A Take-or-Pay clause guarantees that the seller gets paid for a minimum amount of product or service, even if the buyer doesn’t fully utilize what they’ve contracted for. Essentially, the buyer either “takes” the agreed-upon amount or “pays” for it anyway. For instance, if a buyer agrees to take 1,000 units of gas per year but only takes 800 units, the buyer will be subject to a fine on failure to take the delivery of the remaining 200 units from the seller.

This mechanism is vital in capital-intensive industries like energy and mining, where projects often require huge upfront investments. Without guaranteed payments, securing financing for large-scale gas projects or mining operations would be much riskier.

Buyer could face significant financial penalties in the event of a breach of the take-or-pay clause. Buyer must be certain of its needs and have its own offtake agreements in place.

For Seller, a breach could result in: protracted litigation that would disrupt business operations; strain on seller’s ability to meet debt obligations or financing conditions; inefficiencies and increased costs as the seller would need to find alternative buyers for the excess quantity not taken; regulatory issues if buyer’s offtake is required to maintain operational licenses or quotas.