What is an Abandonment Clause?

An Abandonment Clause primarily refers to maritime insurance contracts in which a lost vessel can be replaced without the expectation of recovery or salvage, or the terms by which a construction contract or lease agreement can be dissolved.

This is not to be confused with an Abandonment Option contract between a financial advisor and his or her client. It can also refer to a frequently used clause in construction law, in which the contractors define an abandoned project and give their counter-parties the right to move on and find another contractor to finish the job.

A construction project may be deemed abandoned if the contractor fails to start in a reasonable amount of time, stops work for a certain amount of time, or cannot complete the work for any reason. If the definition of abandonment is met, the contract is dissolved and the abandoning party is not entitled to any further compensation, and he or she may owe damages to the other interested parties.

There is also an abandonment clause in many lease agreements, wherein the owner of a property can have grounds to declare a lease abandoned if a tenant cannot be contacted and rent cannot be collected. In property insurance contracts, the abandonment clause applies to property which is no longer worth salvaging.

If a machine is beyond repair, the abandonment clause may allow it to be replaced without salvage or recovery. This is especially pertinent in maritime insurance, where the owner of a vessel may not be able to keep it afloat, or bringing the vessel to shore for repairs would be too costly.