ABSTRACT
The “take or pay” clause is frequently found in contracts for power and energy projects such as natural gas, electricity, and oil. It has played an essential role in energy agreements both because of its historical character and the role of trade balance in the relevant market. This clause has become one of the main provisions in such energy agreements as it provides an equal distribution of risks in addition to meeting supply and demand by providing income flow. Take or pay clauses impose debts on both parties but do not constitute an ordinary debt for the buyer. This article will examine the unique characteristics of these clauses and the obligations imposed on the parties.
In this paper, the debts of the parties and the characteristics of this clause will be examined in the context of contract law.
I. INTRODUCTION
Agreements with a “take or pay” clause are agreements that impose debts on both parties. Agreements in which the parties generally agree to purchase a particular product or to provide a service are those in which the buyer is obliged to pay the amount agreed under the terms of the agreement, even if he does not receive or use this service. In other words, the take or pay clause is, in a way, an agreed guarantee of purchase between the parties. The buyer is obliged to pay even if he does not receive or use the product or service. The seller is required to deliver to the buyer the specified amount of product or service that is agreed to be sold in the agreement. The buyer is obliged to pay the seller's price to the seller under the stipulated terms and conditions of the agreement1. In this paper, the debts of the parties and the characteristics of this clause will be examined in the context of contract law.
II. THE DEBTS OF PARTIES IN AGREEMENTS WITH A TAKE OR PAY CLAUSE
In agreements with a take or pay clause, the parties should be cautious when deciding the minimum capacity (amount). In such an agreement, the buyer cannot raise any objection regarding the usage of the service provided and is liable to pay the determined amount. Therefore the parties should not enter into commitments that they cannot fulfil and should carry out the necessary investigation and research. This is because the parties will remain liable even in the event of a breach caused by the buyer, as the parties have agreed to the guarantee of purchase. If there is a breach, the buyer is committed to paying for a service that he may never use for the duration of the contract. In the event of a deficiency in the service provided due to the seller's deficiency, however, the seller is subject to the obligations under the agreement terms and any penalty conditions that may apply, which should be determined by the parties. As there is no mandatory provision in the law on the obligations and penalty conditions of the parties, the trading parties may freely determine the terms of the penalty. The critical issue here is that in such agreements, the payment will be made concerning capacity. The parties agree on the size or capacity and a payment relationship accordingly takes place. The seller produces and delivers the amount agreed in the agreement. Even if the buyer does not receive or use this amount, he is forced to pay the minimum amount as provided for under the terms of the contract.
III. TAKE OR PAY AND LONG-TERM AGREEMENTS
A. History of the Take or Pay Clause
Take or pay provisions are often found in long-term energy supply agreements. Take or pay contracts may be included in natural gas, electricity, petroleum, and other energy trading agreements. The seller shall deliver the product or service to the buyer under the contractual provisions, and the buyer shall use the product or service provided and is liable to pay the money even if he does not. It can be said that due to the conditions in these agreements, the parties are under burdensome obligations. For example, in long-term natural gas agreements, take or pay requirements are added and the price is indexed to petroleum. Thus, while the quantity risk remains on the side of the importer, the price risk remains with the exporter with the application of the price index2.
The reason why take or pay clauses are included in long-term energy agreements is related to the chemistry of energy resources. In particular, the extraction, processing, and storage of natural gas resources is a complex process3. Such processes are not confined to natural gas but occur also in the storage of other energy sources. Because the preparation of the goods required for the job takes a long time, the agreement established between the parties is a long-term agreement. The take or pay clause has essential functions in these long-term energy agreements. The first of these functions is “providing regular income flow”4. The extraction process and transport of natural gas to consumers requires considerable financial investment. To meet the significant amounts needed for the projects in question, natural gas producers agree loans with banks and they are financed through credit. Sellers can use the long-term agreements with buyers as a guarantee for the banks and thus they are provided with an income flow. Since there is more demand for natural gas in winter than in summer, natural gas producers are ensured continuity of income flow by the commitments buyers make under the take or pay clause5. The second function is “providing security of supply”. Thanks to this clause, a buyer who makes a long-term agreement is relieved of the burden of seeking a seller during periods of increased demand for natural gas6. The third function is “the distribution of risk.” Risk is not incurred on one side in these agreements; on the contrary, it is distributed between the parties. Accordingly, “the seller assumes the risks related to production, and the buyer assumes the risks related to decreases in market demand”7. The last function of the take or pay clause is the “price-decreasing effect.” The price-decreasing effect was emphasized in the case Frey V. Amoco Production Co. In a gas purchasing agreement, total revenue is the function of the quantity and price. According to this, “(b)ecause the producer will want to set a lower price to ensure that the pipeline operator receives or pays the specified minimum quantity of gas, the take or pay provision will effectively reduce the price for each unit of gas that will be required from the pipeline operator. Therefore, in the absence of a take or pay provision, the price of the gas, and thus the goodwill above it, will increase…”8.
B. The Main Functions of Take or Pay Clauses
The take or pay clause has played a conventional role in the trade of natural gas, electricity, and oil. It is necessary to examine the history of the energy industry to understand this role. In the past, due to the lack of logistic techniques, the distance that natural gas could be transported was limited. For this reason, at the beginning of the twentieth century, natural gas producers held that extracted natural gas extracted was not particularly valuable. The natural gas market is very small compared to the oil market, and it was costly to transport and produce. Initially, sales were made only to monopolies, and natural gas producers had no other customers. However, after the take or pay clause was introduced in the relevant market, the imbalance was fixed. Take or pay provisions are used in electricity generation and sales agreements, which have the same content as natural gas agreements. One of the distinctions between electricity and natural gas is that natural gas cannot be stored and has to be consumed directly, while electricity can be carried and stored more efficiently9.
IV. THE PLACE OF TAK EOR PAY CLAUSES IN TURKISH LAW
In Turkish Law, the principle of take or pay is discussed under build-operate-transfer projects. The Administration guarantees purchase of goods produced or services provided to the project. As per Article 3 of the Build-Operate Model and the Regulation on the Establishment and Operation of Electricity Generation Plants and Regulation of Energy Sales (“Regulation”), the purchase guarantee is defined as: “(a)ccording to the characteristics and location of the generation facility to be established, the amount ... of the energy (production amount) to be produced in the said production facility in terms of the balance of supply and demand under the conditions of the national electricity system as the percentage to be guaranteed by TEAŞ”10. The take or pay principle is the guarantee of purchase in the Regulation. The take or pay clause in Turkish Law has similar content to the “Minimum Purchase Commitment." Minimum purchase commitments are discussed under dealership agreements. These commitments can be found in transactions between petrol stations and dealers. They can be made as a separate agreement and parties may decide the penalty clause. According to the literature, the minimum purchase commitment has three functions. These are:
i) such provisions are penalty clauses;
ii) a regulation that states compensation as a lump sump; or
iii) except that there are two possibilities of its own regulation11.
As in the take or pay clause, there is a guarantee of purchase; the buyer commits the seller to provide a certain quantity of a product, and a penalty clause can be defined in case of breach of this obligation.
There are many cases covering the minimum purchase commitments. For instance, in a 2014 judgment, the Court of Cassation included a minimum purchase commitment. Part of the decision refers to this commitment: “(t)he plaintiff's attorney stated that in accordance with the dealership agreement dated 03.12.2004 between the client and the defendant, the defendant had violated the minimum purchase commitment and that his client would be subject to the penalty clause and deprivation of profit under Article 9/b of the agreement and demanded and sued for the decision to collect 10,000 TL from the defendant with rediscount interest without prejudice to the surplus”12. According to the article specified in the Agreement, the defendant violated his commitment and was subject to criminal terms. As in the take or pay clause, the buyer who guaranteed the purchase was obliged to pay the fee even though he did not receive the product or service. The guarantee obligation of the contracting party has an important place in such clauses. According to another decision of the Court of Cassation dated 2015, “(t)he plaintiff attorney stated that two separate dealership agreements were concluded between the parties, that the defendant acted in contradiction with the contract and provided fuel from other sources, that he did not receive the number of goods under his commitment, that the client terminated the agreement, and that the punishment was exercised in accordance with the agreement.”13. The plaintiff had breached the warranty obligation.
V. CONCLUSION
Agreements with take or pay clause are those that the parties usually agree on the sale of a product or service. However, the main distinction between take or pay clause agreements and other agreements is that the buyer is entirely liable for paying the agreed amount due to the contractual obligations regardless of whether or not he uses the goods or services. In this context, the take or pay clause appears as the buyer's guarantee of purchase to the seller. Take or pay provisions are often included in long-term energy agreements. These clauses have an essential role in the energy market, such as natural gas, electricity, and petroleum, etc. The take or pay clause has four primary functions that enable it to be used in this market. These are to ensure regular income flow and security of supply to help distribute risks, and to have a price-lowering effect. As a result of the competition between natural gas sellers and oil sellers, a solution was provided under the take or pay clause in the natural gas agreements, and the natural gas market was developed. The take or pay clause put the buyer under the obligation to guarantee risk sharing between the parties, and the trade balance in the energy market is established in this way.
BIBLIOGRAPHY
AÇIKELİ, SERKAN “Take or Pay Clauses in Purchase of Natural Gas and Relation Clauses” Published LLM Dissertation, Ankara University, Institute of Social Science, Ankara 2010.
ALİYEVA, SARA ”The Take Or Pay Clause Applied To Natural Gas Contracts In Comparative Law”, Published LLM Dissertation, Ankara University, Institute of Social Science, Ankara 2014.
BULAMA, BITRUS JOSEPH “Take or Pay’ Obligation in Natural Gas Contracts: Any Respite For The Buyer?”, 2.
BÜLBÜL, MUSTAFA OĞUZCAN “Competition in Natural Gas Market”, (Ankara: Competition Authority 2007)
YILDIRIM, MUSTAFA FADIL “Minimum Purchase Obligation in Natural Gas Supply Agreements and Legal Nature of the “Take or Pay” Clauses”, İnönü University Law Faculty Journals, 2016.
WHITE, WILLIAM H. “The Right to Recover Royalties on Natural Gas Take-or-Pay Settlements” Oklahoma Law Review, 1988, Volume:4.
The Court of Cassation, 19. C. D, E. 2014/3953, K. 2014/7865, Dated. 24.04.2014.
The Court of Cassation 19. C. D, E. 2015/976, K. 2015/6432, Dated. 30.04.2015.
FOOTNOTE
1 Sara ALİYEVA, “The Take Or Pay Clause Applied To Natural Gas Contracts In Comparative Law “ Published LLM Dissertation, Ankara University, The Institute of Social Sciences, Ankara 2014, p. 44.
2 The Decision of the Competition Board, K. 18-14/254-120, T. 08.05.2018.
3 Mustafa Oğuzcan BÜLBÜL, Competition in Natural Gas Market, (Ankara: Competition Authority, 2007) p. 13.
4 Serkan AÇIKEL, “Take or Pay Clauses in Purchase of Natural Gas and Relation Clauses.” Published LLM Dissertation, Ankara University, The Institute of Social Sciences, Ankara 2010, p. 46.
5 AÇIKEL, p. 47.
6 AÇIKEL, p. 48.
7 William H. WHITE, “The Right to Recover Royalties on Natural Gas Take-or-Pay Settlements” Oklahoma Law Review, 1988, V:4, p. 669.
8 AÇIKEL, p. 50.
9 Bitrus Joseph Bulama, “Take or Pay’ Obligation in Natural Gas Contracts: Any Respite For The Buyer?”, V 5.
10 Regulation on the Establishment and Operation of Electricity Generation Plants and Regulation of Energy Sales Art.3.
11 Mustafa Fadıl YILDIRIM, “Minimum Purchase Obligation in Natural Gas Supply Agreements and Legal Nature of the “Take or Pay” Clauses”, İnönü University Law Faculty Journals, 2016., 2016, p. 34.
12 The Court of Cassation, 19. C. D, E. 2014/3953, K. 2014/7865, Dated. 24.04.2014.
13 The Court of Cassation 19. C. D, E. 2015/976, K. 2015/6432, Dated. 30.04.2015.
