The exact definition of the buyer`s demand (e.B. which facilities? which area? what period? maximum demand levels?) can be somewhat complex in a requirements contract. If the Buyer fails in its obligation to obtain its goods requirements only from the Seller, the Seller`s loss will be the profit it would have made from the Buyer on the goods it would otherwise have sold (less any proceeds from the resale of the Goods received by the Seller from a discount sale) and, as such, the damages available to the Seller, and the seller`s obligation to mitigate its loss is similar to those that apply to a breach of an obligation to take and pay. In addition, under the ”take and pay” compensation formulation, which requires the seller to reduce and resell quantities of LNG that have not been taken from the buyer, the seller may likely run a higher risk of having to resell the cargo at a significant discount, especially at times when the market is heavily buyer-centric, as has been the case in recent years. In the case of such a mitigation resale (compared to lump sum compensation), in some cases the seller may be exposed to a higher risk of litigation with the original buyer, focusing on whether the seller acted reasonably when it committed to achieving the highest possible resale price in connection with its resale. As described above, a usual deduction of the TOP quantity is a commodity that the seller could not deliver. When drafting a take-or-pay clause, it should be carefully observed that the buyer cannot prevent the delivery of the goods and then claims that it should be a deduction of the TOP quantity. To resolve this problem in a ”take or pay” contract, the best legal and formulation practice for a seller is to provide that its obligation is fulfilled when it offers or makes available the agreed quantity of goods for delivery to the buyer, rather than declaring that the seller must deliver the goods to the buyer. There are a number of English cases which seem to equate the offer of delivery with the actual delivery, but these cases did not occur in the single contractual situation where the buyer`s obligations are in the alternative, and these cases are therefore distinguishable for such reasons. Such cases are also contrary to UCC`s arguably more well-founded practice, which states that the seller`s obligation is fully fulfilled if it offers the buyer the specified quantity and quality of the goods to be delivered to the agreed place of delivery. On the other hand, with regard to the reduction of volume fluctuations, a buyer is generally not entitled to plan and maintain catch-up quantities under a ”take and pay” contractual structure, since the payment made by the buyer at the time of its loss is intended to compensate the seller for the value of its loss, instead of giving the seller the full contract price for the quantity not taken back, regardless of its possible resale. In other words, the buyer`s failure to take a cargo (or part of it) is monetarily regulated at the time of such a failure. This means that the seller does not have to withhold a certain amount of excess production capacity on its LNG export project to ensure that it can meet its contractual obligation to plan and deliver catch-up quantities, nor does it have to move the vessels in its fleet to deliver quantities of make-up.
This is perhaps the main reason why portfolio sellers seem to strongly prefer the take-and-pay contract structure to the more traditional take-or-pay contract structure. Therefore, contracts to be taken or paid encourage utilities to invest in the business. Such agreements serve as an assurance to suppliers that they would recover costs. In the absence of such a contract, the Supplier shall bear all risks, including the cancellation of an order by the Buyer due to price fluctuations. In any take-or-pay clause, careful structuring is necessary to avoid the possibility that a buyer will have to pay for a quantity of goods that he has not taken due to a case of force majeure that has prevented performance by the seller or buyer. Since the buyer`s obligations under a take-or-pay clause are alternately formulated, the occurrence of a case of force majeure may excuse the buyer`s failure to take the TOP quantity, but does it exempt the buyer from paying the seller for this quantity not taken? As long as payment can be made, the seller will argue that the buyer can fully fulfill its contractual obligations by paying the amount of the shortfall or payment applicable at the end of the year. The main distinguishing feature of a ”take and pay” contract is that any failure by the buyer to take the minimum contractual quantity is a separate breach of contract for which the seller must make a corresponding claim for damages, and if the buyer actively objects to the seller`s claim, it can take a long time before the seller can claim its damage. Unless the contract contains a lump sum compensation provision for this type of breach, the Seller must prove, among other things, that it proves its actual loss and efforts to mitigate such damage when it makes amends for such breach. All this will usually take a long time. Many LNG and gas sales contracts give the buyer the right to receive a catch-up quantity equal to the amount for which a take or pay was made in subsequent years (in some cases, even for a short period after the expiry of the contractual period). As a rule, this makeup can only be taken after the buyer has taken the TOP amount for this year for the first time, thus maintaining the seller`s guaranteed annual income source.
In addition, there are often restrictions on the period of time during which the right of buyers to wear makeup exists. Makeup is sometimes lacking in other types of contracts for taking or paying for goods. Here are the advantages of the ”take or pay” contract: In addition to overhead, there are two other reasons why energy projects opt for such ”take or pay” contracts: As the JFTC acknowledges, the structure of the ”take or pay” contract was originally developed to provide the seller with a guaranteed source of income, which, in many cases, is necessary to support the significant initial investment and financing of an LNG export project. However, the JFTC questions the necessity and enforceability of take-or-pay obligations under Japan`s antimonopoly law, which apply after the seller has repaid its debt financing and receives a full return on its initial investment. Most observers of the LNG industry know that any proposal or comment from the Japanese government, even if it does not have the force of law, tends to affect at least the contractual requirements and methods of Japanese buyers. In this case, it may well be that JFTC`s criticism of the traditional ”take or pay” contract structure is in fact due to previous comments by Japanese buyers to the JFTC during the investigation. Regardless, the JFTC`s comments are likely to lead to a more vigorous attempt by Japanese buyers to push LNG sellers to hire contractual structures that deviate from the traditional contract structure to take or pay. Since the so-called LNG buyer market has continued to exist in recent years, a large number of long-term LNG purchase contracts have been concluded with portfolio sellers.
One of the most notable results of this event was the abandonment of the traditional ”take or pay” contract structure and the emergence of alternative contractual structures such as take-and-pay and take-or-cancel contractual structures. The recent popularity of these alternative contractual structures tends to support the conclusion that many LNG buyers who have attempted to break with the traditional contractual structure of taking or paying must now consider viable alternatives. The recent JFTC report, which criticizes the traditional contractual structure and questions its continued viability under Japanese competition laws (especially in the country where most of the LNG has been sold and is being sold in the short term), highlights the fact that serious cracks could now form at the basis of the contractual model previously built by the LNG industry for long-term sale. LNG term. .