Legal Nature and Validity of Take-or-Pay Clause in Longterm Gas Sale Agreements: A Comparative Study

Take-or-Pay clause (T-o-P), as an essential element of long-term off-take and supply contracts in energy sector, particularly in Gas Sales Agreements.The philosophy of T-o-P clause is based on the importance of the fact that the seller will receive a level of revenue guaranteed under the agreement that covers massive financial commitments and debts arising from the upstream project. Although T-o-P clause is frequently considered in GSAs, the validity and applicability of this condition is subject to controversy among different legal systems. Some lawyers have treated this provision as a penalty clause which is invalid and unenforceable. However, others regard it as a valid and enforceable liquidated damage clause. This paper first focuses on uncertainties and ambiguities regarding the legal status of take-or-pay provision, particularly in English legal system. Then, it discusses the issue by considering the fundamentals of Islamic contract rules and jurisprudence, particularly Iranian legal system reflected in the Iranian Civil Code.