basis that the exclusion of liability for personal injury or death was invalid under the UK Unfair Contract Terms Act 1977, the court applied the ‘blue pencil’ test and deleted the section of the clause that referred to personal injury or death. As a result, the rest of the exclusion clause remained valid.
A typical severability clause in a contract governed by Chinese law appears below:
If any provision of this Agreement is held to be invalid or unenforceable, then such provision will (so far as it is invalid or unenforceable) be given no effect and will be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The Parties shall then use all reasonable endeavours to replace the invalid or unenforceable provisions by a valid and enforceable substitute provision the effect of which is as close as possible to the intended effect of the invalid or unenforceable provision.
Unlike common law jurisdictions, Chinese law contains express provisions that deal with severability in relation to civil acts generally and contracts specifically. Article 60 of the General Principles of Civil Law provides as follows:
If a part of a civil act is invalid and it does not affect the validity of other part, the other part will continue to be valid.
Article 56 of the Contract Law provides as follows:
An invalid or cancelled contract does not have legal validity ab initio. Where a part of a contract is invalid and it does not affect the validity of the other part, the other part will continue to be valid.
It is generally accepted that if a provision in a contract is invalid, it can only be separated if it is independent of the other provisions in the contract. If it cannot be separated from the other provisions, the whole contract will be invalid.
Although the above laws contain express provisions dealing with invalid acts and invalid contractual provisions, there are some areas of uncertainty. For example, there is little guidance as to how a court should determine whether an invalid provision affects the validity of the other provisions. In addition, it is uncertain to what extent a court should modify a contract, even though it is general accepted that PRC courts have the power to modify or amend a contract (see China Business Law Journal volume 3 issue 6: ‘Amend or modify?’). Most commentators accept that a court should not modify a contract if the modification would change the nature of the contract.
Another issue that requires guidance under Chinese law is whether a court should sever an invalid provision in a contract if the parties did not include a severability clause in the contract. It has been suggested that if the parties did not include a severability clause, the court would need to determine whether the parties would have entered into the contract if they had known that the relevant provision was invalid. If both parties would not have considered it in their interests for the rest of the contract to remain in effect, the whole contract should be declared invalid.
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.