A take-or-pay contract, or a take-or-pay clause within a contract, is a payment obligation agreed between companies and their suppliers or customers. With this kind of contract, the company/customer either takes the product from the supplier or pays the supplier a penalty. For any product the company takes, it agrees to pay the supplier a certain price, say $50 per ton. Furthermore, up to an agreed-upon ceiling, the company is required to pay the supplier even for products it does not take. This "penalty" price is lower, say $40 a ton.Take-or-pay contracts are common in the energy industry and, in particular, for gas sales; see volume risk.
Outside the oil and gas context, "take or pay" contract terms are often rejected by courts as unenforceable penalties. Courts look at these as "liquidated damages" clauses that must be based on a reasonable approximation of the actual damage that a party would suffer due to the other party's breach. "Take or pay" generally does not meet that standard.
At least within the oil and gas context, however, courts tend to construe "take or pay" contracts as providing a means of alternative performance; a gas purchaser can either buy the gas or pay a deficiency amount. In other words, courts find that so long as the purchaser either buys the gas or makes the deficiency payment no breach has occurred and, therefore, there are no liquidated damages because the payment of the deficiency amount is not a remedy but is instead an alternative means of performance. The Oklahoma Supreme Court explained this rationale in Roye Realty & Developing, Inc. v. Arkla, Inc., 1993 OK 99, 863 P.2d 1150. In that case, Arkla, a gas purchaser, argued that the deficiency payment provision in a "take or pay" contract really was a liquidated damages provision. The Oklahoma Supreme Court rejected Arkla's contention, stating:
In the United Kingdom, a take-or-pay clause included in a contract between M&J Polymers and Imerys Minerals was found to be "commercially justifiable" in a 2008 ruling.[1]