Contract Interpretation Revisited: The Case of Severability Clauses
The contextualist contract interpretation approach – under which courts consider all the relevant circumstances beyond the written contract – is a major method applied by courts in contract law disputes.
Although the theoretical debate over the desirability of this approach is rich, there are only a few empirical studies aiming to assess the contract parties’ opinion about this approach.
Focusing on the interpretation of unenforceable contract terms, this Article empirically investigates the interpretation preferences of sophisticated parties to commercial contracts. By examining 500 commercial contracts that have been recently disclosed to the Securities and Exchange Commission, this Article finds that a majority (71%) of contracts include a “severability clause,” which typically triggers an anti-contextualist rule of contract interpretation. Under this rule, if the contract includes any type of unenforceable term, courts should normally enforce the remainder of the contract. Such rule, in essence, opts-out from the default contextualist method of interpretation typically applied by courts. Under this default method, courts consider all the relevant circumstances surrounding the contract in order to ascertain the intention of the parties regarding the outcome of the specific unenforceable term. This outcome can be either the enforcement of the remainder of the contract or the nullification of the entire agreement, depending on the intention of the parties, as determined via a contextualist interpretation method. This Article however indicates for the first time that contract parties normally object to such contextual default regime by adopting a severability clause.
The results of this study also indicate that the severability clauses adopted by contract parties are not a mere standardized boilerplate that varies marginally, if at all, among different contracts. These clauses vary significantly both in form and substance.
The theoretical and practical implications of these results are discussed.
* Faculty of Law, College of Law & Business. J.S.D. (UC Berkeley); LL.M. (Columbia University).