Legal Definitions - adjustment security

Adjustment security refers to a financial guarantee or asset set aside to ensure that certain financial obligations or contractual terms can be met, especially when the final amount or conditions of an agreement are subject to future changes or "adjustments." It acts as a safeguard against potential shifts in value, performance, or other factors that could alter the original terms of a deal. This security ensures that if an adjustment is required—whether an increase or decrease in payment, or a modification of terms—the necessary funds or assets are available to cover that change.

• Example 1: Business Acquisition with Performance Clawback

  A large technology company, "InnovateTech," agrees to acquire a smaller software startup, "CodeGenius." The purchase agreement includes a clause stating that the final acquisition price will be adjusted downwards if CodeGenius's recurring revenue falls below a certain threshold in the six months following the acquisition. To ensure InnovateTech can recover funds if the revenue target isn't met, CodeGenius's founders place a portion of the initial purchase price into an escrow account. This escrow account serves as an adjustment security. If CodeGenius's revenue indeed falls short, InnovateTech can claim the difference from the funds held in escrow, thereby "adjusting" the final purchase price. The escrow acts as a financial safeguard specifically for this potential future adjustment.

• Example 2: Construction Project with Variable Material Costs

  A city council contracts with "BuildWell Construction" to build a new public library. The contract specifies a base price but also includes provisions for potential cost adjustments if the price of specific raw materials (like steel or concrete) fluctuates significantly beyond a predefined range. BuildWell Construction is required to post a performance bond that includes a component specifically designed to cover these potential cost increases or decreases. This bond acts as an adjustment security. Should the cost of steel unexpectedly surge, the city can draw upon this specific portion of the bond to cover the agreed-upon adjustment in project costs, ensuring the project remains financially viable for both parties within the contract's framework.

• Example 3: Government Grant with Performance-Based Funding

  A non-profit organization, "GreenFuture," receives a substantial government grant to implement a new environmental education program. The grant agreement stipulates that a portion of the final disbursement will be adjusted based on the number of participants reached and the measurable impact on environmental awareness, as assessed after one year. If GreenFuture exceeds its targets, it receives a bonus; if it falls short, the final payment is reduced. To guarantee that any potential reduction in the final grant amount can be covered, the government holds back a percentage of the initial grant in a separate account. This held-back amount functions as an adjustment security. If GreenFuture does not meet its participant or impact targets, the government can reduce the final payment by drawing from these held-back funds, ensuring the final financial outcome aligns with the program's actual performance.