Economic hardship clause: Overview, definition and example
What is an economic hardship clause?
An economic hardship clause is a provision in a contract that allows one party to request adjustments or relief from their responsibilities if they face unforeseen financial difficulties. This clause is often included in contracts to provide flexibility in the event of economic downturns, major market disruptions, or other significant financial challenges that make it difficult or impossible for one party to meet the terms of the agreement. It is designed to balance the interests of both parties by allowing for renegotiation or relief when unexpected economic hardship arises.
Why is an economic hardship clause important?
An economic hardship clause is important because it helps protect businesses from being penalized for factors beyond their control. It acknowledges that market conditions or financial situations can change unexpectedly, and provides a safety net for one party if fulfilling their contractual obligations becomes unreasonably burdensome. For businesses, this clause offers a way to manage risks during uncertain times, such as recessions or economic crises, without automatically triggering penalties or breaches of contract.
Understanding an economic hardship clause through an example
Imagine a small business has a contract with a supplier for the delivery of goods over the course of a year. The contract includes an economic hardship clause, which states that if either party faces a significant change in economic conditions that makes it impossible to fulfill the contract, they can request a renegotiation of terms.
Suppose, halfway through the year, the business faces a sudden drop in sales due to an unexpected economic downturn, making it difficult to afford the agreed-upon payments. The business can invoke the economic hardship clause to request an adjustment to the payment schedule or a reduction in the order quantity, allowing both parties to continue with the contract despite the financial difficulties.
Example of an economic hardship clause
Here’s how an economic hardship clause might look in a contract:
“In the event of significant economic hardship, such as a severe downturn in market conditions or unexpected financial crisis, either party may request a renegotiation of the terms of this Agreement. Any agreed-upon adjustments shall be made in good faith to reflect the changed circumstances.”
Conclusion
An economic hardship clause is a valuable tool in contracts, offering flexibility and protection in case of unexpected financial challenges. It ensures that businesses are not unfairly penalized for events outside of their control, while still maintaining the integrity of the agreement. By including such a clause, businesses can better navigate periods of economic uncertainty and protect their long-term interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.