What Is Take or Pay Agreement

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While a well-designed take-or-pay clause can provide considerable reassurance to sellers and lenders that there will be reasonable sources of income during the term of the contract, care must also be taken to understand the potential lumpiness of these payments in the worst-case scenario, as well as the impact of the buyer`s flexibility rights on the seller`s payment guarantee. Finally, sellers and buyers should also carefully consider the treatment of force majeure in a taking or payment environment, as well as the seller`s exact obligations in relation to its fundamental obligation to perform the contract. As we have seen all too often in recent times, these issues have been overlooked in some situations or simply ignored in the rush to close a deal, and the consequences of some of these mistakes in a long-term contractual environment may be felt for many years to come. A take-or-pay contract is a written agreement between a buyer and a seller that obliges the buyer to pay even if the seller does not provide the item.4 min read In this situation, both parties benefit from the take-or-pay provision. Company A receives from Company C only the quantity of gas it needs, at a lower total cost than it would have paid; Company B receives the penalty price from Company A, instead of earning nothing, if Company A simply changes supplier if the determination of income or payment is missing. In the past, the Supreme Court of England and Wales has also considered whether these clauses are prohibited as an excessive sanction, which is not compensatory, as the rule does not allow the enforcement of a contractual penalty against a party who has breached the agreement. On this dilemma, the Court ruled in favour of the validity of the clause, provided that it does not create a contractual and economic imbalance to the detriment of a party and (provided) that the amount of damages or even the price imposed on the parties depends on the amount of the (specific) damage actually and specifically defined[3]. In addition to overhead, there are two other reasons why energy projects opt for such “take or pay” contracts: As a rule, the fine or penalty is lower than the purchase price. Indeed, the objective of take-or-pay contracts is not to give a party an undue advantage, but to reduce risks. In the example above, Company B can sell the 20 million cubic feet of natural gas that Company A does not buy from another company. Due to the unpredictability of energy markets, where prices can fluctuate due to demand and supply, sellers rely on contracts to take or pay to ensure that their revenues are safe and consistent.

For energy suppliers who use pipelines, oil or natural gas to generate electricity, the huge overhead costs require some certainty that they will generate long-term revenue as expected. Since the purpose of compensation is to compensate the injured party for its losses and not to enrich it, any profit made by a person claiming losses resulting from a prejudicial event should be taken into account and the amount claimed should be reduced, so that the liable party is required to pay only for the actual loss, suffered by the injured party. This is imposed by the notion of loss in the context of the theory of difference itself, according to which loss is the difference between the actual economic situation of the injured party and its economic situation if the injurious event had not occurred. However, at least in the oil and gas context, courts tend to interpret “take or pay” contracts as an alternative means of enforcement; A gas buyer can either buy the gas or pay a shortfall. In other words, the courts conclude that as long as the buyer buys the gas or makes the payment of the defect, there is no violation and therefore there is no lump sum compensation, since the payment of the amount of the deficit is not a remedy, but another means of performance. The Oklahoma Supreme Court explained this reasoning in Roye Realty & Developing, Inc. v. Arkla, Inc., 1993 OK 99, 863 P.2d 1150. In the present case, Arkla, a gas buyer, argued that the default payment provision in a take or pay contract was in fact a lump-sum compensation provision. The Oklahoma Supreme Court rejected Arkla`s request, stating that many LNG and gas sales contracts give the buyer the right to receive a quantity of refill equal to the amount for which a “take or pay” payment was made in subsequent years (in some cases, even for a short period of time after the contract term expires). As a rule, this makeup can only be taken after the buyer has first taken the TOP quantity for that year, thus maintaining the seller`s guaranteed annual income source. In addition, there are often restrictions on the period of time during which the buyer`s right to wear makeup exists.

Makeup is sometimes lacking in other types of contracts for taking or paying for goods. Three factors explain the need for take-or-pay clauses in energy suppliers` contracts: (b) the extent of the seller`s losses to be compensated by the buyer is the same as its supplier`s losses and the fact that the supplier has already claimed compensation for those losses in the sense that there is a direct causal link with that particular buyer`s failure to discharge the quantities of natural gas; that is, the seller`s loss is a direct consequence of the buyer`s failure to transfer the quantities of natural gas. . Since take or pay contracts generally apply to long-term contracts, they are vulnerable to future events that the agreement does not cover. These events can be political, geological, commercial or more. It may happen that the contract is no longer feasible for one or both parties after the event. Thus, the buyer or seller can terminate the contract. Therefore, the initial concept and purpose of the clause is to balance the interests of both parties, i.e. suppliers and sellers (seller or consumer). The take-or-pay clause is activated if the buyer does not purchase the entire quantity of natural gas ordered by him. In many cases, the latter is required to pay the purchase price for a predetermined minimum quantity of natural gas (recharge quantity), even if he did not purchase this quantity during the year concerned.

As a general rule, the buyer can accept the catch-up quantity in future contract years, either by paying a newly determined special price or without any obligation to refund. Often, you take or pay for contracts to include clauses detailing the circumstances in which the parties will renegotiate the terms of the agreement. These clauses are as follows: As described above, a usual deduction on the TOP quantity is a good that the seller has not been able to deliver. When drafting a take-or-pay clause, care must be taken to ensure that the buyer cannot prevent the delivery of the goods and then states that it should be a deduction of the TOP quantity. To resolve this problem in a “take or pay” contract, the best legal and wording practice for a seller is to provide that its obligation is fulfilled when it offers or makes available the agreed quantity of goods to be delivered to the buyer, rather than declaring that the seller must deliver the goods to the buyer. There are a number of English cases that seem to equate the offer of delivery with the actual delivery, but these cases did not occur in the unique situation of the take-or-pay contract where the buyer`s obligations are in the alternative, and these cases are therefore distinguishable for such reasons. .