Take or Pay Obligations in Fuel Supply Agreements: An Overview

Contractual clauses that obligate the buyer to take delivery of a pre-determined quantity of natural gas or other fuel or pay the monetary equivalent of the pre-determined quantity of fuel in case of failure to take delivery are known as take or pay (TOP) clauses. TOPC (TOPC) have been justified from the seller’s point of view on the ground that these clauses help the seller recoup substantial capital investment.

TOPC have been in vogue in the natural gas industry for more than half a century. At the same time, they have been criticised as anti-competitive and anti-consumer. Consequently, the validity of TOPC has been challenged in judicial forums on numerous legal grounds.

The challenges have been more frequent when end-consumers, such as power-producers (using gas as the raw material), are unable to use the committed quantity of gas for consumption owing to circumstances beyond their control. TOPC have also been questioned especially when the prices of natural gas supplied are higher than those of alternative fuels or spot market prices, thereby encouraging buyers to go for such sources, and in economic rescission where demand for gas would be considerably lower than anticipated by the buyer.

Consonant with international practice, TOPC are prevalent in fuel supply agreements in India. In the forthcoming paper to be published in the Dr. Ram Manohar Lohiya National Law University Journal (2020), the manner in which these clauses have continued to be used in fuel sales agreements despite legal challenges under the rubrics of various laws in India has been analysed.

The paper first provides a brief overview of the history and the economic rationale for the continued use of TOPC. It describes the legal developments pertaining to the clause from competition law, contract law and electricity law perspectives. Considering the use of such clauses world over, an international perspective is also provided. The paper concludes by arguing that although TOPC are here to stay, various abuses surrounding TOPC have been, and are being, duly addressed in Indian law.