What Is a Take and Pay Contract

A take-or-pay contract is the norm in the energy industry. This is because suppliers incur high overhead costs in order to offer energy units such as natural gas or crude oil. Overhead costs are usually in the form of pipelines, oil or natural gas to produce electricity. In addition to overheads, the volatility of raw material prices also weighs on the supplier. Unlike take-or-pay, an “on-demand contract” does not have a minimum contractual quantity. Instead, a demand contract requires the buyer to take back all of his request for a commodity from the seller. In fact, the seller assumes the buyer`s market risk, although usually a higher base price reflects the increased risk. While this type of contract would be very cheap from the buyer`s point of view in an uncertain market (no excessive obligation to buy a product that is not required), this type of contract is relatively unusual for large infrastructure projects, as it is difficult for the seller to borrow externally without the guaranteed source of income of a TOP quantity. Contracts to be taken or paid for are common in the energy industry and in particular in gas sales. However, they can also proceed with the contract by renegotiating the terms if external events cause disruption. Compliance with the agreement can benefit both parties if both parties are reasonable and cooperative in the renegotiation.

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. I never knew that contracts to be taken or paid are called that when writers produce a work and the client always pays. The take-or-pay contract requires the buyer to accept delivery of the goods at a certain time. If the buyer does not do so, he will have to pay a fine. In addition to overhead, there are two other reasons why energy projects opt for such contracts to take or pay: For the buyer, such contracts are also useful, since there is no obligation to accept delivery. In the above case, suppose company A finds another buyer who offers a lower price than company B. In this case, Company A will use the take-or-pay contract to terminate the contract and pay the fine.

@bbpuff – You are so right! Caterers work with contracts, but very few of them are to be taken or paid. Some caterers still use this contract when dealing with things like weddings, in case they can`t “deliver” the way the customer wants. Another key element of an take or payment clause is that the TOP amount is not fixed, but is adjusted to reflect events that occur throughout the year. As a general rule, the TOP quantity is reduced by quantities that: (a) the Seller has not made them available for delivery; (b) have been rejected on the grounds that they do not meet the quality specifications; and (c) Buyer has not been able to act due to force majeure. These standard deductions reflect the basic principles that a buyer does not have to pay for goods that could not be delivered; The obligation to take or pay applies only to goods that meet the required specifications (or that the buyer accepts even if they do not conform to the specifications); and that force majeure should fully release some of the obligations affected by force majeure. Since a take-or-pay buyer is always free not to take the TOP quantity in any year (in many contracts, the buyer even has the right to schedule the delivery and then refuse to accept the delivery if it is offered) without violating any performance obligation or defaulting – as long as the buyer pays the corresponding take-or-pay payment at the end of the year – a prudent seller must understand, That in the worst case, a procedure of taking or payment The clause can make it last up to a whole year without making deliveries to the buyer or receiving payments from him. Therefore, the seller should ensure that it has at least sufficient payment guarantee from the buyer to cover a full one-year obligation to take or pay. It is also important to keep in mind that for take-or-pay contracts that are governed by U.S. law and to which Section 2 of the Uniform Commercial Code (“UCC”) applies, in most cases, the seller may not be able to use “reasonable insurance” to require additional security from the buyer in a context of taking or payment, because these UCC rights are based on seller`s “reasonable grounds for uncertainty”. “, which usually occurs when there is an actual or imminent breach or omission on the part of the buyer.

An important area of risk for take-or-pay contracts arises from the contract at the beginning of deliveries. If the buyer is in default of putting into service the equipment he needs to receive and use the goods, the seller always expects that the obligation to take or pay will begin on the first date of contractual delivery: deliveries may not begin, but the obligation to take or pay begins to occur. However, the Seller must be able to prove that the Seller is available for delivery despite the Buyer`s delay. Otherwise, if the buyer can prove that the seller cannot complete the delivery, he can argue that the TOP quantity will be reduced, thus eliminating the provision of taking or payment. Faced with this problem, the seller still has to do everything in his power to prove his ability to deliver the goods. In practice, this meant that sellers would complete the wells and production facilities fully occupied, although it was clear that their buyer would be several months or years late in commissioning the buyer`s facilities. This means that despite a clear and enforceable contractual remedy, the take and pay seller can determine that it still does not have a reliable cash flow from the buyer, and that 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 exclusion clause in which a party cannot claim damages for loss of profits or business opportunities, the seller may also have no effective remedy for the buyer`s breach.

Fortunately, in take-and-pay contracts governed by U.S. law and to which Section 2 of the Uniform Commercial Code (UCC) applies, seller may exercise its reasonable warranty rights even in the event of a breach or default by buyer. In this case, the Seller may be entitled to suspend the further performance of the Contract until it has received reasonable assurances from the Buyer. 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 is able to repay the loan as intended. “Take or pay” regulations are very common in the energy sector due to the high overhead costs for suppliers in the supply of energy units such as natural gas or crude oil and the volatility of energy product prices. .