DEFINITION of 'De-Escalation Clause'

A de-escalation clause is an article in a contract that calls for a price decrease if there is a decrease in certain costs. For example, a de-escalation clause may stipulate that maintenance fees will be reduced if the item being maintained depreciates in value. A de-escalation clause is the opposite of an escalation or escalator clause.

BREAKING DOWN 'De-Escalation Clause'

A de-escalation clause can protect consumers from paying inordinately high prices over the life of a contract that was signed during a time of unusual circumstances. For instance, shipping costs may be higher than normal when a contract is signed due to atypical prices on gasoline. A de-escalation clause will correct for that by lowering the contracted shipping rate as gasoline prices drop.

There are instances in the shipping industry where companies include a bunker surcharge or bunker adjustment factor that may be part of a bill of lading. This cost is for the fuel used in the shipping of cargo, particular by sea. De-escalation clauses may be included in such shipping company contracts to allow for reductions in fees if the cost of fuel decreases while the cargo is in transit.

How De-Escalation Clauses Affect the Public and Private Sectors

Public contracts with government agencies and entities can be particularly affected by de-escalation clauses. For example, if a municipality orders a supply of salt for its winter road clearing operations a de-escalation clause would bring down the cost if the contractor who furnishes the road salt receives a discount from their supplier.

Government entities may be mandated to enter contracts with vendors and suppliers who offer the lowest bid to provide services or products. A de-escalation of prices might help vendors lower their final bids. Government bodies might seek new vendors who offer de-escalation clauses for materials and services they need if current vendors do not include this feature in their contracts.

Retailers might enter contracts with vendors and suppliers where a de-escalation clause is included in order to maintain the lowest possible prices to acquire and restock on merchandise. This allows retailers to maintain competitive profit margins when they price goods for consumers. The retailer is not obligated to pass along the full savings of such a de-escalation to the consumer.

Performance and employment contracts may include de-escalation clauses. For example, athletes may see their salaries reduced if they do not play in the majority of regular season games for the team that hired them.

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