It is important that the take-or-pay buyer does not violate the contract or is in default if he does not name or accept the TOP quantity of the year in question. Often, a buyer has the right to offer zero deliveries in a year, and this would not be a violation or omission. Instead, the difference between the quantity actually used by the buyer that year and the corresponding TOP quantity forms the basis of a missing quantity for which the buyer is required to make a payment to the seller at the end of that year. Therefore, the initial concept and purpose of the clause is to balance the interests of both parties, i.e. the supplier and the seller (seller and consumer, respectively). The take-or-pay clause is activated if the buyer does not purchase the entire quantity of natural gas ordered by him. In many cases, the latter is required to pay the purchase price of a predetermined minimum quantity of natural gas (catch-up quantity), even if he did not purchase this quantity during the year concerned. As a rule, the buyer can allocate the catch-up quantity for the second time in future contract years, either by paying a newly determined special price or without any obligation to pay. Since the buyer still has to pay the full contract price for quantities it does not accept during the applicable measurement period, the buyer is generally entitled to a so-called “catch-up” right in such a payment (commonly referred to as a “take-or-pay payment”), i.e. a right to take the amount of LNG for which it made the take-or-pay payment at a later date. == References ===== External links ===A provision allowing the buyer to choose to pay for LNG that has not been withdrawn during the applicable assessment period in exchange for future catch-up fees is considered an alternative to the obligation to receive and pay for LNG during the applicable measurement period. ==References=====External links===A payment on take or payment is not considered a payment of damages, which could otherwise be attacked as an unenforceable penalty as it is disproportionate to the seller`s actual loss or damage if the buyer does not accept the intended quantities of LNG. [3] It is also clear that a “take or pay” contractual structure is enforceable in English contract law, although the reasoning with which the English courts defend this position is somewhat different.
[4] In addition to the legal distinction discussed above, the structure of the take-or-cancel contract has similar advantages to those of the take-and-pay contract; namely, the regularity of cash flows (since cancellation fees are generally payable on a year-to-year basis) and a smaller fluctuation in volume (given the absence of catch-up rights and generally very limited or no other quantity fluctuation rights). However, since the right of withdrawal itself gives the buyer a high degree of quantity flexibility, it represents a higher burden for the seller to manage the potential for cargo cancellation by the buyer. In order to reduce this burden, an important point of negotiation is the amount of notice that the buyer needs to exercise his right of withdrawal. With regard to the latter difference, there are two common recourse alternatives that can be applied as part of a “take and pay” contract structure. First, the buyer may be required to pay the full contract price for the quantity of LNG not withdrawn, and then the seller would be obliged to resell the untaken quantity of LNG and then provide the buyer with the net proceeds of that resale up to the contract price paid by the buyer (the seller having the right to retain the excess product). Indeed, this remedy is similar to the Seller`s “expected damage” under applicable contract law, except that the Buyer generally pays the contract price in advance before receiving a credit from the Seller`s resale. Of course, the buyer would much prefer to require the seller to first resell the quantity of LNG not taken by the buyer, and then make a claim for damages against the buyer for the negative difference (if any) between the resale value and the original contract price. However, this is not a position generally accepted by sellers, as it effectively gives the defaulting buyer a longer loan term to pay for the expected LNG volumes. In addition, this change in the structure of the take-and-pay contract, by requiring the defaulting buyer to first pay the full contract price at the time of its loss of performance, can arguably provide the security of the source of income necessary to support the financing of the seller`s project.
It is also important to assess the compatibility of those clauses, where they are included in long-term gas supply contracts, with Articles 101 and 102 TFEU. In particular, the inclusion of that clause in supply contracts should not lead to distortion of competition by creating or strengthening a dominant position of certain suppliers or by unduly affecting the commercial freedom of their counterparties. The European Commission has recognised that these clauses are not prohibited per se; however, their impact on the European market should be assessed on a case-by-case basis, in particular taking into account criteria such as the location of the supplier on the relevant market and the general structure of the relevant market, the existence of other suppliers and the duration of the contract[10]. As described above, a usual deduction of the TOP quantity is a commodity that the seller could not deliver. When drafting a take-or-pay clause, it should be carefully observed that the buyer cannot prevent the delivery of the goods and then claims that it should be a deduction of the TOP quantity. To resolve this problem in a “take or pay” contract, the best legal and formulation practice for a seller is to provide that its obligation is fulfilled when it offers or makes available the agreed quantity of goods for delivery to the buyer, rather than declaring that the seller must deliver the goods to the buyer. There are a number of English cases which seem to equate the offer of delivery with the actual delivery, but these cases did not occur in the single contractual situation where the buyer`s obligations are in the alternative, and these cases are therefore distinguishable for such reasons. Such cases are also contrary to UCC`s arguably more well-founded practice, which states that the seller`s obligation is fully fulfilled if it offers the buyer the specified quantity and quality of the goods to be delivered to the agreed place of delivery. Another key element of a take or payment clause is that the TOP quantity is not defined, but is adjusted to reflect events that occur during the year. As a general rule, the TOP quantity is reduced by quantities that: (a) the Seller has not made available for delivery; (b) have been rejected on the grounds that they do not meet the quality specifications; and (c) the Buyer was unable to take due to force majeure. These standard deductions reflect the basic principles that a buyer should not 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 are not specified); and that force majeure should contribute to the full release of some of the obligations affected by force majeure. One of the two common alternative contractual structures in the LNG industry is a take-and-pay contractual structure, which has recently become a typical structure for many of today`s spot and portfolio LNG sales.
[5] Under a “take and pay” contractual structure, buyer must take and pay for the quantity contracted, and any failure by buyer to do so will result in an immediate obligation to pay damages that arises at the time of such omission. Therefore, the main differences between a “take and pay” contract structure and a “take and pay” contract structure are the timing of payments to be made to the seller and the seller`s specific recourse for quantities that the buyer does not take. Many LNG and gas sales contracts give the buyer the right to receive a catch-up quantity equal to the amount for which a take or pay was made in subsequent years (in some cases, even for a short period after the expiry of the contractual period). As a rule, this makeup can only be taken after the buyer has taken the TOP amount for this year for the first time, thus maintaining the seller`s guaranteed annual income source. In addition, there are often restrictions on the period of time during which the right of buyers to wear makeup exists. Makeup is sometimes lacking in other types of contracts for taking or paying for goods. d) As part of the above calculation, the Seller has adjusted the price of the quantities to be taken or paid according to the price finally paid to its supplier. Outside of the oil and gas context, “take or pay” contractual terms are often dismissed by the courts as unenforceable penalties. The courts consider these to be “lump sum damages” clauses, which must be based on a reasonable approximation of the actual harm that one party would suffer as a result of the other party`s breach. “Take or pay” generally does not meet this standard.
The reasons for the take-off or payment clauses are based on the nature of the energy projects, since the investment funds needed for the research, planning and construction of such projects are substantial. In this context, the conclusion of long-term contracts between a supplier and a customer provides suppliers with a guaranteed income, more or less on predefined terms. In this sense, these clauses act as a risk-sharing mechanism between the supplier, who has invested significant funds, often financed by banks and therefore seeking the assurance of a guaranteed income, and the customer, who seeks security of supply and a certain flexibility of prices. It also follows from the above that take-or-pay clauses act as an implicit guarantee of bank financing of a project, with take-or-pay liability often being the main guarantee. .