Australia: Take or Pay contracts in the mining and energy sectors - a double-edged sword?

Explore - insights from the DLA Piper Mining Sector - Issue 1
Last Updated: 21 December 2013
Article by Matthew Saunders and David Harley

Take-or-Pay contracts are fundamental to the effective operation of contracts across the mining and energy sectors, but times change and what seemed a good deal may look very different when you are on the wrong end of the bargain. Matthew Saunders and David Harley suggest ways for buyers and sellers to protect themselves in a dynamic market.

Take-or-pay contracts are fundamental to the effective operation of contracts across the mining and energy sectors, providing certainty of income to sellers, a crucial feature for projects with very large initial capital investment. They are vital for project proponents who have invested large amounts of capital into a project for start-up purposes, and now need the commercial certainty of guaranteed income in order to finance project loans – indeed, lenders will often not fund projects without take or pay commitments in place to provide certainty of the ability to repay financing loans.

So far, so commercially prudent. But for every seller of a commodity or of a service such as rail haulage, there is a buyer – and times change; what seemed a good deal in the context of a certain competitive dynamic in a given market may change profoundly, or a market may shrink in size, sometimes overnight. Recent negative changes, especially in the Chinese economy, have led to falling demand for minerals across the board. All of a sudden take or pay obligations look different; for buyers they are excessively onerous where a market has disappeared and for sellers they may be a lifeline where products can no longer be sold on the "open market". Either way, the relevant contractual clauses will come under greater scrutiny, with those on the "wrong" end seeking to find a way of removing, or at least mitigating the burden. So what should parties be bearing in mind with such obligations?

The problem with take-or-pay clauses is that they are inherently vulnerable in times of economic difficulty and both sides are at risk if the take-or-pay commitment becomes too far removed from the reality of the current market.

On the buyer's side, clearly if markets are falling the obligation to pay for a commodity or service which is now over-priced, unsellable or simply economically burdensome is a significant draw-back. Sellers however should be alive to the fact that if prices crash, the most obvious consequence is a dispute caused by non-payment. Even if the legal solution to a dispute is relatively straightforward, it can still be costly in both time and money to bring the necessary legal proceedings to force a buyer to comply with their obligations. The added problem with take-orpay contracts is that more often than not the legal issues they raise are extremely complicated.


A take-or-pay obligation is effectively pointless if the buyer is going to become insolvent because of the weight of its take/pay obligations. Sellers should:

  • Investigate the buyerfs ability to pay before the clause is agreed
  • Consider the complexity of the relevant insolvency laws that will apply
  • Require sufficient payment security for a year. Where a buyer chooses not to take delivery, in some sectors it is often not required to make interim payments and can wait until the end of the relevant period to pay the amount specified.

Given the scale of burden that such clauses can impose, it is hardly surprising that ingenious (or desperate) counterparties are running novel legal arguments seeking to undermine the critical obligations of take-or-pay contracts.


Recent cour t decisions in Australia and the United Kingdom leave miners open to a potential legal challenge on the basis that take-or-pay obligations amount to a penalty and are unenforceable.

To avoid this risk, sellers should take care to ensure that take-or-pay arrangements are commercially justifiable and, to the extent possible, achieved through arms-length commercial negotiations. They should consider including a provision for re-pricing of the commodity depending on the prevailing market conditions. This has long been a feature of long-term gas supply contracts, and the attractiveness of the flexibility it provides is clear.

In the gas sector, clauses generally give a right to seek negotiation of revised pricing if over a stipulated period of time there is change in the relevant defined market such that the gas can no longer be "economically marketed". Of course, this does not avoid disputes (scores of arbitration lawyers, including the authors, have spent many months arbitrating such clauses) but they do render workable against changed market conditions what are often very long term take-or-pay obligations.

Interestingly though, such clauses are less common in commodities contracts outside of the gas sector. Why such re-pricing provisions have not spread widely into other commodity sectors is unclear, not least because the sustainability they lend to contractual bargains would seem to have advantages for both sides to the bargain.


Most business people will be familiar with the expression 'force majeure'- a standard clause in contracts that allows one party to cancel/suspend the contract or be excused from its performance on the basis of an event occurring that is beyond its control.

English law does not recognise a doctrine of force majeure outside of the wording of the contract itself so it is entirely up to the parties themselves to specify what constitutes 'force majeure' in relation to their agreement. (In stark contrast to many civil law regimes, where it does have an agreed meaning.)

The risk, of course, is that if it is not in the contract, it is not covered.

Let us imagine that a buyer is prevented from taking delivery because an earthquake has destroyed its processing plant and it cannot receive, store or process the commodity it is still committed to purchase. It could be argued by a seller that a buyer's real obligation under the take-or-pay contract is to pay for the commodity or service. The actual ability to pay will not be affected by its factory being destroyed. All that would do is make it very difficult (but not physically or commercially impossible) for them to pay (because of the likely adverse financial consequences). Unless the contract specifically refers to such a situation, these parties are in for a protracted legal dispute.

It is important to note that in English law economic hardship, even very severe economic hardship, will not be considered a force majeure event.

If such an "escape route" is wanted then express "economic hardship" provisions must be drafted, but such clauses are often vague and there is always the difficulty of objectively assessing when sufficiently severe "economic hardship" has arisen. And that means the lawyers get involved.

This, in brief terms, is a clause which excuses a party from performance where it has become unduly economically onerous for them to do so. Usually though there is a requirement for the parties to renegotiate their agreement, rather than simply letting one side "off the hook".

A problem with these clauses is that they are also open to quite different interpretation in civil and common law jurisdictions. Because economic hardship clauses are seen as a type of force majeure clause, all the risks and difficulties inherent in that doctrine apply to economic hardship clauses as well. In a common law system, everything will turn on the definition of "hardship" used in the contract. There is a good deal of unavoidable uncertainty, making this an especially fertile area for litigation and arbitration lawyers (hence, this article!).

For both buyer and seller, the key point is to consider whether the take-or-pay obligation is absolute or whether it is qualified in certain circumstances, such as in the event of force majeure or failure to supply.


Another consideration for parties to a take-or-pay contract is the law of the place of dispute resolution ("lex fora") they have agreed and whether they have chosen litigation or international arbitration.

The lex fora may often not be the same as the law which governs the contract. For instance, a Chinese company could contract with an Australian company concerning commodities being mined in Australia. The law chosen for the take-or-pay contract is English law, but England would clearly not be a convenient location for hearing any dispute. Hence the parties choose Australia as the place of dispute resolution (or perhaps Singapore as a seat for arbitration). This means that the Australian/ Singaporean courts will be asked to apply English law. This is fairly common and courts are used to doing so, but it is just another consideration to bear in mind (not least because "sophisticated" courts may find this easier to achieve than others). The law of the place of dispute resolution will also affect the procedure of any dispute process which may be relevant as to how various issues are proven by use of expert and factual evidence.

A final consideration with take-or-pay contracts is that the dispute resolution process may also be affected by "mandatory" local laws, usually of the place where the contract is being performed. These are laws which cannot be contracted out of in a domestic situation through parties deliberately choosing a different governing law in order to circumvent them. The issue becomes very complicated when the contract is not domestic because it has an international element and legal doctrine in this area is far from clear or settled across different jurisdictions. Cynics (including the authors) observe that resort to mandatory law can sometimes represent little more than a "fig leaf" covering a court seeking to give a party "home player advantage" through negating the otherwise valid choice of a neutral foreign law. Clearly, this is an area in which it is prudent to seek specialist legal advice.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.