Key Takeaways

  • A savings clause ensures the remainder of a contract or law remains valid even if one part is found unenforceable or invalid.
  • Savings clauses are common in statutes, insurance contracts, commercial agreements, and force majeure provisions.
  • They help protect the parties' original intent and limit the impact of potential legal issues or unforeseen events.
  • Specialized forms of savings clauses exist, such as usury savings clauses in financial contracts and tax treaty savings clauses in international law.
  • Properly drafting and understanding savings clauses can reduce legal risks and disputes for both individuals and businesses.

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

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.

Commercial Contracts

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.

Types of Savings Clauses in Contracts

There are various types of savings clauses, each tailored to specific legal or commercial contexts. Some of the most common include:

  • Severability Clauses: Ensure that if one provision of a contract is declared invalid or unenforceable, the remaining provisions will continue in effect.
  • Usury Savings Clauses: Protect loan agreements by specifying that interest rates will not exceed the maximum allowed by law. If a court finds a rate usurious, the excess interest is either voided or reduced to the legal maximum, preserving the validity of the contract and ensuring compliance with usury laws.
  • Regulatory Savings Clauses: Limit the application of a law or regulation to avoid conflicts with other legal requirements, often by exempting certain persons or activities.
  • Tax Treaty Savings Clauses: Allow a country to tax its own residents as if a tax treaty had not come into effect, with exceptions for certain provisions (such as diplomatic immunity, government service, and pensions).

Purpose and Importance of a Savings Clause

The primary function of a savings clause is to preserve the enforceability of an agreement or statute when one part is challenged or invalidated. Key purposes include:

  • Limiting Invalidity: Prevents the entire contract or statute from being voided due to one unenforceable provision.
  • Preserving Parties’ Intent: Maintains the core objectives and balance of obligations initially agreed upon by the parties.
  • Risk Management: Provides predictability and reduces uncertainty, especially in complex or long-term agreements.

Disappointed Expectations

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.

Examples of Savings Clauses

  • General Severability Example:
    “If any provision of this agreement is held invalid, the remaining provisions will remain in full force and effect.”
  • Usury Savings Clause Example:
    “If any applicable law limits the interest payable on this note, the interest shall not exceed the maximum lawful rate, and any excess shall be credited to the principal.”
  • Tax Treaty Savings Clause Example:
    “Notwithstanding any other provision of this treaty, each country may tax its own residents as if the treaty had not come into effect, except as otherwise provided for certain benefits.”

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.

Savings Clauses in Statutory Law and International Treaties

Savings clauses are not just used in private contracts—they also appear in statutes and treaties:

  • Statutory Law: Legislatures may use savings clauses to clarify that new laws do not repeal or interfere with certain rights or obligations established by previous laws.
  • International Tax Treaties: U.S. tax treaties frequently include savings clauses allowing the U.S. to tax its residents and citizens as if the treaty had not been in effect, subject to certain exceptions (such as diplomatic status or government pensions). This ensures domestic tax enforcement while allowing specific treaty benefits in defined circumstances.

Best Practices for Drafting Savings Clauses

To ensure savings clauses are effective and enforceable:

  • Use Clear and Specific Language: Avoid ambiguity to reduce the risk of court reinterpretation.
  • Tailor to the Jurisdiction: Local laws may impact the enforceability of certain savings clauses, especially in financial contracts or statutory settings.
  • Consider the Contract as a Whole: Ensure that removing an invalid provision does not undermine the entire purpose of the agreement.
  • Consult Legal Counsel: Given the technical nature of savings clauses, professional guidance can help draft effective provisions that protect your interests.

Frequently Asked Questions

1. What is a savings clause in a contract?

A savings clause ensures that if part of a contract is found invalid or unenforceable, the rest of the agreement remains effective.

2. How does a savings clause differ from a severability clause?

The terms are often used interchangeably, but “savings clause” may also refer to statutory or treaty provisions that preserve certain rights or obligations.

3. Are savings clauses enforceable in all jurisdictions?

Generally, yes, but local laws may affect how courts interpret and enforce them. Legal advice is recommended.

4. What is a usury savings clause?

It is a clause in loan agreements that prevents the contract from violating usury laws by capping interest at the legal maximum.

5. Can savings clauses apply to tax treaties or statutes?

Yes, savings clauses are common in tax treaties and statutes to preserve the effect of existing laws or ensure certain tax rights are maintained.

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