Introduction
In our earlier article titled “Take or Pay Clauses in Fuel Supply Agreements, Ship or Pay Clauses in Transportation Contracts in the Energy Sector – Part I,” we had examined how Indian courts and tribunals generally assess claims under Take or Pay Clauses (TOPC) through the lens of liquidated damages. Section 74 of the Indian Contract Act, 1872, forms the principal basis for courts to determine whether the stipulated payment in case of non-performance is legally enforceable as a genuine pre-estimate of damages.
However, a deeper question arises: Is it possible to enforce a TOPC without invoking the typical framework of liquidated damages? Can such a payment be classified as a debt, and thereby escape the burden of proof required to establish actual loss? This question has become increasingly significant for energy sector clients of top law firms in Ahmedabad and other commercial hubs in India, especially where long-term supply and infrastructure contracts are involved.
Can TOPC Be Claimed as Debt and Not Damages?
Many arbitration lawyers in India have taken the view that the enforceability of a TOPC without satisfying the conditions of Section 74 hinges on how the clause is constructed. If the clause obligates the buyer to pay a certain sum merely for the seller making the product available—regardless of off-take—it could potentially create a primary payment obligation, thus qualifying as debt.
The seminal definition found in ‘Chitty on Contracts’—that a debt is a sum of money fixed by agreement payable in return for performance—supports this position. In practical terms, if a gas supplier has made the gas available as per contract terms and the buyer fails to lift the quantity, payment may still be enforceable as a contractual debt. Legal firms in Ahmedabad often recommend this approach to clients involved in cross-border or domestic energy transactions to reduce enforcement hurdles.
Legal Foundation: Section 38 of Indian Contract Act
Section 38 of the Indian Contract Act provides that if a promisor unconditionally offers to perform their obligations and the promisee refuses such performance, the promisor does not lose their contractual rights. Applying this to TOPC: if a seller offers gas in compliance with contract terms and the buyer refuses to off-take, the seller may still be entitled to payment.
This view reinforces the position of corporate law firms in India who advise businesses to include precise language in their contracts to support a debt-based claim if the seller’s obligation is merely to make goods available and not conditional upon the buyer’s off-take.
Judicial Precedents: Debt vs. Damages
Indian courts have not explicitly ruled on TOPC enforceability as a debt, but foreign jurisprudence offers a wealth of guidance. In M&J Polymers Ltd. v. Imerys Minerals Ltd., the clause was treated as liquidated damages. Conversely, in White & Carter (Councils) Ltd. v. McGregor, a similar clause was enforced as a debt.
The UK Supreme Court’s ruling in Cavendish Square Holdings BV v. Talal El Makdessi clarified that a primary obligation to pay, conditional upon non-performance, is not necessarily a penalty. This distinction is increasingly adopted by international law firms in India advising on cross-border transactions.
Strategic Contract Drafting for TOPC
The enforceability of TOPC depends heavily on contract language. Best law firms in Ahmedabad and corporate law firms in India often suggest that the clause should not mention payment as a penalty or secondary obligation. For example, stating: ‘Buyer shall pay X for availability of Y commodity regardless of actual off-take’ creates a primary obligation.
Clauses should also define what constitutes ‘availability’—such as written confirmation of readiness, storage conditions, or physical delivery locations. Clarity here ensures that the seller has evidence of having fulfilled their obligations and strengthens their claim for payment as debt.
Pleading Strategy in Arbitration or NCLT Proceedings
Top law firms in Ahmedabad and arbitration lawyers India advise clients to frame their pleadings based on performance rather than breach. The claim must be positioned as a result of the seller’s fulfillment of obligations and not the buyer’s default. This helps avoid judicial scrutiny under Section 74.
In NCLT proceedings where such claims are filed as part of insolvency petitions, classifying the claim as a financial debt can significantly impact the success rate. Corporate lawyers representing clients in energy and transport sectors must ensure pleadings avoid references to ‘penalty’ or ‘compensation,’ and instead use terms like ‘consideration,’ ‘primary obligation,’ and ‘debt due.’
TOPC Claims Post-Termination
If the contract is terminated prematurely, then the seller’s claim is more likely to be considered as one for damages. In such a scenario, the seller is asserting that the termination was unlawful or in breach of contract terms. This brings the matter squarely within the realm of Section 74.
Even in such cases, however, experienced corporate law firms in Ahmedabad and PAN India suggest bifurcating the claim: one part as damages for breach (post-termination) and another as debt for any quantities made available and not taken prior to termination. This dual-approach increases the enforceability of at least a portion of the claim.
Conclusion
Take or Pay Clauses, when strategically drafted, offer a unique opportunity to structure enforceable claims outside the scope of liquidated damages. The key lies in contract formation, clarity of obligations, and precision in pleadings. Whether dealing with energy contracts, infrastructure projects, or long-term supply agreements, the advice of specialized legal experts is essential.
Firms such as R&D Law Chambers, one of the best law firms in Ahmedabad, continue to support clients across India in drafting contracts, resolving disputes, and representing in arbitration or insolvency forums. Their expertise in commercial, contractual, and arbitration law enables businesses to avoid pitfalls and maximize enforceability of payment terms under TOPC.