Savings Clause: Everything You Need to Know
A savings clause, sometimes referred to as a severability clause, is part of a statute or contract that exempts a specific item or ensures that the rest of the statute will stand if one part is found invalid. 3 min read
2. Insurance Contracts
3. Commercial Contracts
4. Disappointed Expectations
5. Managing the Risks of a Force Majeure Contract
A savings clause, sometimes referred to as a severability clause, is part of a statute or contract that exempts a specific item or ensures that the rest of the statute will stand if one part is found invalid. This, in essence, divides the contract into many separate parts; if one is breached, the others must still be fulfilled. The invalid portion will sometimes be written to meet legal requirements and the intent of both parties.
Force Majeure Clauses
This type of clause can be either open-ended or closed-ended and provides for potential eventualities that are beyond the parties' control. Open-ended clauses specify the exact situations that may occur and end with language such as "and events or acts beyond the control of both parties." If any situations of this kind occur, both parties are excused from contractual obligations, which means they are at risk of loss of earnings and potential damage to assets. Some of this risk can be managed through sufficient insurance policies.
Insurance contracts pay for losses suffered because of force majeure events as described above. This type of indemnity contract allows the insurer to avoid paying claims on the policy if the insured party has misrepresented any material facts. The insurance company can also provide exclusions for specific circumstances such as acts of war. This means that when an event such as the 9-11 attacks occurs, insurance companies may not be legally obligated to pay claims that result from this event. However, precedent states that they should deny claims in a disaster only if they must.
A contract between two individuals is a negotiated agreement, and the parties can quantify and transfer the risk associated with unexpected events. The courts interpret contracts only as they are written, which means that the occurrence of a force majeure event does not necessarily void the contract. However, this must be expressed in the contract in clear language to be legally valid. Most long-term contracts provide for these occurrences and their aftermath. Parties will not be able to avoid their legal obligations under the contract simply because of misfortune. Doing so will constitute a breach of contract, thus allowing the other party to sue for damages. Compensation for damages depends on how the party in question would have benefited if the contract had been fulfilled as promised.
If force majeure events are not detailed in a contract, either party can still argue that the contract is "frustrated," defined by the Indian Contract Act of 1872 as physically impossible to fulfill. Commercial hardships do not qualify.
The party must prove that he or she is not unwilling but unable to perform duties as agreed in the contract. However, Supreme Court rulings indicate that frustration is not defined by disappointed expectations.
A contract can also provide that a force majeure event alters the contract only if the nature of the transaction itself is radically changed by the event. This is most common in large corporate transactions such as sales of companies, acquisitions, and mergers. Unexpected events could include a stalled stock market and other economic setbacks.
Mergers and acquisitions, which are typically strategic, are less likely to be affected by force majeure events. Some may attempt to take advantage of these events by negotiating price advantages and other options.
When an unexpected event occurs, breach of contract is common if the area in question is subject to lax enforcement and drawn-out legal proceedings. Companies that prefer short-term gains to long-term relationships may simply decide that performing the contract as agreed will be too costly.
Managing the Risks of a Force Majeure Contract
If you enter a contract that allows for force majeure events, you can manage these risks by:
- Clearly defining the events that apply and avoiding open-ended savings clauses.
- Clearly expressing how the contract will be handled if an event in this category occurs.
- Clearly delineating the obligations of each party during and after such an event.
- Defining how the contractual obligations will be adjusted after this type of event.
- Opting for a short-term contract with a renewal option rather than a long-term contract whenever possible.
If you need help with a contract that has a savings clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.