What Is A Take Or Pay Agreement

Because take-pay contracts are long-term contracts, they are vulnerable to unforeseen events that are not covered by the contract. These external events include political circumstances, commercial developments, geological events, etc. If one of them takes place, the contract may no longer be feasible or viable for either party. In this case, one of the parties may terminate the contract or terminate the contract. Indeed, during the great economic crisis of the early 1980s, take-or-pay clauses led to contract renegotiations and litigation, as buyers had to buy quantities greater than demand independently of the transaction, while prices had fallen well below the value of the contract. In general, the validity of these clauses is not disputed in the United States, since the courts theoretically uphold such agreements [2]. As explained above, the force majeure that prevents the buyer from taking the goods is one of the common deductions to the amount of TOP, thus eliminating any obligation to take or pay for that specified quantity. While this is the case in LNG sales contracts and certain gas sales contracts (which generally have fulsomer and more expensive provisions), it is surprising that many on-demand payment contracts, which cover electricity, water and other raw materials, are lacking. In the absence of specific treatment on the impact of force majeure on the buyer`s obligation to take or pay, the seller and buyer may test the effectiveness of the contractual dispute settlement clause if a force majeure event occurs and the parties have differing views as to whether the payment is still due. Given this vital importance, most readers would be surprised at how often a so-called “take-or pay” contract is actually not written as such, the commercial result being much less desirable than what the seller and his lenders intended to do. This error is not limited to inexperienced negotiators and their advice.

In a recent infrastructure project with a capital cost of more than $1 billion, the parties were surprised to find, rather belatedly in the development schedule, that the so-called “take-or pay” contract was not really the case, although it was described as such in the sponsor information memorandum on the project and signed by project lenders and a highly respected project finance firm.