1. Introduction

Take-or-pay clauses are common in long-term supply contracts in the energy sector, the most typical example being the contracts for the sale of natural gas between a supplier and its customers. Under the take-or-pay clauses, the customer – buyer of a supplier/seller is required to either pay the price corresponding to certain pre-agreed quantities of natural gas and offtake said quantities or pay their corresponding price regardless of whether it purchases them. On its part, the seller commits towards the buyer the availability of the pre-agreed quantity of natural gas.

2. Theoretical approach

The rationale behind the take-or-pay clauses is based on the very nature of the energy projects, as the investment funds required for research, designing and constructing such projects are significant. In this context, the conclusion of long-term contracts between a supplier and a customer ensures a guaranteed income to suppliers, more or less on predefined terms. In that sense, these clauses act as a risk sharing mechanism between the supplier who has invested significant funds often funded by banks and therefore seeks assurance for guaranteed income and the customer who seeks security of supply and some flexibility on prices. It also follows from the above that take-or-pay clauses operate as an implied guarantee for the financing of a project by the banks, the liability under take-or-pay often being the primary collateral.

Therefore, the original concept and the purpose of the clause is to balance the interests of both parties, i.e. supplier and seller (seller and consumer, respectively). The take-or-pay clause is activated when the buyer does not offtake the entire quantity of the natural gas he had ordered. In many cases, the latter is required to pay the purchase price for a minimum quantity of natural gas (make up quantity), defined in advance even if it has not purchased said quantity within the respective year. Usually, the buyer may offtake the make-up quantity in future contractual years either by paying a special price fixed anew or without any obligation to pay for the second time.

3. Historical Approach

Take-or-pay clauses are common worldwide in long-term Natural Gas Sales Contracts, both in the US and the Continental Europe.

In the US, the clause already applied in natural gas contracts in the 1960s aiming to balance the trade relations between producers and pipeline management companies.

Take-or-pay clauses ensure that the buyer will not and may not use the contract to withhold natural gas quantities without the obligation to compensate the seller. Furthermore, the seller ensures an annual fixed income, regardless of whether the natural gas market is eventually profitable for the seller, thus the downside risk in the natural gas market is passed on to the buyer[1].

Indeed, during the period of the world industrial crisis in the early 1980s, the take-or-pay clauses led to renegotiation of contracts and became the subject of legal disputes, as the buyers had assumed the obligation to purchase, regardless of offtaking, quantities far exceeding demand, whilst the prices had fallen to levels far below the value of the contract. In general, however, the validity of such clauses is not disputed in the US, as the courts validate, in theory, such agreements [2].

In the past, the Supreme Court of England and Wales also addressed the question of whether these clauses are prohibited as an excessive penalty, that is not compensatory, since the rule does not permit the enforcement of a contractual penalty on a party that has breached the agreement. On this dilemma, the Court ruled in favour of the validity of the clause, provided that it does not create contractual and economic imbalance to the detriment of one party and (provided that) the amount of damages or even the price imposed on the parties depends on the amount of the actual and specifically defined (specific) damage occurred[3].


4. The nature of the clause and the legislative regulation under national and EU law

The nature of the take-or-pay clauses is compensatory. In principle, these are clauses of pre-agreed compensation, where the buyer is in mora creditoris, which otherwise, i.e. under the general provisions of Art. 349 et seq. of the Greek Civil Code particularly in conjunction with Art. 381 of the Greek Civil Code, would lead, upon certain conditions, to the compensation of the seller, but would not entail payment of the pre-agreed financial consideration of the buyer.

Moreover, because of the nature of the clause and its impact on the natural gas market, it is proper to apply specific arrangements of mandatory law to avoid distortions of competition. This is widely the case on an international basis, given the monopolistic or oligopolistic position of the participants  of the market (mainly the suppliers).

More specifically, in Greece, Law 3175/2003[4] provides that:

(a) The natural gas supply contracts of holders of a power generation license concluded with DEPA (Public Gas Corporation of Greece S.A.) or third parties cannot contain terms that are more onerous than those laid down in the respective contracts of DEPA or third parties with their own suppliers, in particular with respect to take-or-pay clauses.

(b) The above contracts cannot contain take-or-pay clauses that, when added up as to the Customers of each party, exceed the sum of its obligations towards its own suppliers, and

(c) Claims for payment of the price based on the above clauses can only be made if the respective claim arises against the other party according to its contracts with its own suppliers.

(d) Implementation issues regarding this paragraph shall be determined by decision of the Minister for Development, following recommendation by Regulatory Authority of Energy (RAE).

(e) RAE, as part of its powers to monitor and control the operation of all energy market sectors, controls the implementation of the above obligations, in a way that promotes healthy competition and ensures consumer protection, and collects all necessary information.

The Ministerial Decision regarding the terms, restrictions and conditions laid down in paragraph 3 of Article 24 of Law 3175/2003 was never issued[5] probably because the statutory provision was deemed sufficiently defined and the interpretation and implementation guidelines remained in the direction given in the explanatory report, namely towards consumer protection.

Indeed, according to the explanatory report, “with respect to take-or-pay clauses, regulations are introduced to avoid passing on the costs resulting from these clauses to the above natural gas consumers, when such costs are not incurred by their suppliers. As a common practice, take-or-pay clauses in natural gas contracts are imposed individually on each customer and activated, i.e. to impose charges on a customer who could not absorb the minimum contractual quantity, even if its supplier is not required to pay the respective clause to a third supplier, because other customers have absorbed natural gas quantities exceeding the minimum threshold.

The same explanatory report, referring specifically to the limitations of the Law[6], further specifies that “Paragraph 3 of Article 25 of the proposed draft law introduces provisions seeking to safeguard power producers concluding natural gas supply contracts with suppliers of their choice. In this context, it is provided that the natural gas supply contracts of the holders of a power generation license concluded with DEPA or third parties should not contain terms that are more onerous than those laid down in the respective contracts of DEPA or third parties with their own suppliers, in particular with respect to take-or-pay clauses. Therefore, it is provided that DEPA or third parties, cannot impose take-or-pay clauses, which in the aggregate exceed the sum of obligations of DEPA or third parties to their own suppliers. Further, DEPA or third parties cannot demand payment of the price of the compulsory purchase, regardless of offtake by the natural gas consumers, whom they supply themselves, except where DEPA or the third parties are required to pay the price provided for respectively in the take-or-pay clauses in their own supply contracts. In the latter case, DEPA or the third parties shall charge only the defaulting consumers, whom they supply themselves, proportionally to the participation of each one of them in the corresponding cost of DEPA or third parties, as provided for in the supply contract between them.”

The above provisions of the Law are now also applicable to supply contracts concluded between Eligible Customers (industrial customers) and Suppliers[7].

Nevertheless, in light of EU law, the legal assessment of take or pay obligations should examine their compatibility with the rules set out both in the sector- specific  regulatory framework and in competition law.

More specifically, one of the fundamental principles of Directive 2009/73/EC[8] is the possibility to provide third-party-access to the natural gas transmission system, i.e. every supplier is entitled to access it. In this context, derogations from this rule may be requested where another natural gas undertaking that already has access to the network proves that it encounters economic and financial difficulties because of the take-or-pay clause it has entered into[9].

It is further equally important to assess the compatibility of these clauses, when contained in long-term natural gas supply contracts, with Articles 101 and 102 TFEU. Specifically, the inclusion of that clause in supply contracts should not lead to a distortion of competition by creating or strengthening a dominant position of certain suppliers or excessively binding the transactional freedom of their counterparties. The EU Commission has acknowledged that these clauses are not forbidden per se; however, their impact on the European market should be evaluated on a case by case basis, especially taking into account criteria, such as the location of the supplier in the relevant market and the general structure of the relevant market, the existence of alternative suppliers and the duration of the contract[10].

4.1. Drafting the terms of the Contract to comply with mandatory law

The provision of Article 24 is mandatory law, given the purpose it sets to accomplish. Gas sales contracts should adopt the statutory requirements to define the obligations arising from take-or-pay clauses and set specific conditions in raising claims under that clause. In any case, such arrangements and claims cannot lead to a breach of the parameters of Article 24.

4.1.1. Ratio between the terms of the contract between seller and buyer (customer) and the contract between seller and its supplier. The prohibition to impose more onerous terms in the Contract in comparison with the Contract between Seller-Supplier [11]

More onerous are considered not only the terms regarding the price of the take-or-pay quantity but also those regarding the manner of supply and cost of the make-up quantity. As to the latter, the corresponding total cost for the customer should not exceed that for the seller. Namely, the take-or-pay clause in the contract between the seller and its supplier cannot be more favourable as to its key elements, in comparison with the Clause agreed between the seller and the buyer in the Contract. The meaning of the “more onerous terms” is not merely limited to the wording of such terms but also extends to how they are eventually implemented and what economic results derive from their implementation. This examination should take place where appropriate.

4.1.2. Balancing the quantities of natural gas delivered to all of the seller’s customers and the quantities delivered to the seller from its supplier[12]

Take-or-pay clauses when added up as to the customers of each counterparty, should not exceed the sum of its obligations towards its own suppliers.

In that sense, in order to be able to demand from each buyer thereof to cover the cost incurred due to the activation of its own take-or-pay clause against its supplier, the seller must have exhausted its own supply terms and offtaken the make-up quantities to which it is entitled, whilst providing a detailed breakdown of the actual activation cost of that clause. This is because, if in fact the seller’s cost was zero or less than what actually corresponds to each buyer, the seller’s claim should be reduced to that amount.

4.1.3. The correlation between the seller’s claim against the buyer compared to the claim of the seller’s supplier against it[13]

The seller’s claim should be causally linked to the breach of the corresponding obligation by its customer (buyer), and not attributed to any other reason (e.g. because the seller opted to be supplied with gas from another supplier).

In order for the seller to lawfully lodge a claim against the buyer, it is necessary that the supplier of the seller has previously imposed a take-or-pay clause on the seller, solely on the grounds of failure of that particular customer to offtake the annual minimum quantity (take-or-pay quantity) and not because the seller selected another supplier or other solutions at a lower cost (e.g. purchase of LNG spot loads).

4.2. Aggregation of loss and profit

Given the compensatory nature of take-or-pay clauses, the general principles of damages are applicable and, in particular, the restrictions on the scope of damages, such as the obligation to take into account the loss suffered by the injured party (in this case the claiming seller) and any profit gained from the harmful event.

Given that the purpose of damages is to compensate the injured party for its losses and not to entail its enrichment thereof, any profit gained by a person alleging losses from a harmful event should be taken into account and reduce the amount claimed, so that the liable party be obliged to pay only for the actual loss suffered by the injured party. This is imposed by the very concept of loss, under the theory of the difference, according to which the loss is the difference between the actual economic position of the injured party and its economic position, if the harmful event had not occurred.

This means that, in order to establish the damages, the entire economic position of the injured party should be taken into account, i.e. both negative and positive consequences of the harmful event[14].

Offsetting profit and loss includes any profit the seller obtained during the performance of the contract and the parallel contract with its supplier, from arbitrage, i.e. speculative buying and selling based on the criterion of price difference between pipeline gas and liquefied natural gas (LNG). During the performance of the contract, the seller may have purchased amounts that are lesser than its own obligation towards the supplier, in order to buy LNG at more favourable prices. Provided that this is proved, the profits from this practice should be deducted from the amounts sought from its customers for the seller’s loss arising from the activation of take-or-pay clauses.

Another expression of this principle on offsetting is the common terms met in supply contracts, under which the seller should provide evidence and documentation regarding its total Annual Deficit Amounts, which under the relevant take-or-pay clause has resulted in claims against the seller by its suppliers[15].

Therefore, the seller is obliged to invoke and prove that after settlement of the contracts with its customers regarding the take-or-pay clause, the seller continues to suffer losses in connection with its contract with the supplier.

5. Concluding remarks

From the methodology imposed by Article 24, it is derived that the seller’s right to raise claims against its buyers under the take-or-pay clauses is subject to restrictions of mandatory law. Such claims can be raised if the conditions of the relevant terms of the supply contract are adapted to the mandatory nature of the statutory conditions.[16]

In particular the seller must establish that:

(a) Its losses are a consequence of the fact that the seller cannot balance its deficit with natural gas quantities delivered to other customers and any profit thereof. Upon determination of the seller’s loss and profit, the calculation of profit will take into account any positive adjustments of the selling prices of natural gas quantities to the seller from its supplier.

(b) The extent of the seller’s losses to be recovered by the buyer corresponds to the losses of its supplier to the same extent and that the supplier has already claimed compensation of such losses in the sense that there is a direct causal relationship with the failure of that particular buyer to offtake the natural gas quantities, i.e. the seller’s loss is the direct result of the buyer’s failure to offtake the natural gas quantities. .

(c) Upon calculating the seller’s loss and raising the relevant claim, the seller has taken into account any more favourable terms, the seller itself enjoys or provides for to other buyers.

(d) Under the above calculation, the seller has re-adjusted the price of the take-or-pay quantities, depending on the price finally paid to its supplier.