However, at least in the oil and gas context, courts tend to interpret ”Take or Pay” contracts as a means of providing alternative services; a gas buyer can either buy the gas or pay a deficit. In other words, the courts find that as long as the buyer buys the gas or pays for the defect, there is no infringement and therefore there is no lump sum damages, since the payment of the deficit is not a remedy, but another means of performance. The Oklahoma Supreme Court explained this presentation in Roye Realty &Developing, Inc. v. Arkla, Inc., 1993 OK 99, 863 p.2d 1150. In this case, Arkla, a gas buyer, argued that the non-payment provision in a ”Take or Pay” contract was in fact a lump sum provision for damages. The Oklahoma Supreme Court rejected Arkla`s claim and said that since over-the-counter or paid contracts are generally long-term contracts, they are vulnerable to future events that the agreement does not cover. These events can be more political, geological, commercial or more. It may happen that the contract is no longer feasible for either party after the event. Thus, the buyer or seller can terminate the contract.
As a rule, the fine or penalty is lower than the purchase price. This is due to the fact that the purpose of take or pay contracts is not to give an unjustified advantage to a party, but to reduce the risk. In the example above, Company B can sell to another company the 20 million cubic feet of natural gas that Company A does not buy. Given this vital importance, most readers would be surprised at how many times a so-called ”take or pay” contract is actually not written as such, as the business result is much less desirable than what the seller and his lenders intended to do. This mistake is not limited to inexperienced negotiators and their advice. In a recent infrastructure project with a cost of capital in over $1 billion, the parties surprisingly found that the so-called take or pay contract was not really the same, although it was described as such in the proponents` project information memorandum and signed by project lenders and a highly respected project finance firm. In another example, a buyer succeeded, in the context of a long-term gas sales contract, in reducing his ”take or pay” commitment by a decrease in market demand, which, despite the ”take or pay” nomenclature, essentially transformed the contract into a ”needs contract” (hereinafter referred to in more detail). Using only the phrase ”take or pay” in an agreement does not necessarily do so. investinganswers.com/dictionary/t/take-or-pay While a properly crafted OTC or payment clause can provide sellers and lenders with considerable comfort in ensuring that revenue streams are reasonable over the term of the contract, it is also important to ensure that the potential ”rudeness” of such payments is understandable in the worst-case scenario, and the impact of the buyer`s flexibility rights on the seller`s payment security requirements. Finally, sellers and buyers must also be attentive to the management of force majeure in a take or pay framework and take into account the precise obligations of the seller with regard to his fundamental obligation to perform the contract. As we have seen too often in recent times, these problems have been overlooked in some situations or simply embellished in the rush to reach an agreement, and the consequences of some of these mistakes in a long-term contract termination can be noticeable for many years.
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