Triggering event: Overview, definition, and example
What is a triggering event?
A triggering event refers to a specific occurrence or condition that activates or sets into motion a clause, obligation, or provision within a contract or agreement. This event is the catalyst that causes a legal, financial, or operational consequence to take effect. Triggering events can be positive or negative, depending on the terms of the contract, and are often pre-defined and agreed upon by the parties involved. They can be time-based (e.g., a specific date), condition-based (e.g., completion of certain tasks), or event-based (e.g., a natural disaster or regulatory change).
For example, a triggering event could be the completion of a project milestone, a default in payment, or the approval of a government regulation, each of which may activate a specific provision or obligation in a contract.
Why is a triggering event important?
A triggering event is important because it establishes the conditions under which the rights and obligations of the parties in a contract become enforceable. By clearly defining what constitutes a triggering event, both parties have a shared understanding of when certain actions, penalties, or benefits will be applied. It provides clarity, reduces uncertainty, and ensures that the contract is executed fairly and in accordance with the predefined terms.
For businesses, identifying and understanding triggering events helps in planning and managing risks, as they can anticipate when specific actions will be required or when certain benefits will come into play.
Understanding triggering event through an example
Imagine a company enters into a loan agreement with a bank that includes a clause requiring full repayment of the loan if the borrower’s business experiences a significant drop in revenue. In this case, the "triggering event" is the revenue decline. If the borrower’s revenue falls below the agreed threshold, the event triggers the clause, and the borrower may be required to repay the loan in full immediately.
In another example, a contract between a supplier and a retailer could include a triggering event where the supplier is required to deliver additional products once the retailer reaches a certain sales milestone. Once the sales threshold is reached, the event triggers the supplier’s obligation to deliver the additional goods as specified in the contract.
Example of a triggering event clause
Here’s what a triggering event clause might look like in a contract:
“The Parties agree that the following shall constitute a triggering event under this Agreement: (1) a breach of the payment terms outlined in Section [X]; (2) a change in ownership or control of the Borrower; or (3) the failure to meet the specified performance targets set forth in Exhibit [A]. Upon the occurrence of any triggering event, [specific consequences or actions] shall be immediately enacted by the Parties.”
Conclusion
A triggering event is a key component in many contracts, as it defines the precise conditions under which specific terms and actions are activated. By specifying triggering events in a contract, parties can ensure that both sides are aware of when obligations or penalties will come into play, providing a clearer path to resolution or enforcement.
For businesses, understanding triggering events is crucial for managing legal risks and meeting contractual obligations on time, ensuring that all parties are prepared for the actions required when these events occur.
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.