Severability Clauses: Keeping the Rest of Your Contract Alive

When you’re running a small business, contracts are meant to give you certainty. You sign a supplier agreement, a customer contract, a lease, or a services agreement because you want everyone clear on what’s being provided, how you’ll get paid, and what happens if something goes wrong.

But there’s a frustrating reality: sometimes one part of a contract doesn’t hold up. A clause might be too broad, legally unenforceable, or inconsistent with a New Zealand law you can’t contract out of.

That’s where a severability clause comes in.

In this guide, we’ll break down what severability clauses mean for New Zealand businesses, why they matter, when they help (and when they don’t), and how to use them as part of a smarter contract setup.

What Is A Severability Clause (And Why Does It Matter For New Zealand Businesses)?

A severability clause is a section in a contract that says (in plain English):

• If one part of the contract is invalid, illegal, or unenforceable, that part can be removed (“severed”), and
• the rest of the contract still stays in force.

For a small business, the practical value is simple: a severability clause can help reduce the risk of a “one bad clause” problem affecting the rest of your agreement.

This is especially important if your contract includes clauses that are commonly challenged or heavily regulated, like:

• limitations of liability
• restraint of trade / non-compete obligations
• penalty-style fees (for example, cancellation fees)
• pricing and payment terms
• termination rights and notice periods
• privacy, data, and confidentiality obligations

Severability is one of those “small” clauses that can have a big impact when a dispute happens. It won’t stop a disagreement, but it can help preserve the parts of your contract that still work if one section is drafted badly (or becomes non-compliant later).

When Do Severability Clauses Actually Help In New Zealand?

A severability clause can be helpful in a lot of common business scenarios, including when:

• a clause is too broad (for example, a restraint that goes further than needed to protect your legitimate business interests)
• a clause conflicts with a law you can’t contract out of (for example, certain consumer law protections)
• a clause is uncertain or drafted in a way that makes it hard to interpret
• a clause is only partly unenforceable (for example, a term is enforceable up to a point, but not beyond that)

Here’s a simple example. Imagine you run a marketing agency and your standard client contract says the client must pay a huge “late payment fee” that looks more like a punishment than a genuine estimate of loss. If a court views it as a penalty, that specific fee clause might be unenforceable.

Even without a severability clause, a court may still be able to sever an unenforceable term in some situations. However, including severability wording can make the parties’ intentions clearer and reduce arguments about what should happen if one clause can’t be enforced. With severability, there’s a clearer pathway for the rest of the contract (including your right to be paid) to remain enforceable, even if that one fee clause is struck out.

Severability clauses are also commonly relied on in:

• customer-facing terms and conditions (including online terms)
• supply and distribution agreements
• software and subscription contracts
• shareholder or founder arrangements
• commercial leasing and property arrangements

If you’re putting together a broader set of commercial contracts, it’s often worth thinking about your severability wording alongside the rest of your standard provisions (for example, your Terms of Trade).

Common Reasons A Contract Clause Might Be Unenforceable In New Zealand

To understand why New Zealand businesses often include a severability clause, it helps to know what can make a clause unenforceable in the first place.

While it always depends on the wording and the situation, common risk areas include:

1) The Clause Conflicts With Legislation You Can’t Contract Out Of

Some New Zealand laws set minimum standards that contracts can’t override.

Depending on your business, that might include things like:

• consumer protections (for example, the Consumer Guarantees Act 1993, including rules about misleading or deceptive conduct and consumer guarantees where they apply)
• privacy obligations under the Privacy Act 2020 if you collect personal information
• employment minimum rights under employment legislation (if you’re engaging employees)

It’s one reason employment documents should be drafted carefully and consistently. If you’re hiring, your Employment Contract needs to work alongside policies and statutory obligations, rather than trying to override them.

2) The Clause Is Too Uncertain Or Poorly Drafted

Contracts need to be clear enough that a court (or an arbitrator) can work out what the parties agreed to.

If a clause is vague, internally inconsistent, or uses key terms without defining them, you can end up with a term that’s hard to enforce in practice.

This often shows up in:

• scope of work descriptions (“we’ll provide support as required”)
• service levels (“reasonable response times” with no definition)
• pricing variation clauses (“we can change prices at any time”)

Having a properly structured Service Agreement (with clear scope, fees, and change control) usually reduces the risk of an “uncertain clause” issue in the first place.

3) The Clause Is Unfair Or Overreaching

In some cases, a clause can be challenged because it’s overly one-sided or goes beyond what’s reasonably necessary (especially in standard-form contracts).

For example:

• a limitation of liability clause that tries to exclude everything, even where it shouldn’t
• a restraint clause that tries to prevent someone from working in the industry anywhere in New Zealand for years
• a termination clause that gives one party total discretion without any checks

If you’re using standard templates across multiple customers or suppliers, it’s worth keeping an eye on “unfair contract term” risk. Even where a severability clause could help, you don’t want your core commercial protections to be the part that gets severed.

What Should A Severability Clause Say? Key Elements To Look For

There’s no single perfect wording, but a good severability clause is usually doing a few jobs at once.

When reviewing your contracts, look for whether the severability clause covers these core ideas:

• Severing invalid terms: if any term is invalid, illegal, void, or unenforceable, it can be severed
• Keeping the remainder alive: the rest of the contract continues in full force
• Minimum change approach: the clause may say the term should be read down to the extent necessary to make it enforceable (if possible)
• Preserving commercial intent: it may state the parties intend the agreement to remain effective even if part is struck out

That “read down” concept is worth pausing on. Some severability clauses aim to allow a problematic clause to be adjusted (as little as possible) rather than deleted entirely. This matters for clauses where you might prefer a narrower enforceable version, rather than losing the protection completely.

That said, “read down” language has limits. Courts generally won’t rewrite the parties’ bargain or create a new deal for you - and if a term is fundamentally unlawful or unworkable, it may simply be struck out rather than repaired. It’s not a substitute for getting the clause right from the start.

If you’re also building out a set of core governance documents (especially if you have multiple owners), you’ll want consistent drafting across documents. For example, your Company Constitution and your Shareholders Agreement should be aligned on how disputes, exits, and decision-making work, and severability should support (not confuse) that framework.

Severability Isn’t Magic: Limits And Tricky Situations To Watch For

A severability clause is helpful, but it doesn’t guarantee that your contract will survive every legal issue. There are situations where removing an invalid clause could create bigger problems.

Here are a few common “watch outs” for New Zealand businesses.

1) If The Invalid Clause Is Central To The Deal

If the clause that’s invalid is so important that the contract no longer makes commercial sense without it, the agreement might still fall apart in practice.

Example: if the “price” clause is unenforceable and there’s no workable pricing mechanism, it’s hard to keep performing the contract even if everything else technically stays alive.

Severability clauses are best at protecting agreements where the invalid term is “non-essential” and can be removed without undermining the bargain.

2) If Severing Changes The Meaning Of Other Clauses

Contracts are interconnected. A termination clause might rely on a notice clause. A liability clause might rely on an indemnity clause. A confidentiality clause might be linked to IP ownership clauses.

If you remove one piece, it can have a domino effect.

This is why it’s smart to treat severability as part of an overall drafting approach, not as a last-minute clause you paste in at the end.

3) “Read Down” Clauses Can Be Unpredictable

Some severability clauses try to let a court modify a clause to make it enforceable. This can be useful, but it can also create uncertainty, because you’re leaving it to a third party to decide what the “fixed” clause should look like.

From a business perspective, you usually want clarity upfront:

• What risk are you taking?
• What outcome happens if there’s a dispute?
• What do you need to prove?

If you want a clause to be enforceable, the better strategy is usually to draft it narrowly and clearly from day one (with severability there as a safety net).

4) Severability Won’t Save You From Non-Compliance Elsewhere

If your contract setup involves collecting customer information, running email marketing campaigns, or handling sensitive data, you’ll still need to comply with the Privacy Act 2020 (and, if applicable, regional rules and industry requirements) and build that into your processes.

A severability clause won’t fix operational non-compliance. For many businesses, it’s also worth having a properly drafted Privacy Policy and ensuring your internal practices match what you tell customers.

How To Use Severability As Part Of Stronger Contract Foundations

For small businesses, the goal isn’t just “have a severability clause” - it’s to build contracts that are enforceable, practical, and aligned with how you actually operate.

Here’s a simple way to think about it.

1) Start With The Clauses Most Likely To Be Challenged

In many SME contracts, the clauses that get challenged first are:

• limitations of liability
• payment terms, interest, and fees
• automatic renewals
• termination and notice provisions
• restraint/confidentiality/IP ownership (especially with contractors)

These clauses deserve extra care because if anything is going to be severed, it’s often something in this bucket.

2) Make Sure Your Contract Matches Your Business Model

This sounds obvious, but it’s where many contracts go wrong.

For example:

• If you provide services in stages, your contract should deal with milestones, change requests, and partial delivery.
• If you sell products online, your terms should address shipping, returns, and consumer law obligations.
• If you rely on subcontractors, your customer contract should align with your subcontractor agreements on timing, liability, and IP.

When a contract is copied from a different industry or business model, it’s much more likely to contain clauses that don’t “fit” and end up being unenforceable. A severability clause might keep the rest alive, but you’ll still be left with a contract that doesn’t properly protect you.

3) Treat Severability As A Safety Net, Not The Strategy

The best contracts aren’t built around the idea that some clauses might fail. They’re built around clarity and compliance, with severability as a back-up if something unexpected happens.

That could include:

• a law changes and affects a clause you drafted years ago
• a court interprets a type of clause more strictly than expected
• a clause is found to be too broad in the particular circumstances

Severability is a smart “risk management” clause, but the real protection comes from careful drafting and periodic reviews as your business grows.

4) Keep Your Contract Suite Consistent

If you have multiple agreements that interact (for example, customer terms + contractor agreements + platform terms + privacy policy), inconsistency is a common cause of disputes.

Imagine your customer contract says you own all IP immediately, but your contractor agreement says the contractor retains IP unless assigned. If there’s a dispute, severability won’t fix the underlying mismatch - and it could leave you exposed.

This is why businesses often benefit from reviewing their contracts as a “suite” rather than in isolation, especially as you scale up or add new products, services, or channels.

Key Takeaways

• A severability clause is designed to help keep your contract enforceable even if one clause is invalid, illegal, or unenforceable.
• For many SMEs, a well-drafted severability clause can help prevent a “one bad clause” issue from affecting the rest of the agreement (though courts may be able to sever some terms even without an express clause, depending on the circumstances).
• Clauses can become unenforceable for several reasons, including conflicts with legislation, uncertainty in drafting, or overreaching terms (like overly broad restraints or penalty-style fees).
• Severability clauses work best when the problematic term is not central to the contract and can be removed without undermining the overall deal.
• Severability isn’t a substitute for proper drafting - it’s a safety net that works best alongside clear, tailored contracts that match how your business operates.
• If your business uses multiple agreements (customers, suppliers, contractors, governance documents), consistency across documents matters just as much as any single clause.

This article is general information only and does not constitute legal advice. If you need advice for your specific circumstances, you should speak to a lawyer.

If you’d like help reviewing or drafting a contract (including making sure your severability clause works properly for your situation), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.