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Take or Pay

Definition

A take-or-pay contract is a rule structuring negotiations between companies and their suppliers. With this kind of contract, the company either takes the product from the supplier or pays the supplier a. For any product the company takes, they agree to pay the supplier a certain price, say $50 a ton. Furthermore, up to an agreed-upon ceiling, the company has to pay the supplier even for products they do not take. This "penalty" price is lower, say $40 a ton.

What is 'Take or Pay'

Take or pay is a provision, written into a contract, whereby one party has the obligation of either taking delivery of goods or paying a specified amount.

Explaining 'Take or Pay'

This is used in some contracts as a method to ensure that the transaction occurs. For example, a Banana farmer will enter into a take or pay contract with a fruit retailer so that the retailer will buy all the bananas from the farmer or pay a provision for not buying them.

Take Or Pay FAQ

What is a put or pay contract?

A contract under which a party will supply a raw material, product or service for a certain price during a stated period and pay for an alternative supply if it cannot perform.

What is a payment provision?

Take or pay is a provision, written into a contract, in which one party can either take delivery of goods or pay a specified amount. Take or pay provisions benefit both the buyer and the seller by sharing risk, and can benefit society by facilitating trade and reducing transactions costs.

What is a throughput agreement?

An agreement to put a specified amount of product per period through a particular facility, e.g., an agreement to ship a specified amount of crude oil per period through a particular pipeline.

What is a penalty clause?

Generally, a penalty clause is a contractual provision which levies an excessive monetary sum unrelated to the actual harm against a defaulting party.

What is a minimum volume commitment?

Minimum volume commitment contracts (MVCs), often referred to as throughput agreements, are agreements in which a shipper or producer—a counterparty—undertakes to transport an agreed minimum volume of a commodity such as natural gas, NGL or crude oil through a third-party operator's assets, at a particular period.

What is a take or pay provision?

A take-or-pay clause is essentially an agreement whereby the buyer agrees to either: (1) take, and pay the contract price for, a minimum contract quantity of commodity each year (the TOP Quantity); or (2) pay the applicable contract price for such TOP Quantity if it is not taken during the applicable year.

Further Reading


Valuation of path-dependent contingent claims with multiple exercise decisions over time: The case of take-or-pay
www.jstor.org [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

Risk mitigation in take or pay and take and pay contracts in project financing: the purchaser's perspectiveRisk mitigation in take or pay and take and pay contracts in project financing: the purchaser's perspective
www.inderscienceonline.com [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

How long does it take to pay back rangeland improvement investments? A case study from Erzurum Province in TurkeyHow long does it take to pay back rangeland improvement investments? A case study from Erzurum Province in Turkey
www.publish.csiro.au [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

Small business uniqueness and the theory of financial managementSmall business uniqueness and the theory of financial management
www.econstor.eu [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

Some aspects of the pure theory of corporate finance: bankruptcies and take-oversSome aspects of the pure theory of corporate finance: bankruptcies and take-overs
www.jstor.org [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

Discussion on “take or pay” contracts in gas businessDiscussion on “take or pay” contracts in gas business
en.cnki.com.cn [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

Regulating bankers' payRegulating bankers' pay
heinonline.org [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …

Effectiveness of CEO pay-for-performanceEffectiveness of CEO pay-for-performance
www.sciencedirect.com [PDF]
… However, the maximum daily purchase quantity in the contract is not increased to allow for make-up volume. B. The Economic Purpose of Take-or-Pay Purchase Contracts Since take-or-pay contracts are not commonly encountered in academic lit …



Q&A About Take or Pay


What is Take or Pay?

Take or pay refers to a contract where the buyer must either take delivery of goods and services they have ordered, or pay for them.

Why would a seller want a take or pay contract?

A seller may want a take or pay contract because it ensures that they will receive payment even if their product is not accepted by the buyer.

Why would a buyer want a take or pay contract?

A buyer may want a take or pay contract because it allows them flexibility when ordering products from suppliers. They can choose whether they want to accept delivery of an order, depending on how much inventory they already have on hand at any given time. This gives them more control over their inventory levels than if they were required to accept all deliveries under an FOB (free on board) shipping arrangement with no option for return shipments without penalty . p Investopedia contributors come from a range of backgrounds, and over 2&43; years there have been thousands of expert writers and editors who have contributed. p html ""

What does the term "pay" refer to in this context?

The term "pay" refers to paying for goods and services.

Who uses take or pay?

Take or pay is used in some contracts as a method to ensure that the transaction occurs. For example, a Banana farmer will enter into a take or pay contract with fruit retailer so that the retailer will buy all the bananas from the farmer or pays for not buying them.

What does the term "take" refer to in this context?

The term "take" refers to taking delivery of goods and services.

Who uses take or pay contracts?

Both buyers and sellers use take or pay contracts.

What is take or pay?

Take or pay is a provision, written into a contract, whereby one party has the obligation of either taking delivery of goods or paying a specified amount.

Why do people use take or pay?

Take or Pay helps to ensure that transactions occur and also gives an incentive for parties to fulfill their obligations under the contract.

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