When Is A Contract Term Severable?

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Contracts contain a number of terms and conditions. Failure to fulfil certain term or if the term is considered illusory can result in the whole contract being voided. Generally if terms are essential terms (such as price or quantity) then the contract will be unenforceable. However, if the term in question is not essential to the contract, courts will consider whether they can infer an intention that the agreement should be valid in the absence of the relevant term. If they can deem such an intention as severable from the contract, leaving the remainder of the agreement enforceable. This article explores the severance of incomplete, uncertain or illusory terms and how it may impact the contracts you have signed.

Severance of Illusory Terms

Illusory terms within contracts are terms which courts will not enforce. This can be for one of two reasons. First, a promise may give one party unfettered discretion over the performance of a promise. Second, if an exemption clause within the contract is so sweeping that it deprives the promise of any force. If a contract contains such a term, it can be possible for you to seek its severance from the agreement. This would allow you to maintain your agreement with the other party, but simply removing the troublesome clause from the contract.

Severance of Uncertain Terms

In order for a contract to be enforceable, it must be sufficiently certain. This means that it must be complete, and an agreement must be reached on all essential terms. The agreed terms must be clear so that all parties understand their obligations under the contract. Sometimes, contracts can contain terms that do not meet the threshold required for certainty. This can happen for a number of reasons. First, if a term within the contract uses unclear language it may create confusion over the obligations it imbues upon the respective parties. Second, if a clause imports a requirement for reasonableness without giving an objective criteria of what should be considered reasonable. Finally, if a contract contains a term which acts as an agreement to negotiate in the future.

All of these issues create uncertainty within a contract which can make the entire contract void. However, if the specific term can be voided without changing the entire nature of the contract then it is possible for it to be severable. Again, this keeps the rest of the agreement in tact and simply removes the uncertainty from the contract for the parties.

Severance of Incomplete Terms

Finally, a term may be severable from a contract if it is deemed to be incomplete. Generally, no contract is considered concluded until the parties have agreed upon all the terms of the bargain, as per Milne v Attorney General (Tas) (1956). For example, if a contract contains an ‘agreement to agree’ where a term is not silent but it stipulated to be negotiated in the future – it will be considered incomplete. The crucial element in this instance is whether the term is essential to the contract. If the parties would not have entered the contract without this term being complete, then it cannot be severed. However, if it is a less important term of the contract then it may be severed from the contract.

Conclusion

As a business owner, you will enter into a contracts on a regular basis. Negotiating the ins and outs of a contract can be extremely challenging. However it is essential for your business that you do so. Understanding the terms within your contract and what to do if issues arise is one aspect of that process. Knowing that a term is severable may save you from having to redo contracts. Therefore, if you are looking to sever a term from a contract you have signed or have any other issues relating to contracts we recommend that you consult with a contract lawyer.

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