Take or pay: does the law of penalties apply?

DIGEST | ISSUE 20
Take or pay:
Does the law of
penalties apply?
Dr Hamish Lal, Josephine Kaiding
and Léa Defranchi
Partner and Associates of Akin
Gump Strauss Hauer & Feld LLP
The second quarter of 2020 saw a tangible increase in the
number of queries from clients asking about the enforceability
of take or pay clauses common in supply agreements.
Intermingled with questions around force majeure, the key issue appears
to be whether take or pay clauses can be an unenforceable penalty, thus
opening up questions about the delta between the supplier’s loss relative to
the amount payable under the take or pay provision.
Take or pay agreements dealing with the supply of workers, project
management, materials or gas (the paradigm) are all affected.
English law often governs international supply agreements, and so, one
typically looks at the English case law on take or pay clauses. However, the
question whether the law of penalties applies to such provisions also opens
a wider generic debate in other jurisdictions, including whether the sums
payable can be reduced commensurate with the actual harm to the supplier.
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