Take Or Pay: Does The Law Of Penalties Apply?

Q2 2020 saw a tangible increase in the number of queries from clients asking about the enforceability of take or pay clauses common in supply agreements. Intermingled with questions around force majeure, the key issue appears to be whether take or pay clauses can be an unenforceable penalty, thus opening up questions about the delta between the supplier's loss relative to the amount payable under the take or pay provision. Take or pay agreements dealing with the supply of workers, project management, materials or gas (the paradigm) are all affected. English law often governs international supply agreements, and so one typically looks at the English case law on take or pay clauses. However, the question whether the law of penalties applies to such provisions also opens up a wider generic debate in other jurisdictions, including whether the sums payable can be reduced commensurate with the actual harm to the supplier. Put shortly: