Legal Definitions - economic-out clause

An economic-out clause is a specific provision within a contract that allows one or both parties to terminate or renegotiate the agreement if certain unforeseen and significant economic changes occur, making the contract's original terms financially impractical, excessively burdensome, or no longer viable. These economic changes must typically be outside the control of the party seeking to invoke the clause and must fundamentally alter the financial basis upon which the contract was initially formed.

Here are some examples to illustrate how an economic-out clause might apply:

• Example 1: Construction Project

  A construction company enters into a fixed-price contract to build a new office building. The contract includes an economic-out clause. Midway through the project, an unexpected global event causes the price of essential building materials, such as steel and lumber, to skyrocket by 200% within a few months. This drastic and unforeseen increase makes it impossible for the construction company to complete the project at the agreed-upon price without incurring catastrophic financial losses. The company could invoke the economic-out clause to either renegotiate the contract terms to reflect the new material costs or, if renegotiation fails, withdraw from the project without penalty.

• Example 2: Long-Term Supply Agreement

  A technology manufacturer in the United States signs a five-year agreement to purchase specialized components from a supplier in Japan, with payments denominated in Japanese Yen. The contract contains an economic-out clause. Two years into the agreement, the Japanese Yen experiences a sudden and sustained appreciation of 40% against the US Dollar due to unforeseen global economic shifts. This makes the cost of the components significantly higher for the US manufacturer than originally projected, severely impacting their profitability and making the supply agreement financially unsustainable. The manufacturer could activate the economic-out clause to seek new pricing terms or terminate the agreement.

• Example 3: Renewable Energy Development

  A renewable energy company secures a contract to develop a large-scale solar farm, contingent on obtaining specific financing at a projected interest rate. The contract includes an economic-out clause. Before construction begins, the central bank unexpectedly raises interest rates significantly to combat inflation, making the cost of borrowing for the project prohibitively expensive and rendering the entire venture financially unfeasible under the original terms. The energy company could utilize the economic-out clause to exit the development agreement, as the fundamental economic assumption regarding financing costs has drastically changed beyond their control.