What is Take or Pay?
Take or pay is a contract that obligates one party to either take possession of certain goods or pay a certain amount.
How Does Take or Pay Work?
Let's say John Doe is a beet farmer in Scranton, Pennsylvania. He usually grows about 10,000 bushels of beets a year. Company XYZ is a pickling company and offers to buy 10,000 bushels from John in two weeks. Because John wants to ensure that the deal happens, he inserts a take or pay clause into the purchase contract, which obligates Company XYZ to either buy all the beets as agreed or pay John $150,000.
When Company XYZ decides it wants to pickle onions instead of beets, John falls back on the contract and tells Company XYZ to either come and get its 10,000 bushels of beets or cut a check for $150,000. If Company XYZ opts to cut the check, John still has the beets and can sell them to someone else.
Why Does Take or Pay Matter?
Take or pay contracts ensure that a transaction occurs and that the person supplying the good or service is not left high and dry. They are most common in the energy industry, where natural gas providers and other suppliers agree to buy fuel or pay an amount to walk away.