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What Are Take Or Pay Agreements

In order for the seller to legitimately claim a claim against the buyer, it is necessary that the seller has previously imposed a “take or pay” clause on the seller, and only because that customer does not remove the minimum annual amount (quantity taken or paid) and not because the seller has chosen another supplier or other solutions at a lower cost (for example. B purchase of lots of LNG). 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. In another example, a buyer was able, under a long-term gas sales contract, to reduce his “take-or pay” commitment by a drop in market demand, which made the contract a “demand contract” (more detailed below) despite the take-or pay nomenclature. Only the use of the phrase “take or pay” in an agreement does not necessarily make it that way. A take-or-pay contract is the norm in the energy sector. This is because suppliers incur high overheads to provide energy units such as natural gas or crude oil. Overheads are generally generated in the form of pipelines, oil or natural gas for electricity generation.

In addition to overheads, volatile commodity prices are also wreaking havoc on the supplier. In addition to overhead, there are two other reasons why energy projects go to such take-up or payment contracts: to define precisely what the buyer`s demand is (. B for example, which facilities? What surface? What period? maximum demand?) can be a bit complex in an order setting. Moreover, the seller`s loss is the buyer`s profit on the buyer`s share of the merchandise he would otherwise have sold (decreased by the proceeds from the resale of goods that the seller receives from a sale in accordance with the discount) and, therefore, the damages available to the seller if he had breached his obligation. and the seller`s obligation to reduce the loss is similar to that which applies to a breach of a “take and pay” obligation.

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