Escalator clauses adjust contract prices or salaries if uncontrollable events occur. They prevent financial hardship and ensure contract terms can be met. Examples include lease agreements and employment contracts. The clause must apply to both parties and prevent arbitrary price increases.
Also known as escalation clauses, escalator clauses are provisions in contracts that allow the price or salary specified in the contract to be adjusted if specific events occur that are beyond the control of the parties to the contract. The escalator clause helps ensure that suppliers of goods and services do not experience unreasonable financial hardship due to uncontrollable increases in the prices of the raw materials needed to deliver goods to customers, or rising utilities or taxes. Basically, this type of contract clause is intended to ensure that the terms of the contract can still be met, even if unforeseen and uncontrollable situations occur at some point during the life of the contract.
An example of how a sliding scale clause can be implemented is seen in many lease agreements. It’s not unusual for landlords to include a sliding scale clause within the body of the contract that allows for the monthly rent to be increased if property taxes go up. In the event that the landlord provides one or more utilities as part of the monthly rent amount and those utilities increase significantly, the landlord can advise the tenant that a rent increase will soon begin. This allows the landlord to offset increased costs that were beyond his control, effectively passing on a portion of the increased expense to the tenant.
Another type of escalator clause is found in employment contracts. In this case, the goal is to ensure that the employee receives some type of rate increase in case the general cost of living in the area increases significantly. This arrangement may allow the employee to meet greater demands on his salary, such as an increase in property taxes and general inflation in the cost of necessary items such as food, clothing and housing. This projected cost-of-living increase under the escalator clause is considered above and beyond any salary or wage increases that the employer may choose to implement based on the employee’s performance.
In all cases, the purpose of the escalator clause is to ensure that the contract can continue, even if some uncontrollable factors affecting the ability to deliver the procured goods or services have changed. The key to this arrangement is that the factors must be beyond the control of both parties. This prevents arbitrary price increases simply because one party wishes to enjoy a higher profit margin, while also protecting the recipient from being deprived of the benefits he receives as a result of the agreement.
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