This is what a long-term ”take or pay” contract does for the parties: COVID-19 has forced buyers and sellers under long-term supply contracts to determine whether their contracts contain obligations to take or pay that can be difficult for buyers to meet, especially after a decline in demand from customers downstream of buyers. The ”take or pay” provisions of a contract are intended to allow for predictable results from a financial point of view, especially when it comes to debts. If a supplier needs a loan to finance the production of an order from the buyer, the lender may not be willing to offer the necessary funds without a provision of taking or payment in the contract. This provision ensures that the supplier will be able to pay the loan as intended. Many LNG and gas sales contracts give the buyer the right to receive a catch-up quantity equal to the amount for which a take or pay was made in subsequent years (in some cases, even for a short period after the expiry of the contractual period). As a rule, this makeup can only be taken after the buyer has taken the TOP amount for this year for the first time, thus maintaining the seller`s guaranteed annual income source. In addition, there are often restrictions on the period of time during which the right of buyers to wear makeup exists. Makeup is sometimes lacking in other types of contracts for taking or paying for goods. A take-or-pay contract is a rule that structures negotiations between companies and their suppliers.

In this type of contract, the company takes the product from the supplier or pays him a penalty. For every product the company takes, they agree to pay the supplier a certain price, say $50 a tonne. In addition, up to an agreed upper limit, the company must also pay the supplier for the products he does not take. This ”penalty price” is lower, say $40 a tonne. Often, when a ”take or pay” payment is due, it will be significant and the buyer will dispute it, usually arguing that it is an unenforceable penalty or that the underlying cause was a force majeure event and that, therefore, the TOP quantity is reduced (or both). The fact that a ”take or pay” payment is not due due due to a breach of contract or late payment (it rather follows from the buyer`s valid decision not to take the TOP quantity) is one of the main reasons why most UK and US courts have found the take or payment clauses enforceable when a buyer challenges the clause as an unenforceable penalty. In these cases, courts are usually quick to point out that when there is no violation, no penalty can be imposed. Some courts consider a take or payment clause to be similar to a capacity or reserve payment, where the payment is processed in exchange for the seller`s obligation to be willing to supply the agreed quantity of goods to the buyer by providing the agreed quantity of goods, rather than being a payment for the delivery of the actual goods. Other courts often refer to a ”take or pay” payment as an upfront payment for goods, especially if there is a catch-up right, but we find that there is generally no transfer of ownership of the goods until they are subsequently delivered. With regard to the latter difference, there are two common recourse alternatives that can be applied as part of a ”take and pay” contract structure. First, the buyer may be required to pay the full contract price for the quantity of LNG not withdrawn, and then the seller would be obliged to resell the untaken quantity of LNG and then provide the buyer with the net proceeds of that resale up to the contract price paid by the buyer (the seller having the right to retain the excess product). Indeed, this remedy is similar to the Seller`s ”expected damage” under applicable contract law, except that the Buyer generally pays the contract price in advance before receiving a credit from the Seller`s resale.

Of course, the buyer would much prefer to require the seller to first resell the quantity of LNG not taken by the buyer, and then make a claim for damages against the buyer for the negative difference (if any) between the resale value and the original contract price. However, this is not a position generally accepted by sellers, as it effectively gives the defaulting buyer a longer loan term to pay for the expected LNG volumes. In addition, this change in the structure of the take-and-pay contract, by requiring the defaulting buyer to first pay the full contract price at the time of its loss of performance, can arguably provide the security of the source of income necessary to support the financing of the seller`s project. This means that despite a clear and enforceable contractual remedy, the take-and-pay seller may determine that it still does not have a reliable cash flow from the buyer, and its ability to cover current operating costs and pay debt service depends on its ability to quickly and successfully resell quantities not taken by the buyer. If the contract also contains a typical opt-out clause in which a party cannot obtain damages for loss of profits or lost business opportunities, the seller may also be deprived of an effective remedy for the buyer`s breach. Fortunately, for take and pay contracts governed by U.S. law and to which Section 2 of the Uniform Commercial Code (UCC) applies, seller may also be able to exercise its reasonable warranties in the event of breach or default by buyer. In this case, the seller may be entitled to suspend the performance of the contract until he has received reasonable assurances from the buyer.

As stated above, force majeure that prevents the buyer from taking the goods with him is one of the usual deductions from the TOP quantity, eliminating any obligation to take or pay for that particular quantity. While this is common in LNG and some gas sales contracts (which tend to include more extensive and sophisticated take-or-pay provisions), there is a surprising lack of many take-or-pay contracts that include electricity, water, and other goods. .