What is an Abandonment Option?

An abandonment option is a clause in a contract that permits either party to leave the contract before obligations have been fulfilled.

How Does an Abandonment Option Work?

An abandonment option gives either party participating in a contract the right to leave without having to fulfill obligations. The option itself is included explicitly as part of a contract's terms and specifies that neither party will incur any penalties should either of them withdraw from (abandon) the contract. For instance, if an individual withdraws from an employment contract containing an abandonment clause, the employer cannot contest his resignation.

Why Does an Abandonment Option Matter?

An abandonment option is an attractive feature for participants because it protects each party's financial interest in the event that a project or investment fails to generate the intended benefit. Both parties need to be aware that withdrawal on the part of one party could have serious consequences for the other.