Take Or Pay Agreement Proz


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However, at least in the context of oil and gas, courts tend to interpret “Take or Pay” contracts as an alternative means of delivery; a gas buyer can either buy the gas or pay a deficit amount. In other words, the courts find that as long as the purchaser buys either the gas or makes the payment of the default, there has been no infringement and therefore there is no damage that can be liquidated because the payment of the deficit amount is not a remedy, but another means of benefit. The Oklahoma Supreme Court explained this reasoning in Roye Realty – Developing, Inc. v. Arkla, Inc., 1993 OK 99, 863 P.2d 1150. In that case, Arkla, a gas buyer, argued that the default payment provision in a “Take or Pay” contract was in fact a liquidated damages provision. The Oklahoma Supreme Court rejected Arkla`s assertion and said that outside the oil and gas context, contractual terms for “taking or paying” are often rejected by the courts as unenforceable penalties. The courts consider them to be “liquidated compensation clauses,” which must be based on an appropriate reconciliation of the actual harm suffered by one party as a result of the other party`s infringement. “Take or pay” generally does not meet this standard. A take-or pay contract is a rule that structures negotiations between companies and their suppliers. With this type of contract, the company either withdraws the product from the supplier or pays a fine to the supplier. For every product the company takes, they agree to pay the supplier a certain price, say $50 a tonne.

In addition, within an agreed cap, the company must also pay the supplier for products it does not take. This “criminal price” is lower, say $40 a tonne. Take-out or pay-as-you-go contracts are common in the energy sector and, in particular, in the case of gas sales.