Take or Pay

A take or pay contract is an agreement between two parties under which the buyer agrees to pay for the supplier’s output whether or not the buyer needs the output at that time. This reduces the supplier’s risk, as they have guaranteed sales revenue irrespective of the buyer’s demand. Such an arrangement would occur where there is significant investment required by the supplier and the supplier has sufficient market power to persuade the buyer to share in the commercial risk. Such contracts are most commonplace in the supply of gas, electricity and some commodities.