Put Or Pay Agreements

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Because take-pay contracts are long-term contracts, they are vulnerable to unforeseen events that are not covered by the contract. These external events include political circumstances, commercial developments, geological events, etc. If one of them takes place, the contract may no longer be feasible or viable for either party. In this case, one of the parties may terminate the contract or terminate the contract. It is also a “homicide clause.” These agreements are usually signed by companies when their suppliers ask them to purchase a certain amount of items until a specified date, and a fine is imposed if they do not. In this type of agreement, the seller is protected against a possible loss of money from the production of the item that the buyer should buy. The take-pay clauses in a contract are intended to facilitate financially predictable results, particularly when it comes to debt. If a supplier needs a loan to finance the establishment of a buyer`s contract, the lender may not be willing to provide the necessary funds without a take-or-pay scheme in the contract. This provision ensures that the supplier can pay the loan as planned. Outside the oil and gas context, contractual terms of “taking or paying” are often dismissed 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. In this case, both parties benefit from the rule to be taken or paid. Company A receives only the amount of gas it needs from Company C, at a total cost less than it would have paid; Company B receives the criminal award from Company A instead of earning nothing if Company A simply switches suppliers without the take-or-pay scheme. The rules to be taken or payable are generally between companies and their suppliers who require the purchasing company to have a specific delivery of goods taken by the supplier until a certain time at the risk of paying a fine to the supplier if they do not. This type of agreement benefits the supplier by reducing the risk of losing money for any capital spent on the manufacture of the product it wants to sell.