Abstract

Take-or-pay (ToP) provisions are widely used in long-term offtake and supply agreements. A ToP provision is a clause that provides that a buyer must pay for specified quantities of a good or service from a seller, even if the buyer is unwilling to take such quantities. In its most basic format, a ToP clause requires a buyer to either (1) purchase and take a minimum contract quantity (the ToP quantity of a good or service delivered) or (2) pay the applicable contract price for that portion of the ToP quantity of goods or services not taken. Despite their wide use, or perhaps as a consequence of it, sometimes ToP contracts are employed even when the underlying circumstances make their utilization inconvenient. This article intends to shed more light on the defining characteristics of ToP provisions - and the projects they are applied to - by presenting an overview of (1) the reasons determining how and when they can be utilized and (2) whether a buyer and a seller should engage in this type of agreement. We also detail the circumstances in which the utilization of ToP provisions is not appropriate.