M & J POLYMERS LTD v.

IMERYS MINERAL
LIMITED: CAN TAKE OR PAY CLAUSE IN GAS
CONTRACT BE CONSIDERED A CONTRACTUAL
PENALTY?
Ayeni Oladotun*

ABSTRACT: The recent case of M & J Polymers Limited v. Imerys Minerals Limited (Polymers
case) is the first test of English case to have explicitly considered the question of whether a take or pay
clause constitutes a penalty and whether it falls short of the English Law Rule which prohibits
contractual penalties. The Polymers case raises so many questions as to whether take or pay clauses
can be considered as contractual penalties, its effect; if its deemed a penalty, whether a failure to take
or pay a minimum under a supply gas contract constitutes a debt and what principles should be
considered when preparing a long-term gas contract in view of the rule against penalties.
This research paper shall seek to address the above questions by examining its implication on the
future of take or pay clause in gas contracts.

The author is currently completing his LL.M in Petroleum Law and Policy at the Centre for Energy,
Petroleum, Mineral Law and Policy (CEPMLP), University of Dundee. He holds an LL.B (Hons)
Degree and was called to the Nigerian Bar in 2006. Prior to his study at the CEPMLP, he worked as an
Attorney in the law firm of G. Elias & Co. (Barristers & Solicitors) in Lagos specialising in corporate
and commercial law, litigation and dispute resolution. His main interests are project finance, oil and
gas contracts and international business transactions. He is a member of the Nigerian Bar Association,
Association of International Petroleum Negotiators (AIPN), Society of Petroleum Engineers and the
Energy Institute. Email: ayeni1999@yahoo.com

TABLE OF CONTENTS

ABBREVIATIONS......iii
1. INTRODUCTION.....1
2. TAKE OR PAY CLAUSE IN GAS CONTRACTS: AN OVERVIEW.2
2.1.

Defining Take or Pay Clause as used in Gas Contracts....2

2.2

Rationale for Take or Pay Clause in Gas Contract ..3

2.3

Mitigating and Restricting the risk of Take or Pay in Gas

Contracts ..5

3. BACKGROUND TO THE POLYMERS CASE.....8

3.1.

The Facts: The Case before the Court ..............8

3.2.

The Legal Issues ...9

3.3.

The Argument and Judgment ..10

3.4.

The Rule Against Penalties .12

3.5.

The Polymers Case in relation to Take or Pay Clause ...........14

4. IMPLICATION OF THE POLYMERS CASE TO GAS CONTRACT.16

5.

4.1.

Implication to the Buyer of Gas ..17

4.2

Implication to the Seller of Gas ...17

4.3

Future of Take or Pay Clause to Gas Contracts ..........17

CONCLUSION .........18

BIBLIOGRAPHY

ii

ABBREVIATIONS

A.C.

Appeal Cases

All E.R

All England Reports

C.A.

Court of Appeal

CAR

CEPMLP Annual Review

EHWC (Comm.)

England and Wales High Court (Commercial Division)

GSA

Gas Sales Agreement

HL

House of Lords

IELR

International Energy Law Review

JENRL

Journal of Energy and Natural Resources Law

LNG

Liquefied Natural Gas

OGLTR

Oil & Gas Law and Taxation Review

PPA

Power Purchase Agreement

SPA

Share Purchase Agreement

iii

1.

INTRODUCTION

The Take or pay clause is commonly used within the energy and mining sectors in
long term Offtake Contracts, Power Purchase Agreements (PPAs) and long term Gas
Sales Agreements (GSAs). The enormous financial commitment involved in
developing the infrastructure for energy and mining projects leads the parties to such
contracts to secure the level of supply and demand throughout the life of the supply
arrangement so as to guarantee future returns on their investment. The take or pay
clause has however evolved to protect the interest of both the buyer and seller
(producer and supplier) as it guarantees a minimum income to the seller while the
buyer is assured of regular supply. 1

Despite the fact that the take or pay clause is widely used in supply contracts of
various shades and forms most especially in high risk investments in the energy
sector, the High Court of Justice, Queens Bench Division Commercial Court,
England and Wales on the 29th of February, 2008 in the recent case of M & J
Polymers Limited v Imerys Minerals Limited (Polymers case) 2 considered for the
first time whether or not a take or pay provision in a commercial agreement was
unenforceable on the basis that it amounted to a penalty; whether or not it contravenes
the English Law rule against penalties and whether or not it amounted to an action in
damages or a debt claim. In M & J Polymers Limited (M & J Polymers) v Imerys
Minerals Limited (Imerys), the High Court held that as a matter of principle, the
rules against penalties could apply to a take or pay clause in certain circumstances.
Given the frequent usage of the take or pay clause in Gas Sales Agreements (GSAs)
and in Sale and Purchase Agreements (SPAs) (where it is the sale of LNG) in the
1
2

Hodges, P., and J. Rogers, Take or Pay Clause Tested in English Courts, I.E.L.R. 3 (2008), p. 60
M & J Polymers Limited v Imerys Minerals Limited (2008) EHWC 344 (Comm.)
1

energy sector, the Polymers case raises so many questions as to whether or not take
or pay clauses can be considered as contractual penalties, its effect, if is deemed a
penalty?; whether a failure to take or pay a minimum under a supply gas contract
constitutes a debt?; what the English rule against penalties is?; what principles should
be considered when preparing a long-term gas contract in view of the rule against
penalties?; and what the effect of the Polymers case will be on gas contracts.

In addressing the above questions, an analytical approach is adopted. This research

paper shall in section 2 provide a brief overview of take or pay clauses in general,
rationale for take or pay clauses, its implications, how it is mitigated and its
restrictions. Section 3 gives a background to the Polymers case, identifies the legal
issues arising, the findings of the court, the rule against penalties and whether the take
or pay clause in a gas sales contract could be a contractual penalty? Section 4 analyses
the implications of the decision of Polymers to a seller and buyer of gas in a Gas Sales
Contract and the energy industry and the future of take or pay clauses in GSAs. This
paper shall conclude based on the legal issues discussed in the body of this research.

2.

TAKE OR PAY CLAUSE IN GAS CONTRACTS: AN OVERVIEW

2.1

Defining Take or Pay Clause as used in Gas Contracts

A Take or pay clause is often contained in long-term contracts for the sale of natural
gas. Take or pay clause can be defined as a clause that requires the buyer of gas to
receive and pay for, or (if available) pay for whether taken or not, a minimum
quantity of gas. It is a clause that obligates a purchaser to pay for a percentage of the
gas which a seller can produce, whether or not the purchaser actually takes the gas. 3

Lowe, J. S., The Take-or-Pay Wars Is Peace at Hand? 1 O.G.L.T.R (1989/90) p. 3

2

It entitles the buyer either to pay for the quantity of gas contracted to be taken in a
specified period (e.g., a day, month, quarter or year) or, if it does not take delivery of
that quantity or only part of it, to pay for the quantity not taken. The vast majority of
long-tern gas purchase contracts contains provisions which obligates the buyer to take
a minimum quantity of gas on an annual basis (minimum contract quantity), or if
the buyer is unable to take all the minimum contract quantity, to pay the producer for
the difference between the minimum contract quantity and the volume of gas actually
taken by the buyer. The payment made by the buyer to the seller pursuant thereto is
commonly referred to a take or pay payments. 4

2.2

Rationale for Take or Pay Clause in Gas Contracts

The question that should be asked at this juncture is why the need for a take or pay
clause in gas contracts or why should a buyer agree or be made to pay for gas even if
it is not used or supplied?. The reason for subjecting a buyer of gas to the take or pay
obligation is because, in the structuring of a GSA (or SPA), the seller is usually
reluctant in relying on the merchant formulation of delivering and being paid for gas
only when the buyer requests gas for delivery, because of the risk that the buyer might
not want gas and the seller will not earn any revenue 5 coupled with the sensitivity of
natural gas demand to weather conditions and economic downturns. The attendant
reluctance of the seller in relying on the market formulation of the buyer is due to the
peculiar feature of gas from oil; gas cannot be stored and transported easily in large
quantity like oil and consequently gas is more typically produced in order to meet a
demand in a specifically identified or created market. Therefore, gas is often sold and
4

Pearson, M. P., and R.D. Watt, To Share or Not To Share: Royalty Obligations Arising out of Takeor-Pay or Similar Gas Contract Litigation, 42nd Annual Institute on Oil and Gas Law and Taxation,
(Dallas, USA: Matthew Bender, 1991), pp. 11-5.
5
Roberts, P., Gas Sales and Gas Transportation Agreements: Principles and Practice, (2nd Edition),
(London, UK: Sweet and Maxwell 2008), p. 153
3

transported under a clear contractual arrangement which seeks to match up the market
demands of the buyer with the production, storage and transportation constraints of
the seller.6

Due to the above reasons, the seller will seek to protect itself from the inherent risk of
the market formulations of the buyer by obliging the buyer to take and pay for a
certain quantity of gas at any time (take and pay) or by an assured revenue through a
take or pay commitment.7 Therefore, the take or pay clause in gas contracts is a viable
tool for ensuring a steady cash flow to the sellers and collateral security to the lenders
for the enormous investment in the energy sector.8 As a viable economic tool for
enhancing gas contract, the take or pay by virtue of guaranteeing a regular cash flow
amortizes the huge initial investment of gas projects and secures the financing of the
project.9. Take or pay clause benefits the buyer as the buyer commits to pay for a
minimum quantity to guarantee a regular but flexible supply thereby meeting delivery
obligations to end users.10

One of the fundamental reasons for the inclusion of a take or pay clause in a gas
contract is to allocate the risks of the production and sales of natural gas between the
seller and buyer. The take or pay clause moves the risk of market failure from the
seller to the buyer. The seller bears the risk of production; to compensate the seller for
that risk, the buyer agrees to take, or pay for it if not taken, a minimum quantity of
gas, thus the buyer bears the risk of market demand. The sharing of price risk and
6

Roberts, P., Supra note 5 p. v

Roberts, P., Supra note 5 p. 153
8
Greenwald, G. B., Natural Gas Contracts under Stress: Price, Quantity and Take or Pay, 5(1)
J.E.N.R.L (1987), p. 1
9
Namikawa, R., Take or Pay under the Japanese Energy Policy, Energy Policy, Vol. 31 (2003), p.
1328
10
Namikawa, R., Ibid.
7

quantity risk is a common feature of long-term take or pay gas contracts11. The seller
is compensated at all times for being ready to deliver the maximum amount of gas to
the buyer and avoids the risk that he would usually have faced were the buyers
demands drop too low.12

2.3.

Mitigating and Restricting the Risk of Take or Pay Clause in Gas

Contract
The inclusion of take or pay clause in gas contracts could be onerous and unfair to a
buyer who might object to the take or pay clause on the ground that, the seller should
be free to sell its gas elsewhere if the buyer elects not to request gas for delivery.
However, the view of the buyer in this instance may not be economically justified
where the seller had dedicated gas reserves to the buyer such that they cannot be
freely sold elsewhere, or where the seller may not have access to unutilised gas
transportation capacity in order to facilitate the sale of gas to other party. 13

The take or pay clause has also been criticized for reducing the effect of competition
in the sale of natural gas by negativing the aims of competition to provide the best
service to the consumer at the lowest price because the buyer is bound by the GSA (or
SPA). The take or pay clause in gas contracts do not generally make the GSA easily
amenable to changes to reflect prevailing market situations as buyer is at a

11

Glachant, J., and Hallack, M., Take-or-pay contract robustness: A three step story told by the Brazil
Bolivia gas case? Energy Policy, Vol. 37 (2009), pp. 651 657.
12
Marseglia, E. A., Take-or-Pay Litigation The Producer Perspective: Part 2, 5 0.G.L.T.R.
(19987/88) p. 129
13
Roberts, P., Supra 4 p. 153
5

disadvantage where the demand volume for gas falls below the contracted price
coupled with the developments of spot market.14

The above enumerated risk of a take or pay clause in a gas contract could be mitigated
by amending the terms of the GSA to reflect the prevailing economic circumstances
by making the term of the GSA short, lengthening the take or pay obligation and
decreasing the percentage of the take or pay obligation.15 The GSA could also be
made flexible by a make up clause which will cater for the possibility that the buyer
will take less gas and a carry forward clause which will cater for the possibility that
the buyer will take more gas. 16 (The make up and carry forward clause are vital
tools available to the buyer to modulate its take or pay commitment in the light of
unpredictable operational and/or commercial requirements).17

Renegotiation clauses could be included in the GSA in a bid to allow the parties
materially revisit their economic interest, clarify any ambiguity or uncertainty and
redraft the basis of the GSA to reflect the present economic climate. 18 This serves to
put the disadvantaged party in a better stance commercially and to reach consensus.
Furthermore, price review clauses could be included in the GSA to oblige both parties
to renegotiate the market price of gas changes viza-viz the contract price.19
Given the difficulties encountered by many buyers of gas as a result of the take or pay
clauses, the seller may to her advantage, in the long term, afford to the buyer what is
14

Glachant, J., and Hallack, M., supra note 11 at, p. 1328; Osikilo, Y., How are the Problems of Buyer
in Long-Term Take or Pay Contracts in the Gas Industry Mitigated? CEPMLP Annual Review (CAR),
2004/2005.
15
Glachant, J., and M. Hallack, supra note 11 p. 1328
16
Roberts, P., Supra note 4 at, p. 167
17
Roberts, P., Ibid.
18
Phillips, B., Examining the Future of long term Take or Pay contracts, O.G.L.T.R Vol. 3 (1997), pp.
7374.
19
Davey, H., Take or Pay and Send or Pay: A Legal Review and Long-Term Prognosis,
O.G.L.T.R. Vol. 11 (1997), p. 421
6

in effect a take or pay holiday, so that the effective date or pay rate is reduced in
earlier years but compensated for at an appropriate rate in subsequent years of the
life of the contract.20

Despite the mitigation of the risk of take or pay contacts in the GSA, it is imperative
to state that the above explained mitigation could be restricted in a number of ways;
for example, the seller in a GSA may wish to limit or exclude completely the buyers
access to carry forward the payment for the gas; the seller could also seek for
limitations on the amount and timing of the make up quantities. The seller may also
through a mechanism called infidelity clause21 penalise the buyer for its desire to
buy further volumes of gas (or LNG) from the spot market or from someone other
than the seller by increasing the buyers take or pay liability under the GSA (SPA) but
the buyer may posit that such infidelity clause falls foul of any competition provisions
to which the GSA (SPA) may be subject or argue that the clause unjustly restricts the
freedom of the buyer to buy gas from other sources in its bid not to be bound by the
take or pay provisions.22

From the above analysis, it can be inferred that long-term obligations relating to take
or pay is an essential term for stabilising GSA (or SPA). Having discussed the
concept of take or pay clause in a GSA, including its mitigation and restrictions, it is
necessary to proceed to the crux of this research paper for a better appreciation of the
analysis.

20

Phillips, B., Supra note 18 p. 78.

Roberts, P., Supra note 10 at, p. 162.
22
Roberts, P., Supra note 10 at, p. 162.
21

3.

BACKGROUND OF POLYMERS CASE: THE RULE AGAINST

PENALTIES AND TAKE OR PAY CLAUSE

3.1

The Facts: The Case before the Court

Under a supply contract dated 25th January, 2005, M & J Polymers (claimant)
agreed to supply chemical dispersants to Imerys, subject to various provisions for
termination, the supply agreement had a three-year minimum term and a take or pay
provision. Under Article 5.3 of the supply contract, the Imerys (defendant) agreed
to buy specified minimum quantities of the products, and under Article 5.5 of the
supply contract (the take or pay clause) the defendant agreed to pay for the
minimum quantities of the products even if the defendant had not ordered the
indicated quantities during the relevant monthly period. Under Article 10.1, the
claimant warranted that the products would be (i) of the specified and ordered
quality, (ii) free from defects, (iii) in strict accordance with any specifications or
standards attached to this Agreement or to any Buyer Order , and (iv) free from any
and all liens and encumbrances and under Article 10.3, the defendant was to make
known to the claimant the purposes for which the product was required and the
claimant, based on the then state of the art, was to make sure that the product was
compatible with those purposes.23

A dispute subsequently arose between the parties as to the quality of the products
being supplied under the supply contract and that Imerys (the purchaser) neither
took nor paid for the stipulated minimum quantities. Imerys later terminated the
supply contract claiming that the product was defective and not within the agreed
specification. M & J Polymers accepted Imerys termination but treated is as unlawful
repudiation of the contract. In the period preceding the termination, Imerys was taking
23

M & J Polymers Limited v Imerys Minerals Limited (2008) EWHC 344 (Comm.)
8

less than the required minimum quantity of product and was not paying the minimum
amount specified for such minimum quantity under the contract. M& J Polymer sued
Imerys claiming payment for the minimum amount, stipulated by the contract, as a
debt.24
3.2

The Legal Issues

The legal issues that arose for determination from the facts before the Commercial
Court included: (i) whether the dispersants delivered by the claimant was fit for its
purpose under Article 10.3 of the supply contract and whether the defendant company
was entitled to refuse to accept any further deliveries of it; (ii) (a) whether the sums
due to be paid by Imerys to the M & J Polymers for a shortfall in orders for the period
prior to the repudiatory breach of the supply contract by the defendant, were
recoverable as a debt rather than damages in respect of the price of the minimum
quantities of product which the defendant was to purchase (or pay for) under the
supply contract; and (ii) (b) whether the take-or-pay clause constituted a penalty and
that the claimant should be limited to a general claim in damages for breach of the
defendants obligation to order the specific minimum quantities; and (iii) whether the
defendant has breached the supply contract by not ordering the required minimum
amount of goods. It should be noted that legal issue (ii) is the main crux of this
research paper, therefore, I shall briefly state the decision of the court on issue (i) and
(iii) while I will dwell more on issue (ii).

24

Ibid.
9

3.3

The Argument and The Judgement

On the first issue, based on the evidence presented by M & J Polymers and Imerys
coupled with internal investigations and independent tests, the court rejected Imerys
argument that it was entitled to refuse to accept any further deliveries of dispersants
by M & J Polymers on the ground that it was not fit for the purpose in breach of
Article 10(3). The court held that M & J Polymers was not in breach of Article 10(3)
of the supply contract because M & J Polymers produced the dispersants in
accordance with its contractually provided specification and the supplied dispersants
were compatible with the purpose for which Imerys required it. 25 The court also held
that Imerys was in breach of the contract by ordering less than the minimum
quantities.

In connection with legal issue (ii) above, M & J Polymer argued that the failure by the
defendant to make the minimum payment under the supply contract constituted a debt
and a breach of contract and consequently, the law of penalties did not apply. The
defendant further asserted that the claimants claim pursuant to the take or pay clause
amounted to a penalty and that the claimant must be limited to a claim for breach of
the defendants obligation under Article 5.3 of the supply contract. M & J Polymers
further buttressed its argument that its claim under the take or pay provision was a
debt by referring Burton J. (the presiding judge) to the citation in Chitty on
Contracts26 that discussed the principle of law in White & Carter (Councils) Limited v
McGregor27 where it was stated that: The law on penalties is not relevant where

25

M & J Polymers Limited v Imerys Minerals Limited (Supra).

Hugh, B., 29th Edition, 2004, Vol. 1 at Para. 26-118.
27
(1962) AC 413
26

10

the claimant claims an agreed sum (a debt) from the defendant in return for the
claimants performance of his obligations. 28

M & J Polymers also relied upon the decision of the House of Lords in Export Credit
Guarantee Dept. v Universal Oil Products Co.,29 wherein a payment to take place on a
specified event was held not to be susceptible to the law of penalties. M & J Polymers
argued that the sum was due as a price irrespective of whether Imerys had ordered the
minimum quantities or as it might alternatively be stated whether or not they have
ordered the quantities or indeed whether or not there has been a breach of clause?
and concluded that the amount due was a debt and not as damages and the rule of
penalties did not apply.

Burton J. disagreed with M & J Polymers argument and held that the sum due under
the take or pay proviso arose as damages for failure to order the minimum quantity
and therefore it was not a claim for debt but for damages and therefore the rule of
penalties might apply to take or pay clause. The court held that on the evidence, it was
clear that the take or pay clause was commercially justifiable, did not amount to
oppression, was negotiated and freely entered into between parties of comparable
bargaining power, and did not have the predominant purpose of deterring a breach of
contract nor amount to a provision "in terrorem" and therefore the take or pay clause
in Article 5.3 was not a penalty and the rule against penalties does not apply.

28

Holland, B., and P. Ashley, Enforceability of Take-or-Pay Provisions in English Law Contracts,
26(4) JENRL, (2008)
29
(1983) 1 WLR 399
11

3.4

The Rule Against Penalties

The rules against rule against penalties do not permit the enforcement of a contractual
provision which imposes a penalty on a party in default. The law does however permit
the recovery of liquidated damages. Two parties to a contract may (and within the
scope of the parties freedom of contract) as part of the agreement between them, fix
the amount which is to be paid by way of damages in the event of breach. Whether
such sum is or is not in fact recoverable from the party in breach depends on whether
the amount provided for in the agreement constitutes liquidated damages (which are
recoverable) or a penalty (which are irrecoverable).30
A penalty provision is a clause in a contract that intimidates a party into complying
with the contract by specifying an additional liability for a breach of the contract. It is
sometimes referred to as a sum in terrorem (in order to frighten). Clauses of this
nature are considered to be unjust and courts will usually not enforce them.

The English law rule against penalties prohibits the enforcement of contractual
provisions which operate as a penalty against a defaulting party. 31 For example, the
rule renders unenforceable, a provision which states that upon a breach of a contract
by one party, a sum shall become payable to the non-defaulting party in circumstances
where the amount due is not a genuine pre-estimate of loss suffered due to the
breach. 32 The English law on penalties was upheld in the case of Robophone Facilities
Limited v Blank33 wherein it was stated that a provision which has the object or effect
of acting as a penalty against a party in order to secure the performance of an
obligation under an agreement will be rendered unenforceable.
30

Beale, H., Chitty on Contracts, (29th Ed.), (London, United Kingdom: Sweet & Maxwell, 2004), Vol.
1 at Para 26-109.
31
Holland, B., and P. Ashley, Supra note 27 p. 610
32
Hodges, P., and J. Roger, Supra note 1 p. 61.
33
(1966) 3 All E.R. 128 C.A.
12

The question whether an express clause which states a sum to be recovered on breach
is an enforceable liquidated damages clause or is unenforceable as a penalty rests
essentially on whether it is a genuine pre-estimate of loss. This question was
examined in the leading case of Dunlop Pneumatic Tyre Co. Limited v New Garage
and Motor Co. Limited 34 wherein Lord Dunedin summed up the law as follows;
1. the Parties use of the words penalty or liquidated damages does not
conclusively decide the issue;
2. the case must be judged according to circumstances at the time of the
contract was made and not at the time of breach;
3. the sum will be held to be a penalty if it is extravagant and
unconscionable in amount in comparison with the greatest loss that could
conceivably be proved to have followed from the breach;
4. the sum will be held to be a penalty if the breach consists only in not
paying a sum of money, and the sum stipulated is a sum greater than the
sum which ought to have been paid;
5. there is a presumption (but no more) that it is penalty when a single lump
sum is made payable by way of compensation, on the occurrence of one or
more or all of several events, some of which may occasion serious and
others but trifling damage, and on the other hand it is no obstacle to the
sum stipulated being a genuine pre-estimate of damage, that the
consequences of the breach are such as to make precise pre-estimation
almost an impossibility. On the contrary, that is just the situation when it

34

(1915) A.C. 79, pp. 86-88. (Please see this case for a fuller explanation).
13

is probable that pre-estimated damage was the true bargain between the
parties.35

In respect of the above, the rule against penalties in English law therefore means that
a party is free to breach its contractual obligations provided damages would be paid
based on the value to be determined by the court based on established principles. 36
The adverse effects of the penalty rule is that it runs against the principle of freedom
of contract not to enforce the fairly bargained agreements and the allocation of risk
agreed by the parties and should not be extended at the expense of freedom of
contract and simply to afford relief against onerous bargains. 37 (The courts are
generally reluctant to invoke it and will do so only in circumstances of undue
oppression (for example, where there exists an inequality of bargaining power and/or
the provision is not commercially justifiable).38

3.5

The Polymers Case in relation to Take or Pay Clause and Penalty

Burton J. stated that as a matter of principle, the rule against penalties may apply.
However, on the facts of the case under review, it was held that the take or pay
provision was not a penalty because it was commercially justifiable and did not
amount to oppression, it was negotiated and freely entered into between parties of
comparable bargaining power and did not have the predominant purpose of deterring
breach of contract nor amount to a provision in terrorem.

35

(1915) A.C. 79, 86-88 as cited in Beale, H., in Chitty on Contracts, Supra. note 27 Page 26-109.
Holland, B and P Ashley, Supra. note 27 p. 611.
37
Exports Credits Guarantee Department v Universal Oil Products Co. (1983) 2 All E.R. 205 HL cited
in Roberts, P., Supra. p. 163
38
Hodges, P. and J. Rogers, Supra.
36

14

The Polymers case is important in respect of the take and pay clause as it appears to
open the take or pay provisions to attack because it found that a breach of any take or
pay clause similar to the one examined by the judge, represents an action in damages
(and consequently a penalty) not a debt coupled with the judges interpretation as to
when take or pay clauses could be treated as a penalty and consequently
unenforceable. 39 To appreciate this judgement in relation to take or pay provisions, it
is imperative to describe the distinction between a claim for a debt and for damages.
A debt is a definite sum of money fixed by the agreement of the parties as a payment
by one party in return for the performance of a specified obligation by the other party
or upon the occurrence of some specified event or condition; damages may be
claimed from a party who has broken his contractual obligation in some way other
than a failure to pay such debt.40

According to Burton J., the sellers claim was a damages claim because the obligation
of the buyer to pay under a take or pay clause arose as a result of the breach of the
duty to order the minimum quantity so the claim was subject to the rule against
penalties. He stated further that he did not see how a payment obligation can arise
under the take or pay provision except than a breach of the obligation to request for
the minimum quantity.41 The implication of Burton J.s reasoning is that most take or
pay obligations would be a penalty given the fact that it usually involves an obligation
on the buyer to order a minimum quantity of a product. However, take or pay clauses
should not be interpreted as a clause that functions only because of the breach of an
obligation to order the minimum quantity neither is it necessary to interpret the

39

Holland, B. and P. Ashley, Supra. note 27 p. 611

Beale, H., Supra. note 29 at, para. 26-009 cited in Holland, B., and P. Ashley, Ibid.
41
M & J Polymers v Imerys (Supra).
40

15

interrelation of the minimum order clause and the take or pay in a manner that makes
a claim by a seller under the take or pay clause a damage claim. 42

Despite Burton J.s reasoning for its judgment, a take or pay clause does impose an
obligation on the seller to deliver goods to the buyer while the buyer has an obligation
to take up and / or pay for the goods; the sum due being a debt. It should be noted that
take or pay payment is not payable as a penal consequence of a failure of the buyer to
take delivery of a quantity of gas equal to the buyers take or pay commitment but an
alternative method of contractual performance for the buyer, which has the option to
take the delivery of gas and to pay for it or not to take delivery of gas but still to
pay. 43

The supply contract in Polymers case did not contain a make up provision that
would have made it difficult for the buyer to argue that the take or pay provision was
oppressive and unenforceable as a penalty.

4.

IMPLICATION OF THE POLYMERS CASE TO GAS CONTRACTS

Given the widespread and common usage of take or pay clauses, had the court found
them unenforceable it would have caused major problems. By deciding they are likely
to be enforceable in all but extreme cases, the court has maintained the status quo.
Having said this, the finding that take or pay clauses could, in principle, be a penalty
has some important implications.

42
43

Holland, B. and P. Ashley, Supra. note 27 p. 12

Roberts, P., Supra. note 10 p. 163
16

4.1

Implication to the Buyer of Gas

The reasoning by Burton J. that take or pay may constitute a penalty could be
attractive to a buyer under a GSA (or SPA) which contains a take or pay obligation
resulting in the buyer being bound to buy gas (or LNG) at a price which is greater
than the price at which the gas could be bought elsewhere in another market. 44 The
Polymers case also appears to give a buyer a plausible (though difficult) argument to
avoid liability under a take or pay clause.

4.2

Implication to the Seller of Gas

The seller can take confidence in using take or pay provisions and enforcing
payments. In order to protect the interest of the seller and to guard against a take or
pay clause been deemed a penalty, sellers must ensure that their take or pay clauses
are negotiated in a manner that confirms they are not oppressive or framed as a
deterrent to breach, but rather as an estimation of damages which has been incurred
by the seller as a result of setting aside the gas for the specific buyer. Particular care
must be taken where it might be suggested that the seller has greater knowledge and
bargaining power.

4.3

Future of Take or Pay Clause to Gas Contracts

The positive impact of take or pay clause in ensuring security of a revenue for a seller
is important in enhancing the growth of new gas (or LNG) production and
transportation infrastructure coupled with the take or pay commitment which has been
shown to be a vital mechanism in the evolution of a growing gas (LNG ) markets.
However, the marriage of a long-term GSA with a take or pay obligation and a fixed
44

Roberts, P., Supra note 10 p. 163

17

contract price could be challenged by the buyer or make the buyer refuse to perform
its obligations in view of the cost of competing gas or other fuels and buyers
commitment becoming commercially unfair in view of the comparative opportunities
to buy and sell gas in the gas market. This situation was clearly demonstrated when
the rigid application of and the high commitments of the take or pay provisions in
contracts for the purchase and sale of natural gas wreaked havoc in the US gas
industry in the late 1980s and early 1990s. A similar scenario was played out in the
United Kingdom as a result the combination of the effects of deregulation,
introduction of competition, and downward pressure on gas prices which exposed
pipeline company gas buyers, who were acting effectively as middlemen in the
purchase of gas from gas producers and excess supply of gas over demand in the gas
market.
To avoid take or pay commitments from losing its viability, there is the need to revisit
the economic and legal regime of take or pay clauses by infusing flexibility into GSA
(SPA) by transcending from long-term GSAs (SPAs) to short-term GSA agreements,
inserting a price review clause in the GSA so as to mitigate the price risk or volume
risk of take or pay obligations and to make provision for the possibility of
renegotiation of GSA or (SPA) so as to ensure a balance between its mitigation and
restrictions.
5.

CONCLUSION

The benefits of a take or pay to both the buyer and seller of gas coupled with balance
between the mitigation and restriction of the risk of take or pay clauses in GSAs and
the commercial justification for its inclusion in gas contracts would most unlikely
make take or pay clauses to be unenforceable as a contractual penalty.
18

BIBLIOGRAPHY
PRIMARY SOURCES
Cases
Dunlop Pneumatic Tyre Co. Limited v New Garage and Motor Co. Limited (1915)
A.C. 79.
Exports Credits Guarantee Department v Universal Oil Products Co. (1983) 2 All E.R.
205 HL.
M & J Polymers Limited v Imerys Minerals Limited (2008) EHWC 344 (Comm.)
Robophone Facilities Limited v Blank (1966) 3 All E.R. 128 C.A.
White & Carter (Councils) Limited v McGregor (1962) AC 413.

SECONDARY SOURCES

Books

Roberts, P., Gas Sales and Gas Transportation Agreements: Principles and Practice,
2nd Edition, (London, United Kingdom: Sweet and Maxwell, 2008).

Articles

Glachant, J., and M. Hallack, Take-or-pay contract robustness: A three step story told
by the BrazilBolivia gas case? Energy Policy, Vol. 37 (2009)

Greenwald, G. B., Natural Gas Contracts under Stress: Price, Quantity and Take or
Pay, 5(1) J.E.N.R.L (1987)

19

Hodges, P., and Rogers, J., Take or Pay Clause Tested in English Courts, Vol. 3
I.E.L.R. (2008)

Holland, B., and P. Ashley, Enforceability of Take-or-Pay Provisions in English Law

Contracts, 26(4) JENRL, (2008)
Lowe, J. S., The Take-or-Pay Wars Is Peace at Hand? 1 O.G.L.T.R (1989/90)
Marseglia, E. A., Take-or-Pay Litigation The Producer Perspective: Part 2, 5
O.G.L.T.R. (1987/88)

Namikawa, R., Take or Pay under the Japanese Energy Policy, Energy Policy, Vol.
31 (2003)

Osikilo, Y., How are the Problems of Buyer in Long-Term Take or Pay Contracts in
the Gas Industry Mitigated? CEPMLP Annual Review (CAR), 2004/2005.

Pearson, M. P., and Watt, R. D., To Share or Not To Share: Royalty Obligations
Arising out of Take-or-Pay or Similar Gas Contract Litigation, 42nd Annual Institute
on Oil and Gas Law and Taxation, (Dallas, USA: Matthew Bender, 1991).

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