Severable Contracts: Definition, Key Features, and US Case E...

Introduction

A severable contract (often called a divisible contract) is an agreement that is split into separate parts with distinct obligations and usually separate pricing. Common examples include multiple shipments of goods, phased construction, or software delivered in stages. If one part fails, the rest of the contract can usually continue. In other words, a breach tied to one shipment, milestone, or task does not automatically sink the entire deal.

US courts look at the parties’ intent, the contract’s wording, and how performance and payment are structured to decide whether an agreement is severable or indivisible (also called an entire contract). For the sale of goods, the Uniform Commercial Code (UCC) recognizes installment contracts and sets rules for handling problems with individual installments.

What You’ll Learn

• What a severable (divisible) contract is and how it differs from an indivisible contract
• How US courts decide whether an agreement is severable, including the role of intent, pricing, and deliverables
• How breach and remedies work when only one part of the contract is at issue
• Practical drafting tips for sales, construction, and service agreements
• Key risks, including ambiguity and interdependent deliverables
• How UCC Article 2 treats installment contracts for goods
• The difference between a severable contract and a severability clause

Core Concepts

What Is a Severable Contract

• A severable contract is made up of multiple parts, each capable of standing on its own.
• Each part typically has its own consideration (price or benefit) and its own performance obligations.
• Payment, acceptance, and remedies can be apportioned to each part.
• US sources often refer to this as a “divisible” contract. See Restatement (Second) of Contracts § 240 (part performance as agreed equivalents).

Key features:

• Separate obligations: Each item, phase, or service period is treated as its own unit.
• Independent consideration: Pricing is tagged to each unit, batch, milestone, or month.
• Multiple deliverables: Goods, services, or tasks can be supplied and accepted separately.

Severable vs Indivisible Contracts

• Severable (divisible): Distinct parts with separate pricing and performance. Breach of one part usually affects only that part.
• Indivisible (entire): Performance is treated as a single whole with one overall price or condition of complete performance. A material breach can affect the contract as a whole.

Signals that a contract may be indivisible:

• One lump-sum price with no breakouts
• Performance is interdependent or must be completed as a whole to have value
• Acceptance and payment occur only after full completion

How Courts Decide Classification

Courts look at the agreement as a whole and consider:

• Intent of the parties: Did both sides treat each part as separate deals?
• Contract language: Does the contract state that deliveries, milestones, or tasks are separate and independently payable?
• Pricing: Are there unit prices, milestone fees, or monthly rates tied to specific parts?
• Performance structure: Are deliverables scheduled and accepted in parts, with separate invoices?
• Subject matter: Can each part provide value on its own, or do parts depend on each other to work?

Tip: Clear drafting carries a lot of weight. Label installments, use unit prices, set per-installment acceptance criteria, and spell out remedies for each part.

Breach and Remedies in Severable Contracts

General rules:

• Breach of one part does not automatically cancel the entire contract.
• The non-breaching party can usually seek damages or other remedies for the defective part while continuing the rest.

UCC Article 2 (goods) highlights:

• Section 2-307: Unless otherwise agreed, delivery is in a single lot. Contracts that call for multiple deliveries shift into installment territory.
• Section 2-612: Installment contracts let a buyer reject a nonconforming installment if it substantially impairs the value of that installment and cannot be cured. The buyer can cancel the entire contract only if the nonconformity substantially impairs the value of the whole contract.
• Acceptance, rejection, cure, and revocation can be handled on an installment-by-installment basis.

Service and construction contracts:

• Courts often allow recovery and payment by milestone or phase if the contract is structured that way.
• A material breach in one phase may allow suspension of obligations related to that phase, but not necessarily termination of the entire agreement—unless the contract ties phases together or the breach defeats the project’s overall purpose.

Severable Contract vs Severability Clause

• A severable (divisible) contract is about splitting performance and payment into parts.
• A severability clause is about cutting out an illegal or unenforceable term so the rest of the contract remains valid.
• They address different issues. Many agreements include both concepts: one for performance in parts, and one to save the contract if a clause is invalid.

Key Examples or Case Studies

Note: The following are illustrative case studies commonly used to explain how courts may approach severable contracts.

Johnson v. Smith Co.

• Facts: A supplier agreed to deliver several batches of goods on different dates. One batch was defective; the others conformed.
• Issue: Does the defective batch taint the entire agreement?
• Court’s takeaway: The breach related to the defective batch only. The buyer could pursue remedies for that batch (e.g., reject, cover, or damages), but the rest of the contract remained enforceable.
• Why: The contract was structured as multiple deliveries with separate acceptance and payment, indicating it was severable. Under UCC § 2-612, the buyer can cancel the whole only if the nonconformity substantially impairs the contract as a whole.

Green v. Tech Solutions

• Facts: A software project was split into defined stages with milestone payments. Stage 1 was late; later stages met deadlines and specs.
• Issue: Does delay in Stage 1 allow the client to terminate the entire agreement?
• Court’s takeaway: Each stage was severable. The client could seek remedies tied to Stage 1 (e.g., liquidated damages if provided, or actual damages), but had to pay for later stages that met the contract requirements.
• Why: The contract used milestone pricing and acceptance criteria for each stage. Performance and payment were clearly separated.

Practical note:

• If repeated problems or a single major failure defeats the overall purpose, a buyer may argue that the whole contract has been impaired (for goods, see UCC § 2-612(3)). Clear drafting can set guardrails on when cancellation of the entire agreement is allowed.

Practical Applications

Where severable contracts show up:

• Sales of goods: Blanket purchase orders with scheduled releases or multiple shipments, each at a unit price.
• Construction: Projects broken into phases (design, site work, framing, MEP, finishes), each invoiced and certified separately.
• Services: Maintenance, support, or consulting engagements billed monthly or by deliverable.
• Technology: Software development in sprints or milestones with separate acceptance testing and payments.
• Equipment deals: Multiple items delivered at different times with separate invoices.

Drafting tips:

• Use clear labels: “Installments,” “Milestones,” “Phases,” or “Lots,” and link each to price, delivery date, and acceptance criteria.
• Price per part: Unit prices, milestone fees, or monthly rates help show that each part stands on its own.
• Acceptance by part: Define testing and acceptance for each installment or milestone. State how nonconformities will be cured.
• Remedies by part: Spell out rejection rights, cure periods, price adjustments, or service credits for a specific part without canceling the rest.
• Termination rules: Set when a party can cancel the entire contract (e.g., repeated failures or substantial impairment to the overall deal) versus when cancellation is limited to the affected part.
• Dependencies: If parts rely on each other, say so. Note any critical path items that, if missed, allow broader remedies.
• Invoices and payment: Tie payment to acceptance of each part. Consider partial withholding limited to the affected part to avoid disputes over nonpayment for conforming parts.
• Avoid confusion: A severability clause (about unenforceable terms) is not the same as a severable contract (about performance in parts). Use both when appropriate.

Contract management pointers:

• Keep records by part: Purchase orders, delivery receipts, test reports, and acceptance notices should identify the specific installment or milestone.
• Send precise notices: Reference the affected installment or milestone, the issue, the cure period, and the requested remedy.
• Continue performing unaffected parts: This supports a severable structure and preserves claims without escalating the dispute.
• For goods: Apply UCC perfect tender for single deliveries and installment rules for multi-delivery contracts; document whether the problem substantially impairs the installment or the contract as a whole.

Common challenges:

• Ambiguity: Vague pricing or acceptance language can trigger fights over whether the contract is severable.
• Interdependent deliverables: If parts rely on each other, courts may treat the agreement as indivisible or allow broader remedies.
• Jurisdiction differences: States follow similar principles but may vary in how they read contracts and apply the “substantial impairment” test under the UCC.

Summary Checklist

• Define deliverables, schedules, and acceptance criteria for each part
• Tie price and payment to units, milestones, or months
• Include cure periods and remedies that apply per installment or milestone
• Clarify when a party may cancel a single part versus the entire agreement
• State any dependencies and critical items that affect overall performance
• Use both a severable-performance clause and a traditional severability clause
• For goods, align terms with UCC §§ 2-307 and 2-612
• Keep detailed records and issue notices that identify the specific part at issue

Quick Reference