Severable Contracts: Everything You Need to Know
Severable contracts include multiple separate agreements between the same involved parties.3 min read
What Is a Severable Contract?
A severable contract contains several separate agreements, such as for different pieces of equipment, shipments, or sales, that are formed between the same parties. If a breach of one of the severable contracts occurs, this will not count as a breach of the overall contract or the other agreements. Breaching one part of the contract doesn't give the other party an excuse to fail to honor the terms of any other contracts or agreements that were not breached.
To be considered severable, the contract must include at least two promises. Both promises must be able to be enforced independently from one another. Failing to deliver on one of the promises made in the contract doesn't result in a breach of the whole contract. Other names for severable contracts include several contracts and divisible contracts.
If a contract can be divided on either side, it may be considered severable. It must correspond with the consideration on both sides, such as a contract for one party to perform certain labor tasks in exchange for payment from the other party.
For example, Jones Widgets has a contract with Hearty Hardware for 100 rolls of plastic, 12 space heaters, 2,000 pounds of screws, and a pallet of roofing tiles. The contract outlines the price for each product. Jones Widgets stops producing screws, so the company is not able to deliver on that portion of the contract, but the other items outlined in the contract would still be enforced between the two parties.
When a contract can remain in effect, despite having several voided provisions, it is considered severable. A contract must pass the “blue pencil test,” which means that any phrase or term stricken from the contract cannot alter the original purpose of the contract. After making edits, the terms and language in the contract must be grammatically correct and make sense. If these requirements no longer apply, the contract is not considered to have become severable.
If the parties involved in the contractual agreement don't believe that all actions being performed together are essential to the overall purpose, the contract can become severable.
Divisible and Indivisible Contracts
A divisible contract involves performances by both parties that have been divided into pairs of required duties. These pairs must be matching and considered equal by both parties. In concept, a divisible contract is similar to an installment contract. For example, if a convenience store orders its candy, chips, and soda that are sold in the store in three clauses, this may be considered a divisible contract. If the store hired a vendor to supply the candy, chips, and soda in one clause, this would be considered an indivisible contract.
When determining whether a contract is indivisible or divisible, the first step is looking at the terms of consideration. If the consideration is provided in a lump sum format, this contract is usually classified as indivisible. However, when the consideration includes line items or separate clauses for all exchanged items, the contract may be severable. When a contract contains clauses that are legal and illegal, a court can only enforce the legal clauses, even in severable contracts. During a legal proceeding, a court will often use the blue pencil test to create a severable contract.
In another example, two companies called Squeezers and Sun's Rays enter into a contract. The terms outline:
- Sun's Rays will ship 100 bushels of navel oranges in month one at a price of $10 per bushel
- Sun's Rays will ship 100 bushels of limes in month two at a price of $11 per bushel
- Sun's Rays will ship 100 bushels of blood oranges in month three at a price of $12 per bushel
- Sun's Rays will ship 100 bushels of lemons month four at the price of $12 per bushel
In the fifth month, the shipment of navel oranges will take place and the cycle will continue. The term of this contract is three years. This would be considered a divisible contract because the performances of both parties can be split into matching pairs. Both parties would view their performance requirements as matching and equal.
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