Sat, Oct

Escalation clause


Escalation clause(or Escalator clause) With currency values fluctuating, with the revenue of the shipowner being in one currency and his costs possibly being in another, and, with rising costs and inflation, he will want some compensatory protection, especially when the charter is for a long period, such as in time charters and COAs.

Because there are so many possible variables an escalation clause (similarly to "currency clauses") must be carefully drafted. BIMCO does publish a standard "escalator clause":

"The rate of hire agreed in this charter is based upon the level of Owners' monthly operating expenses ruling at the date of this charter as shown in the statement for future comparison attached hereto, including provisions, stores, master's and crew's wages, war bonus and other remuneration, maintenance and usual insurance premiums.
By the end of every year of the charter period the average monthly expenses for the preceding year shall be compared with the basic statement attached hereto. Any difference exceeding 5 per cent to be multiplied by 12 and regulated in connection with the next hire payment. The same principle to apply pro rata at the termination of w the charter for any pan of a year."

While the above clause deals only with time charters, an appropriately worded clause can be used for consecutive voyage charters or COAs allowing a percentage increase in freight based on some factor such as the change in some economic or financial index.