A significant area of risk in take-or-pay contracts occurs at the beginning of deliveries under the contract. If the Buyer is in arrears in commissioning the facilities it needs to receive and use the goods, the Seller will continue to expect the Take-or-Pay obligation to begin on the first contractual delivery date: deliveries may not begin, but the Take-or-Pay obligation will begin to appear. However, the Seller must be able to prove that, despite the Buyer`s delay, the Seller is available to make the goods available for delivery. 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 demonstrate his ability to deliver the goods. In practice, this meant that sellers would complete the wells and fully equip the production facilities, although it was clear that their buyer would be several months or years late in commissioning the buyer`s facilities. 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-off or payment provisions), there is a surprising lack of many contracts to take or pay for that include electricity, water, and other goods. Without specific treatment of how force majeure affects the buyer`s obligation to take or pay, the seller and the buyer can test the effectiveness of the contractual dispute settlement clause if a case of force majeure occurs and the parties have different views on whether payment remains due. 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 compensatory payment, there is no infringement 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 enforcement.
The Oklahoma Supreme Court explained this reasoning in Roye Realty & Developing, Inc.c. Arkla, Inc., 1993 OK 99, 863 P.2d 1150. In the present case, Arkla, a gas buyer, argued that the indemnification provision in a contract of taking or payment was in fact a lump-sum compensation provision. The Oklahoma Supreme Court dismissed Arkla`s request, stating that, given this vital importance, most readers would be surprised how often a so-called contract of taking or payment is actually not written as such, with the business outcome being far less desirable than the seller and its lenders had anticipated. This mistake is not limited to inexperienced negotiators and their lawyers. In a recent infrastructure project with a capital cost of more than $1 billion, the parties were surprised to discover quite late in the development period that the so-called “take or pay” contract was not really like that, although it was described as such in the developer`s project briefing note and signed by project lenders and a very very Respected. In another example, in the context of a long-term gas sales contract, a buyer managed to reduce its purchase or payment obligation by decreasing market demand, making the contract essentially a requirements contract (discussed in more detail below) despite the “take or pay” nomenclature. Just using the phrase or paying in an agreement doesn`t necessarily make it that way. Unlike take-or-pay, a demand contract does not have a minimum contractual quantity.
Instead, a demand contract requires the buyer to take their entire claim for a seller`s property. 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 favorable from the buyer`s point of view in an uncertain market (no excessive obligation to purchase goods that are not required), this type of contract is relatively unusual for large infrastructure projects, as it is difficult for the seller to obtain external debt financing without the guaranteed source of revenue of a TOP quantity. The damages available to the seller if the buyer does not accept delivery of the goods may be of the nature of unspecified general damages, or they may consist of agreed lump sum damages, but in most cases they will not be the total contract price for the quantity not covered. When claiming general damages, the seller is often obliged to take steps to reduce its losses, which may cause a seller to resell the goods not taken by the buyer and offset the proceeds of the resale with the seller`s claim for damages. In a take-or-pay contract, the seller has no such obligation to reduce or resell, and if he succeeds in reselling the quantity not taken by the buyer, the seller is entitled to withhold the entire proceeds of the sale and is not required to account to the buyer for this product. In any take-or-pay clause, careful structuring is necessary to avoid the possibility that a buyer will have to pay for a quantity of goods that he has not taken due to a case of force majeure that has prevented performance by the seller or buyer. Since the buyer`s obligations under a take-or-pay clause are alternately formulated, the occurrence of a case of force majeure may excuse the buyer`s failure to take the TOP quantity, but does it exempt the buyer from paying the seller for this quantity not taken? As long as payment can be made, the seller will argue that the buyer can fully fulfill its contractual obligations by paying the amount of the shortfall of taking or payment applicable at the end of the year. .