Legal Definitions - fluctuating clause

A fluctuating clause is a provision within a contract that allows for the adjustment of a price, payment, or other specified term, either upward or downward, based on predefined external factors or conditions. Unlike a simple escalator clause which typically only allows for increases, a fluctuating clause explicitly permits changes in both directions, reflecting market dynamics, cost variations, or other agreed-upon metrics.

• Example 1: Construction Materials Supply Agreement

  A construction company enters into a long-term contract with a steel supplier for a major building project. The contract includes a fluctuating clause stating that the per-ton price of steel will be adjusted quarterly based on the average market price of raw iron ore as reported by a specific international commodities exchange. If the price of iron ore increases, the steel price goes up; if it decreases, the steel price goes down. This clause ensures that both parties are protected from significant market shifts in the cost of the primary raw material.

• Example 2: Commercial Property Lease

  A small business leases office space for five years. Their lease agreement contains a fluctuating clause that ties the annual rent adjustment to the local Consumer Price Index (CPI). Each year, the rent will be recalculated based on the percentage change in the CPI from the previous year. If the CPI rises by 3%, the rent increases by 3%; if the CPI were to fall (indicating deflation), the rent would decrease accordingly, up to a certain floor, ensuring the rent reflects the general cost of living and doing business in the area.

• Example 3: Energy Supply Contract

  A manufacturing plant signs a three-year contract with an energy provider for its electricity supply. The contract incorporates a fluctuating clause that links the per-kilowatt-hour rate to the wholesale price of natural gas, which is a primary fuel source for electricity generation in the region. The rate is reviewed monthly, and if the wholesale natural gas price changes by more than 5% from the baseline, the electricity rate for the plant is adjusted proportionally, either higher or lower. This allows the energy provider to manage its fuel costs and the manufacturing plant to benefit from potential drops in energy prices.