Im a bit confused as to how the principle of quantum entanglement does not conflict with special relativity.

Say for instance that a wavefunction consists of two particles which are entangled and far apart. If one particle is observed it results in the collapse of the entire wavefunction and an instantaneous effect on the entangled particle which can be noted by an observer. If one position of the affected particle would be considered a '0' and the other a '1' then it can be regarded as the transfer of information at faster than light speed. Does this not violate the principles of special relativity?

No, because you can't transmit the information you've obtained faster than the speed of light. The collapse of the wave function doesn't transmit this information, because the wave function contains the information about both particles.