Take or Pay

By
rjonesx
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Definition

A take-or-pay contract is a rule structuring negotiations between companies and their suppliers. With this kind of contract, the company either takes the product from the supplier or pays the supplier a. For any product the company takes, they agree to pay the supplier a certain price, say $50 a ton. Furthermore, up to an agreed-upon ceiling, the company has to pay the supplier even for products they do not take. This “penalty” price is lower, say $40 a ton.

Take or Pay

What is ‘Take or Pay’

Take or pay is a provision, written into a contract, whereby one party has the obligation of either taking delivery of goods or paying a specified amount.

Explaining ‘Take or Pay’

This is used in some contracts as a method to ensure that the transaction occurs. For example, a Banana farmer will enter into a take or pay contract with a fruit retailer so that the retailer will buy all the bananas from the farmer or pay a provision for not buying them.

Take Or Pay FAQ

What is a put or pay contract?

A contract under which a party will supply a raw material, product or service for a certain price during a stated period and pay for an alternative supply if it cannot perform.

What is a payment provision?

Take or pay is a provision, written into a contract, in which one party can either take delivery of goods or pay a specified amount. Take or pay provisions benefit both the buyer and the seller by sharing risk, and can benefit society by facilitating trade and reducing transactions costs.

What is a throughput agreement?

An agreement to put a specified amount of product per period through a particular facility, e.g., an agreement to ship a specified amount of crude oil per period through a particular pipeline.

What is a penalty clause?

Generally, a penalty clause is a contractual provision which levies an excessive monetary sum unrelated to the actual harm against a defaulting party.

What is a minimum volume commitment?

Minimum volume commitment contracts (MVCs), often referred to as throughput agreements, are agreements in which a shipper or producer—a counterparty—undertakes to transport an agreed minimum volume of a commodity such as natural gas, NGL or crude oil through a third-party operator’s assets, at a particular period.

What is a take or pay provision?

A take-or-pay clause is essentially an agreement whereby the buyer agrees to either: (1) take, and pay the contract price for, a minimum contract quantity of commodity each year (the TOP Quantity); or (2) pay the applicable contract price for such TOP Quantity if it is not taken during the applicable year.

Further Reading

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