A severability clause is one of those boilerplate sections that are typically hidden among the miscellaneous clauses at the end of a contract. Although usually these provisions do not get a lot of attention during negotiations, it may be time to dust off your template language and give your severability clause a good read. A recent finding by the U.S. Court of Federal Claims in DMS Imaging Inc. v. United States highlighted the significance of severability clauses. The court upheld a risk of loss provision in a lease agreement notwithstanding the fact that the indemnification provision in the same agreement may not have been enforceable.
In the decision, the court outlined the facts of the case, which included the following:
- The U.S. Department of Veterans Affairs (VA) leased a magnetic resonance imaging (MRI) mobile unit from DMS.
- The lease agreement included a risk of loss clause stating that the VA would bear "the entire risk of loss . . . from any cause whatsoever and no loss . . . or damage of the leased property shall relieve Lessee of the obligation to pay rent or any other obligations under this lease."
- The lease agreement’s indemnification clause required the VA as Lessee to “indemnify and hold harmless Lessor . . . from any loss, claim, liability, and expense . . . including without limitation claims for personal injury, death or property damage or loss where the injury, death, damage or loss arises out of or is in any way related to the leased property.”
- The lease agreement included a severability clause that stated, “In the event that any portion of this agreement is held to be unenforceable or void, such provision shall be deemed to be severable and shall in no way affect the validity of the remaining terms and conditions of this agreement.”
- The machine was later destroyed by a fire, and the VA stopped making lease payments, which prompted DMS to file suit.
In its objection to DMS' claim that the VA was liable for risk of loss of the MRI mobile unit, the VA argued, among other things, that the lease agreement (including the risk of loss provision) was unenforceable because the agreement included an indemnification clause that required the government to assume unlimited liability, thereby violating the Antideficiency Act. DMS asserted that it was entitled to recover under the agreement's risk of loss clause.
Among several findings (including regarding the validity of the underlying contract), the court determined that even if the indemnification clause violated the Antideficiency Act and was in fact void, that because the lease agreement contained a severability clause, the entire agreement was not void and the VA was liable under the risk of loss clause.