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What Is a Take or Pay Contract

As a rule, the fine or penalty is lower than the purchase price. Indeed, the objective of take-or-pay contracts is not to give a party an undue advantage, but to reduce risks. In the example above, Company B can sell the 20 million cubic feet of natural gas that Company A does not buy from another company. Taking or payment is a provision included in a contract in which a party is required either to accept delivery of goods or to pay a certain amount. Take or pay provisions benefit both the buyer and the seller by sharing the risk, and can benefit society by facilitating transactions and reducing transaction costs. More specifically, one of the basic principles of Directive 2009/73/EC[8] is the possibility of granting third parties access to the natural gas transmission system, i.e. each supplier has the right to access it. In this context, derogations from this rule may be requested if another natural gas undertaking already having access to the network demonstrates that it is experiencing economic and financial difficulties as a result of the “take or pay” clause it has concluded[9]. Heavier are not only the conditions in terms of the price of the quantity to be taken or paid, but also those in terms of the type of delivery and the cost of the amount of makeup.

In the latter case, the corresponding total cost to the customer must not exceed that of the seller. The take-or-pay clause of the contract between the seller and his supplier could not be more favourable in terms of key elements compared to the clause agreed between the seller and the buyer in the contract. The meaning of `more expensive terms` is not limited to the wording of those terms, but also extends to how they are ultimately implemented and the economic results resulting from their implementation. This review should take place where appropriate. The advantages of the take-or-pay contract are as follows: from the method prescribed in Article 24, it is deduced that the seller`s right to assert claims against its buyers under the take-or-pay clauses is subject to mandatory legal restrictions. Such claims may be invoked if the terms of the relevant terms of the supply contract are appropriate to the mandatory nature of the legal conditions. [16] Many contracts for the sale of LNG and gas give the buyer the right to receive a quantity of recharging equal to the amount for which a “take or pay” payment 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 first taken the TOP quantity for that year, thus maintaining the seller`s guaranteed annual income source. In addition, there are often restrictions on the period of time during which the buyer`s right to wear makeup exists. Makeup is sometimes lacking in other types of contracts for taking or paying for goods. Alternatively, if world gas prices fall during the contract, Company A could refuse to accept the gas and instead purchase gas from another supplier, Company C, at the new lower price and instead pay the agreed penalty to Company B. It is in the interest of Company A to do so if the total cost of Company C`s gas plus the penalty is less than the price originally negotiated to take Company B`s gas.

For the buyer, such contracts are also useful, since there is no obligation to accept delivery. In the above case, suppose company A finds another buyer who offers a lower price than company B. In this case, Company A will use the take-or-pay contract to terminate the contract and pay the fine. This means that, in order to determine the damage, account must be taken of the overall economic situation of the injured party, i.e. the negative and positive consequences of the injurious event[14]. investinganswers.com/dictionary/t/take-or-pay Since the purpose of compensation is to compensate the injured party for its losses and not to enrich it, any profit made by a person claiming losses resulting from a harmful event should be taken into account and reduce the amount claimed, so that the liable party is required to pay only for the actual loss, that the injured party has suffered. This is imposed by the notion of loss in the context of the theory of difference itself, according to which loss is the difference between the actual economic situation of the injured party and its economic situation if the injurious event had not occurred. Due to the unpredictability of energy markets, where prices can fluctuate due to demand and supply, sellers rely on contracts to take or pay to ensure that their revenues are safe and consistent. For energy suppliers who use pipelines, oil or natural gas to generate electricity, the huge overhead costs require some certainty that they will generate long-term revenue as expected. However, maintaining the contract often has benefits for both parties, even if an unforeseen event occurs. It is best if both parties are reasonable and cooperative and maintain a good reputation in the industry and in the business world.

As a result, most companies, governments, and other entities will allow renegotiations when external events cause disruption. The same explanatory report, which refers specifically to the limits of the law[6], further states that “Article 25(3) of the proposed law introduces provisions to protect electricity producers who conclude contracts for the supply of natural gas with suppliers of their choice. In this context, it is provided that natural gas supply contracts concluded with DEPA or third parties of the holders of an electricity generation licence may not contain more onerous conditions than those laid down in the respective contracts of DEPA or third parties with their own suppliers, in particular as regards take-or-pay clauses. It is therefore envisaged that DEPA or third parties may not impose take or payment clauses that exceed in total the sum of the obligations of DEPA or third parties towards their own suppliers. In addition, DEPA or third parties may not demand payment of the price of the compulsory expropriation, regardless of the purchase by consumers of natural gas which they supply themselves, unless DEPA or third parties are required to pay the price provided for in the cessation or payment clauses in their own supply contracts. In the latter case, DEPA or third parties shall only charge the defaulting consumers whom they themselves provide for each of them`s share of the corresponding costs of DEPA or third parties, as provided for in the supply contract between them. Because take-or-pay contracts are long-term agreements, they are vulnerable to unforeseen events that were not included in the contract. .