What is an Escalator Clause?

Also known as escalation clauses, escalator clauses are provisions within contracts that make it possible to adjust the price or salary named within the contract, if specified events that are beyond the control of the parties involved in the contract take place. The escalator clause helps to ensure that providers of goods and services do not encounter unreasonable financial hardship as the result of uncontrollable increases in the prices of the raw materials required to deliver goods to customers, or the increase of utilities or taxes. At its core, this type of contract clause is intended to ensure that the terms of the contract can still be honored, even if unforeseen and uncontrollable situations come to pass at some point during the life of the contract.

One example of how an escalator clause can be enacted is seen in many rental agreements. It is not unusual for landlords to include an escalator clause within the body of the contract that makes it possible to increase the monthly rent payment if taxes on the property are increased. In the event that the landlord provides one or more utilities as part of the monthly rental amount, and those utilities increase significantly, the landlord can advise the tenant that a rent increase will commence shortly. This allows the landlord to offset the increased costs that were beyond his or her control, effectively passing a portion of the increased expense on to the tenant.

Another type of escalator clause is found in employment contracts. Here, the aim is to ensure that the employee receives some type of rate increase in the event that the general cost of living in the area goes up significantly. This provision can allow the employee to cope with more demands on his or her salary, such as an increase in property taxes, and general inflation of the cost of necessary goods like food, clothing, and shelter. This cost of living increase that is provided for under the terms of the escalator clause is considered above and beyond any wage or salary increases that the employer may choose to implement based on the performance of the employee.

In all cases, the aim of the escalator clause is to make sure the contract can continue, even if some uncontrollable factors have changed that impact the ability to deliver contracted goods or services. The key to this provision is that the factors must be outside the control of either party. This prevents the arbitrary increase of prices simply because one party wishes to enjoy a higher profit margin, while at the same time protecting the recipient from being deprived of the benefits he or she receives as a result of the agreement.