Using Deductibles or Thresholds In Contracts

In negotiations of terms that have a cost or liability impact, the party that is being asked to assume the cost, risk or liability may resist having those start at the first indication of a problem one. Contracts are not black or white, there are a lot of shades of grey in between. Nothing has to be all or none. Things that make sense for one period may not need to remain intact for the duration of the contract. Deductibles or thresholds are tools that can be used to trigger actions to apply the rights of the party to change. Here are a few examples:

With insurance and indemnity a party may want you to provide a waiver of subrogation rights so you or your insurance company cannot make a claim against them for their negligence. You could use an deductible or threshold to modify the waiver of subrogation commitment. For example, “the waiver of subrogation shall apply only for claims that are less than One Million Dollars.If the claim exceeds that amount, the waiver of subrogation no longer applies.

In negotiation of epidemic defect liability where you want to recover more of your costs than just having the item be repaired or replaced under warranty, you may need to agree upon a threshold that must be met before the defects are considered “epidemic”. The threshold could be a percentage of the total quantity, a minimum quantity amount. or a mix of both percentage and quantity that must be met such as 2% and a minimum or a hundred units so both thresholds must be met. When you negotiate a threshold that is creating a deductible to the other party’s liability.

Band-width currency provision may be used for payments made to a supplier in a foreign currency. Band width provisions have both upper and lower thresholds. As long as exchange rate stays between the lower and upper threshold the price remains the same.

If you make a commitment to purchase a specific quantity you cold have a deductible or threshold provide relief from that commitment. For example, if you placed orders for quantities and the supplier could not deliver and you needed to purchase your needs from another supplier, your language in the commitment could have those quantities be counted toward meeting that commitment.

In negotiations when you are at an impasse, unless you absolutely can’t change and are prepared to walk away from the deal, always think about whether you can use a deductible or threshold. As a Rolling Stones lyric once said “you can’t always get what you want, but if you try sometimes you might find you get what you need.” Many times less is better than nothing.