Severability Clause

What is a severability clause?

Severability clause (German: salvatorische Klausel) denotes a contract provision under which the invalidity or unenforceability of individual provisions is not to affect the rest of the contract. The German name comes from the Latin salvare, to save. A provision is invalid, for example, if it violates a statute or places one side at an unreasonable disadvantage. The gap that arises is to be closed by a provision that comes as close as possible to what was economically intended.

The contract can be pictured as a wall: if a single stone falls out, the whole wall should not collapse, and the gap should be closed with a suitable stone.

The clause appears at the end of almost every German commercial contract, from the company purchase agreement and the participation agreement to the managing director's service agreement. It usually combines two parts: a preservation clause for the rest of the contract and a replacement clause for the invalid provision. In transactions, it becomes important when provisions run up against legal limits, such as non-competition covenants, exclusions of liability or forfeiture rules in participation programmes.

Starting point in the statute: Section 139 BGB

If part of a legal transaction is void, under Section 139 of the German Civil Code (BGB) the entire legal transaction is void, unless it can be assumed that it would have been entered into without the void part. In case of doubt, therefore, total nullity applies. Anyone who wants to preserve the rest of the contract must plead and prove that the parties would have concluded it without the invalid provision (burden of pleading and proof).

The severability clause reverses this rule of doubt but does not switch off Section 139 BGB. According to case law, it shifts the burden of pleading and proof. Anyone who relies on the nullity of the whole contract must show that the parties would not have concluded the contract without the invalid provision. The question therefore remains what the parties would reasonably have wanted; the clause is a weighty indication for this, but not automatic.

Preservation, replacement and their limits

Preservation clause and replacement clause

The preservation clause provides that the remaining provisions stay effective. The replacement clause obliges the parties to replace the invalid provision with an effective one that comes closest to its economic purpose, or it lets such a rule apply directly. Many clauses also extend to gaps in the regulation. Independently of this, courts can close gaps by supplementary interpretation of the contract, that is, with the rule that fair-minded parties would have agreed for the case not considered.

Limits of the clause

The clause does not preserve every contract. If a provision that forms the core of the transaction falls away, such as the purchase price or the subject matter of performance, total nullity remains despite the clause. The parties would not have concluded a contract without this core. If the transaction as a whole is contrary to public policy (sittenwidrig), that is, incompatible with fundamental valuations of the legal system (Section 138 BGB), the clause does not help either. Nor does it cure a defect of form: an agreement not notarially authenticated in connection with a contract on shares in a GmbH (German limited liability company) remains invalid for lack of form.

Severability clause in standard terms and the prohibition of validity-preserving reduction

Standard terms and conditions (AGB), that is, terms that one side pre-formulates for many contracts, are subject to their own rules. If a clause is invalid, the contract otherwise remains effective under Section 306 (1) BGB. The statute takes the place of the clause (Section 306 (2) BGB). The whole contract is invalid only if holding to it would be an unreasonable hardship for one party (Section 306 (3) BGB). A preservation clause is therefore superfluous in standard terms.

An invalid standard-terms clause is also not reduced to the extent that is still just permissible; it falls away entirely. This prohibition of validity-preserving reduction is meant to prevent users from imposing excessive terms without bearing any risk. Replacement clauses that are meant to put the permissible rule in the place of an invalid term are therefore regularly invalid in standard terms.

For growth companies, this concerns above all employee participation programmes (ESOP). In Germany, they are usually structured as virtual programmes (VSOP): employees receive no share in the company but a payment claim for the case of a sale. The terms are pre-formulated uniformly for many employees and are therefore subject to review under the standard terms rules. If a forfeiture rule for bad leavers, that is, for departing employees whose entitlements are to lapse under the plan, does not withstand this review, it falls away completely.

Severability clause in transactions

Buyers examine in due diligence, that is, in the review of the company before purchase, whether economically important provisions of the target company are effective. These include limitations of liability in customer terms, non-competition covenants in managing director contracts and forfeiture rules in participation programmes. A severability clause does not remove this risk; it only determines what remains of the rest of the contract.

In the company purchase agreement, the question concerns above all the seller's non-competition covenant, that is, the seller's obligation not to compete with the sold company for a period of time. Competition law sets limits here; up to two years is usual, and up to three years where know-how is transferred. If a prohibition goes beyond that, the remainder of the contract stays in place thanks to the clause.

Whether the prohibition itself is reduced to the permissible extent or falls away entirely depends on the individual case and cannot be reliably planned. If only the duration is too long, case law tends towards reduction. If the prohibition is too broad in territory or subject matter, it is more likely to fall away entirely.

Practical example: severability clause in the purchase of a software GmbH

A buyer examines before the purchase three provisions whose effectiveness is doubtful: one in the draft of the purchase agreement and two in contracts of the target company. The purchase agreement is individually negotiated and contains a severability clause.

• A non-competition covenant of five years is proposed, which might apply only in shortened form or not at all. The parties agree on three years because essential know-how passes with the company.
• The target company's customer terms exclude liability even for gross negligence, that is, for a particularly serious breach of duty of care. If this standard-terms clause does not withstand judicial review of its content, it falls away entirely; the buyer therefore assesses the liability risk without any limit.
• Under the uniformly pre-formulated terms of the virtual participation programme, employees lose even shares that have already vested on any resignation of their own. If this rule falls away, three departed employees together keep 900 earned virtual shares.
• At an expected payout of EUR 100 per virtual share, payment claims of 900 × EUR 100 = EUR 90,000 arise. The buyer treats them as a debt-like item that reduces the equity value by this amount, that is, the value of the equity from which the purchase price for the shares results.

In this case, the purchase agreement's severability clause secures only its continued existence. It does not remove the risks arising from the doubtful provisions of the target company. These are negotiated as a deduction from the purchase price or through an indemnification, that is, through the seller's undertaking to bear a specified loss.

Distinctions: severability clause and partial nullity under Section 139 BGB

• Partial nullity under Section 139 BGB: the statutory basic rule where the parties have agreed nothing. In case of doubt, the whole contract is void.
• Validity-preserving reduction: reducing an excessive provision to the permissible extent. In standard terms, it is excluded.
• Entire agreement clause: determines which agreements form part of the contract. The severability clause regulates what applies if one of them is invalid.

Common mistakes

• Understanding the clause as a repair. Excessive provisions are not reliably cut back to the permissible extent. They can fall away entirely.
• Wanting to secure core provisions. If the purchase price or the subject matter of performance is regulated ineffectively, the clause does not preserve the contract.
• Overlooking questions of form. The clause does not replace notarial authentication. A replacement rule for an authenticated share purchase agreement may itself require authentication.
• Recording no purpose. Without a preamble or description of purpose, the yardstick by which a replacement rule is to be aligned is missing.

Frequently asked questions

Is a contract without a severability clause void as a whole if one provision is invalid?

Not necessarily, but in case of doubt yes. Under Section 139 BGB, the rest remains effective only if the parties would have concluded it without the invalid provision. Whoever relies on that must prove it.

Does the severability clause save a non-competition covenant that is too long?

Not reliably. It preserves the rest of the contract but does not ensure that the prohibition continues with a shortened duration.

Does the severability clause also apply in standard terms and conditions?

Only to a limited extent. The continued existence of the rest of the contract is already governed there by Section 306 BGB. A replacement clause is regularly invalid because of the prohibition of validity-preserving reduction.

Can the severability clause save a share purchase agreement that is not completely authenticated?

No. It does not cure a defect of form. If an agreement belonging to the transaction is not authenticated in a contract on shares in a GmbH, it remains invalid for lack of form and can affect the whole contract. The agreement takes effect only once the shares have been assigned in the proper form (Section 15 (4) sentence 2 of the German Limited Liability Companies Act, GmbHG).

How is a severability clause usually worded?

Usually in two sentences, one to preserve the contract and one for replacement. A common wording is: "Should a provision of this contract be or become invalid or unenforceable in whole or in part, the effectiveness of the remaining provisions shall remain unaffected. The invalid or unenforceable provision shall be replaced by the effective rule that comes closest to its economic purpose; the same applies to gaps in the regulation." The first sentence is the preservation clause, the second the replacement clause.

The Roemer Capital view

In transactions, Roemer Capital does not rely on the severability clause. In preparing a sale, Roemer Capital goes through with the client's law firm the provisions whose loss would change the figures: forfeiture rules in the participation programme, non-competition covenants and limitations of liability in customer terms. It quantifies what a loss would cost before a buyer does so in due diligence.

In negotiations, Roemer Capital advocates that provisions stay from the outset within the permissible framework that the law firm sets out. An excessive clause that a court is later supposed to cut back or strike creates uncertainty for both sides and burdens the purchase price negotiation.