Take-or-Pay: How to Structure Minimum Obligations Without Creating Unnecessary Liabilities

In the complex landscape of long-term commercial relationships—especially in sectors that require high levels of investment and guaranteed supply—the Take-or-Pay (ToP) clause serves as a fundamental tool for risk allocation.

In simple terms, it establishes a minimum purchase obligation for a product or service over a specific period or the payment of that minimum amount if the product or service is not taken. It is a mechanism in which the customer assumes the demand risk, guaranteeing the supplier a base revenue regardless of actual consumption. This structure thus differs from a standard supply contract, in which the obligation to pay is tied to a specific purchase order.

The clause has its origins in long-term contracts in the U.S. natural gas sector, dating back to the 1930s. The construction of gas pipelines and the development of gas fields required high initial investments with long-term and uncertain returns. Producers needed demand guarantees to secure financing, while buyers needed a stable supply. Over time, the model expanded to other sectors, such as the pharmaceutical industry.

The use of this clause offers the following strategic and financial advantages:

• For suppliers, it ensures predictable revenue to amortize initial investments and cover fixed operating costs, mitigates the risk of demand volatility, and facilitates access to long-term financing; and,
• For buyers, it ensures a guaranteed supply, protects against supply shortages or abrupt fluctuations in spot market prices, and enables strategic planning of their operations.

However, drafting and negotiating a ToP clause requires caution. It is recommended that companies pay attention to practical aspects, such as:

• the establishment of carry-forward mechanisms (i.e., the possibility of drawing on the volume paid for in future periods);
• the possibility of offsetting excess volumes from one year against a subsequent period in which the minimum is not consumed;
• the application of a possible discount on the unit price in the case of “pay” (payment without volume withdrawal), especially when reduced consumption is communicated in advance (e.g., through purchase forecasts submitted throughout the contract), to the extent that the supplier will not incur the full production costs covered by the full price;
• the setting of a margin that is lower, as a percentage, than that provided for in the binding schedule, such that, if that percentage is reached, the ToP clause will not be triggered;
• the establishment of any supervening conditions that exempt the exercise of the clause or necessitate a renegotiation of the terms, such as a drastic reduction in demand for the product in a given year or the launch of a competing product on the market, requiring an adjustment to the minimum guaranteed volume for subsequent periods;
• the establishment of payment obligations on the part of the supplier in the event that it fails to provide the minimum guaranteed volume required by the customer.

During the term of the contract, it is essential that suppliers actively enforce this clause to avoid the risk of suppressio, even if the contract contains a provision in its final clauses stating that the silence or inaction of one of the parties shall not constitute a waiver of a right or agreement with a particular fact or conduct. Prolonged and unqualified inaction in collecting amounts due for minimum volumes not consumed may, under the principle of objective good faith, create a legitimate expectation on the part of the customer that this right has been waived, resulting in the loss of the right to demand such payments.

For buyers, the major challenge during the execution phase is to assess whether it is more advantageous to pay the availability fee (pay) or to actually take delivery of the unconsumed minimum volume (take). This cost-benefit analysis must take into account not only the value of the product itself but also all associated logistics costs, such as the expenses of maintaining excess inventory and the operational risks of product destruction and loss.

In interpreting the ToP clause, the Brazilian judiciary has consistently held that it constitutes a principal obligation rather than a penalty clause. The prevailing trend, therefore, is to preserve the binding force of the clause, recognizing its importance for legal certainty and the efficient allocation of risks.

In an increasingly dynamic business environment subject to uncertainty, the proper structuring and management of contracts containing the ToP clause are essential for the sustainability and success of large-scale projects, requiring specialized legal counsel and a keen strategic vision.

Therefore, negotiations regarding such clauses must be preceded by an in-depth analysis of litigation risks and market projections. At the same time, it is essential that the wording be precise and unambiguous, avoiding ambiguities that could lead to losses, litigation, and unnecessary costs.