Severance in contract

Where contracts are found void or unenforceable for being illegal or in restraint of trade, it is likely only part of the agreement will be objectionable. In some situations, the contract can be split into its constituent parts, with one part being found valid, and the objectionable part unenforceable.

There are two aspects to this, namely severance of the consideration and severance of promises. For example, A agrees to pay B £1,000 to fraudulently obtain a painting and frame it. The first part of this contract, involving the fraud is illegal, but the second part, for the framing, is prima facie a perfectly legal arrangement. If B does what is required, and then sues for the £1,000, the issue of severance of consideration will arise.

Severance of consideration

For severance of consideration to be allowed, the lawful part of the consideration must be more important than the unlawful part. The approach will in general be ‘all or nothing.’ Thus in the above example of the painting, B would either be able to claim the full £1,000, or nothing at all (which would be the more likely outcome).

This may not apply however, if it is possible to assign a precise value to different parts of the contract. This occurred in Ailion v Spiekermann, where the contract to pay the illegal premium could be severed, because a precise amount could be assigned to the illegal part of the agreement.

Severance of promises

The attempt to sever promises occurs most frequently in relation to restraint of trade cases, where the wish is to ‘edit out’ from a list of restrictions those which make the restraint too wide, but to leave the rest in force. There have traditionally been two elements to the courts’ approach, namely, the ‘Blue Pencil Test’ and the requirement that the nature of the contract must be retained.

The Blue Pencil Test

The Blue Pencil Test stems from the old-fashioned use by editors of a blue pencil to edit written work. It means the severance must be possible simply by cutting out the offending words; the court will not redraft the contract. Thus in Mason v Provident Clothing Co, the court refused to substitute the phrase ‘in Islington,’ for ‘within 25 miles of London.’

In Goldsoll v Goldman, on the other hand, a covenant in the sale of a jewellery business contained a restriction on dealing in ‘real or imitation jewellery’ in any of a long list of countries. This was too wide both as regards scope (the business was only concerned with imitation jewellery) and geographical area (the business was limited to the UK). Both restrictions could be narrowed, however, by simple deletions of the words ‘real or,’ and the list of countries other than the UK, and this the court agreed to do. 

Nature of the contract must be retained

Courts will not delete words if doing so would change the very nature of the contract. In Attwood v Lamont, the plaintiff owned a general outfitters. The defendant worked in the tailoring department as a tailor and cutter. His contract of employment bound him, after leaving his job, not to be concerned in trade or business of a tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentlemen’s, ladies’ or children’s outfitter. It was suggested the clause could be made reasonable by cutting out all the trades except ‘tailor.’ The Court of Appeal refused to do this, treating the covenant as an entirety, intended to cover all aspects of the plaintiff’s business. To sever it would be to affect its nature. 

The current approach

It appears the tests outlined above will not nowadays be applied so strictly by the courts. In BM China/Hong Kong Ltd v Nigel John Knight, for example, restrictive covenants in an employee’s contract prevented him from working for a competitor for a year anywhere in the world. Although the judge ruled that the year restriction was reasonable, the geographical scope was felt to be too wide. He therefore ordered that the restriction be altered so the employee was only barred from working for IBM competitors in Greater China. The judge therefore substituted a clause he felt unfair to one he felt was reasonable.