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.

  1. Hedge Clause

    A hedge clause is a clause in a research report that attempts ...
  2. Distribution Clause

    A distribution clause is a type an insurance policy provision ...
  3. Severability

    A severability clause states that the terms of a contract are ...
  4. Alienation Clause

    An alienation clause is a clause in a financial contract that ...
  5. Financial Responsibility Clause

    A financial responsibility clause indicates that an auto insurance ...
  6. Civil Authority Clause

    A civil authority clause is an insurance clause outlining coverage ...
Related Articles
  1. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  2. Investing

    Why the 'Santa Claus' Stock Rally Is at Risk

    Whether the stock market enjoys a "Santa Claus rally" this year may hinge on the progress of tax reform.
  3. Financial Advisor

    Should You Poach Clients From Other Advisors?

    Make sure you know the laws before you seek out clients from other advisors. You could end up in hot water.
  4. Managing Wealth

    Protect Your Company From Employee Lawsuits

    Understanding employment practices liability insurance is easy, once you know the basics.
  5. Financial Advisor

    Divorce and Annuities: What Clients Need to Know

    Divorce can be the most financially devastating event in a person’s life. Here’s what your clients need to know about handling annuities in a divorce case.
  6. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  7. Investing

    A Quick Guide for Futures Quotes

    Here is a quick guide for reading and understanding futures markets quotes.
  8. Investing

    Why You Should Buy the Sell-Off

    Time to buy? Strategists at Wells Fargo, JPMorgan see the recent stock sell-off as an opportunity.
  1. What Is an Alienation Clause?

    An alienation clause when in reference to insurance policies, mortgages or commercial loans stipulates certain things to ... Read Answer >>
  2. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
  3. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  4. What does a futures contract cost?

    Learn about values of futures contracts and the initial margin a trader must place in an account to open a futures position, ... Read Answer >>
Trading Center