Take Or Pay Clause Case Analysis

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2.2.4 JUDICIAL INTERPRETATION OF TAKE OR PAY CLAUSE AND THE RULE AGAINST PENALTY

The first English case to have deliberated upon the question of whether a take-or-pay clause could fall foul of the English law rule, which proscribes penalties emanating form a contract is the 2008 case of M&J Polymers Ltd. vs. Imerys Minerals Ltd., . A critical analysis of this case is of utmost importance because it was held , the ToP clause was not held to be a penalty, the court however, noted that there are instances where a ToP provision might violate the English rule against penalty.

A. Polymers Case: Facts in Brief

Claimant was supplying chemical dispersants to defendant, pursuant to a supply contract dated 25th January 2005. The contract had
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Findings of the Court

Though in this case there were several issues adjudicated upon but in respect of the present project — firstly, whether the ToP clause gives rise to a debt rather than damages; and, secondly, whether the ToP clause constituted a penalty.

C. ToP Claims – Debt or
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A party may be obligated to pay damages where it has broken its contractual obligation in some ways other than a failure to pay such debt.41 In this particular case, the court held that the defendant’s obligation to pay arose due to a breach of its obligation to order the minimum quantity, hence, the claimant’s claim was a damages claim, which was subject to the rule on penalties.42

It must be noted that many ToP provisions are coupled with an obligation on the buyer to order a certain quantity and would fall within the rule against penalty. In the light of this judgment, there may be two simple ways of drafting ToP provisions in order to avoid payments being construed as damages, rather than a debt.43

Firstly, if a ‘make-up’ right is included in the contract, it would be extremely difficult to construe the amount paid as damages rather than debt, since the paying party is simply making a payment for the future performance of an obligation.

Secondly, where a commercial imperative does not exist to compel the buyer to take the product, then it is advisable for the contract to clearly state that the buyer ‘may’ order quantities of the product, instead of imposing any obligation on the buyer that

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