Why the Coronavirus Pandemic Will Change Severability Clauses

Whitman Legal Solutions, LLC

Whitman Legal Solutions, LLC

As the story goes, Johannes Brahms, possibly the most famous German romantic composer, had reached the “advanced age” of 57 when he decided to give up composing. Brahms had started a fifth symphony, but deeming it unsatisfactory, he tore it up and tossed it in the river. Then, he wrote his will, leaving his money to charities for needy musicians.

After that, he did compose some shorter compositions, but only during the summers. He spent every summer in Ischl, an Austrian town popular with musicians known for its famous spa. In the summer before his death, Brahms was walking along the River Traun with the composer Gustav Mahler. Brahms remarked that he felt his music was declining and would end for good upon his death.

Mahler responded by pointing to the river. Confused, Brahms asked Mahler what he saw. Mahler responded, “There goes the last wave.... but maybe what matters is whether the wave goes into the sea or into a swamp.”

Shortly after that, Brahms was diagnosed with jaundice. A few months later, Brahms learned he had liver cancer, and he died the following spring at the age of 63, without ever returning to Ischl.

Brahms’ compositions may have stopped upon his death. But far from flowing into a swamp, his works influenced both his contemporaries and generations to come.

Two years ago, in Severability Clauses: To Sever, Modify, or Invalidate?, I discussed how to review and negotiate severability clauses. My focus then was on customizing what many view as a boilerplate contract provision to meet the parties’ needs.

Although my previous article remains valuable, the coronavirus has changed how we look at contracts. To apply Mahler’s example, the contract provision which two years ago boded smooth sailing on the open sea for the parties now may send the parties into a swamp.

This article, which discusses how the pandemic has revealed flaws in standard severability clauses, is one in a series of articles discussing how the coronavirus has affected business and real estate contracts and transactions. Previous articles discuss how the coronavirus pandemic affects material adverse change, force majeure, and notice provisions in contracts.

What is a Severability Clause?

Most parties intend their contracts to be enforceable. They don’t intentionally include unenforceable provisions.

However, a contract provision that the parties believed was enforceable might later be changed by a statute or court decisions. Other times, circumstances may change so that a contract term, which on its face is acceptable, is unenforceable as applied to a situation. Severability clauses save the contract in these instances.

Traditionally, one invalid clause could invalidate an entire contract. Severability clauses provide that if a contract provision is unenforceable, the unenforceable provision will be “severed” from the contract. Then the rest of the contract remains in effect or can be modified to accomplish the parties’ purposes.

A simple severability clause might read as follows:

If any provision of this Agreement is determined to be invalid, illegal, or unenforceable, it shall not affect the enforceability of any other provision of this Agreement. Rather, the invalid, illegal, or unenforceable provision shall be deemed severed from this Agreement, and this Agreement shall be enforced as if the Agreement did not contain the invalid, illegal, or unenforceable provision.

Some severability clauses go beyond just “severing” the unenforceable provision. Acknowledging that sometimes, just removing a provision doesn’t work, those clauses also allow a court to modify the unenforceable provision so that it is enforceable to accomplish the parties’ intention.

How the Coronavirus Pandemic Affects Severability Clauses

Severability clauses usually are triggered only if a contract provision is illegal or otherwise unenforceable. Although laws and circumstances change, the coronavirus pandemic has brought change at warp speed.

There are a plethora of new federal and state laws, local regulations, and government orders that affect businesses. For instance, in Demystifying the Commercial Lease-Can You Get Out of Your Lease Due to the Coronavirus Pandemic? I discussed how government-mandated business closures might make it impossible for tenants to comply with continuous operation provisions in their leases.

In Coronavirus- Stay-at-Home Orders, I discussed how stay-at-home orders impact businesses. Due to the haste involved in adopting these orders, there wasn’t time to go through the legislative process, so many stay-at-home orders aren’t technically laws. Instead, they are orders issued by governors or local officials under “emergency powers” or “police powers.” Depending on the jurisdiction, these powers may be constitutional, statutory, or implied powers.

According to the US Constitution Center, in some instances, these orders face strict scrutiny under the U.S. Constitution, and as time goes on, the orders are more likely to be invalidated. Although many stay-at-home orders initially have been upheld, on May 13, 2020, the Wisconsin Supreme Court struck down the extension of that state’s order.

Although the validity of government orders is beyond the scope of this article, a Court evaluating many severability clauses will need to make that determination. If the order that’s preventing contract performance isn’t valid, it follows that the contract provision isn’t “invalid, illegal, or unenforceable.”

These aren’t going to be easy questions for courts to answer. In the U.S Supreme Court’s May 30, 2020 5-4 decision in South Bay Pentecostal Church v. Newsom, Chief Justice Roberts appeared only to concur only because of the high standard of review required for emergency relief, and he noted there may be “reasonable disagreement” on the underlying Constitutional issues.

A party shouldn’t be in the position of having to risk breaching a contract on one hand or violating a government order on the other. This doesn’t even consider the situation where a party might be faced with a Center for Disease Control and Prevention (CDC) recommendation (many of which are incorporated into government orders), which the party would be well-advised to follow but which doesn’t have the force of law.

Impossibility and Frustration of Purpose Aren’t Enough

Sometimes, the doctrines of impossibility or frustration of purpose will help parties who can’t perform contracts due to government orders. Those doctrines apply in specific circumstances where unforeseen circumstances prevent contract performance. But the doctrines are seldom used because they impose requirements most parties can’t satisfy.

Impossibility requires that performance literally be physically impossible. A textbook example of impossibility involves homeowners hiring a painter to paint their house. If the house burns down, that meets the impossibility standard to excuse the painter. COVID-19 orders usually don’t make it physically impossible for a party to perform like the house fire would.

Frustration of purpose applies when unforeseen circumstances make it commercially impossible for the parties to achieve the core purpose of the contract. An example might be a contract between a store and an importer to purchase goods produced in China. If the government embargoed goods from China due to fears of COVID-19 contamination, that might be frustration of the purpose of the contract.

Frustration of purpose might allow parties to get out of some contracts due to COVID-19. But many times, COVID-19 or government orders might significantly impact a party’s performance without affecting the core purpose of the contract.

An example might be if a prospective tenant living in City A signed a lease for an apartment in City B, intending to move there. The lease requires the tenant to take occupancy by June 1. If the government-imposed travel restrictions so the tenant couldn’t travel from City A to City B until July 1, that wouldn’t impact the core purpose of the contract, renting an apartment. But it would make it impossible for the tenant to move by June 1.

Severability Clauses After the Coronavirus Pandemic

The solution is to change the language in standard severability provisions. A revised provision could cover government orders and recommendations, so parties don’t have to consider whether the order has the force of law.

This revised clause might read:

If any provision of this Agreement is determined to be invalid, illegal, or unenforceable or of any federal, state, or local government order, the parties shall be excused from performing that provision of the Agreement, but it shall not affect the enforceability of any other provision of this Agreement. Rather, the provision that is invalid, illegal, or unenforceable or violates a government order or recommendation shall be deemed severed from this Agreement, and this Agreement shall be enforced as if the Agreement did not contain such provision.

I think of this clause as having a severability trigger (the non-italicized language) and a consequence or cure (the italicized language). The consequence/cure must meet the parties’ needs Instead of completely severing the offending provision, the parties may want a consequence/cure that modifies the provision. Other times, the parties may prefer that the consequence/cure be to invalidate the entire contract.

Using Mahler’s imagery, what triggers a severability provision is a wave, and the consequence or cure in the severability provision is the wave’s destination. The parties’ goal is to properly identify the wave and to be sure it doesn’t take them into a swamp.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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