How California Courts Determine the Severability of Contracts
Often, people think of a “contract” as some unified whole; a singular “thing.” But, in truth, contracts are generally complex and involve a collection of obligations that are agreed to by both parties. Even a simple contract to deliver product contains a collection of obligations including delivering the promised product (not something different), delivering the quantity promised, on time, and at the place intended. On the other side of the transaction is also a collection of promises including payment, prompt payment, payment in the bargained-for currency, and more.
The multiplicity of obligations inherent in a typical business contract gives rise to the possibility of severing and dividing the various parts. More specifically, for various legal reasons, courts may sever and divide contracts and enforce some parts and refuse to enforce other parts. In this article, we discuss how California courts go about severing and dividing contracts.
The idea of severability is codified in the California Civil Code, §1599 which states:
“Where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest.”
One of the more famous cases concerning severability is Keene v. Harling, 61 Cal.2d 318 (Cal. Supreme Court 1964). In Keen, the contract was for the delivery of coin-operated machines. As it turned out, among the large quantity of machines was a small number of coin-operated machines that were illegal under California law at that time — bingo-type pinball machines. The buyer wanted out of the contract entirely and argued that the whole contract should not be enforced because of the presence of the illegal machines. However, the California Supreme Court held that the contract should be severed because the value of the illegal machines could be quantified and, thereby, easily separated from the legal machines.
From Keene, we can see two principles of how courts consider the issue of severability. First, severability is more likely if there is an easy way to quantify or identify the parts of the contract to separate. Second, if the illegal portion of the contract is small compared to the whole of the contract, then severability will be more likely. Quite possibly, if the quantities of legal and illegal machines had been reversed in Keene — that is, mostly illegal machines and a few legal machines — the contract may not have been severed. This gives us the third legal concept with respect to severability — that is, contracts will not be severed if illegality “permeates” the contract. This is the result reached in Armendariz v. Foundation Health Psychcare, 6 P. 3d 669 (Cal. Supreme Court 2000). That case involved a mandatory arbitration provision in an employment contract. Unconscionability is another reason that courts will refuse to enforce contracts. In Armendariz, the employees claimed that the lengthy arbitration provision was unconscionable, and the California Supreme Court agreed. The employer asked the court to sever and divide parts of the arbitration provision that were objectionable and to enforce the remainder. However, the Court said “no.” The court held that, with respect to the arbitration provision, the “good” could not be separated from the “bad” because the “bad” had entered into and permeated the whole provision.
Another example is the very old case of Teachout v. Bogy, 175 Cal. 481 (Cal. Supreme Court 1917). In that case, the city relevant to the case changed the law and prohibited the sale of liquor within city limits. The plaintiff sought to enforce a contract for the purchase of a lease within the city, a liquor license, and a quantity of alcoholic beverages. The court refused to enforce or sever the contract. Since selling liquor was now illegal, the part of the contract with respect to the license was obviously unenforceable. But the other parts, the lease and the product, were linked and dependent on the illegal part such that the parts could not be separated. After all, why enter a lease and buy alcohol that could not legally be sold? This shows how illegality can “permeate” a contract.
A fourth consideration taken into account by California courts when resolving severability is the intent of the parties to the contract. If the parties ask the court to sever the contract, the courts are much more likely to engage in the process. A typical provision might read like this:
“Severability: The parties agree and acknowledge that if portions of this Agreement are held to be illegal or otherwise unenforceable, such shall not affect the legality or enforceability of the remainder of the Agreement.
Likewise, if the parties agree that the contract is not severable, the courts will generally honor that intent. An experienced San Diego corporate attorney can help draft your business contracts to avoid illegality and unconscionability and to express your intent regarding severability.