Introduction
In our article named – “Take or Pay clauses in a fuel supply agreements, Ship or Pay Clauses in transportation contracts in Energy Sector, Enforceability thereof and attendant maters – Part I”, we analysed that Indian Courts and quasi-judicial bodies have been deciding the TOPC claims based on principles of liquidated damages contained in Section 74 of the Indian Contract Act of 1872.
We further pointed out that as highlighted in our article on liquidated damages and enforceability of the same:-
- For a claim under the liquidated damages clause to succeed, breach of contract must be established.
- The liquidated damages clause must represent a genuine pre-estimate of the damages or loss.
- It must be established that the damage and loss have actually been suffered.
- In cases where damage and loss are difficult or impossible to prove, the liquidated amount named in the contract, if found to be a genuine pre-estimate of damages or loss, will be upheld by the court.
In this article we seek to address the aspect as to whether it is possible to Claim the amount under a Take or Pay Clause(TOPC) without satisfying the condition for liquidated damages?
Whether TOPC claim can be successfully made without proving damages?
Could a successful claim under TOPC be for a debt as against damages?
The author believes that if TOPC claim is properly put forth as a debt claim against the claim for liquidated damages, it could be possible to avoid the tests of liquidated damages as postulated under Section 74 of the Contract Act.
Whether the TOPC liability could qualify as debt depends on careful drafting of the contracts, the background thereto, and also on the pleadings in the proceedings. For detailed reading on what could qualify as debt, we recommend reading of our article captioned as “Debt versus damages and significance thereof in various commercial contract”.
In terms of chitty on contracts (31st addition in Sweet & Maxwell, 2012), debt is a definite sum of money fixed by the agreement of the parties as a payment by one party in return for the performance of a specified obligation by the other party or upon the occurrence of some specified event or condition; damages may be claimed from a party who has broken his contractual obligation in some way other than a failure to pay the debt.
Looking at the definition, the author is of the view that if a contract is drafted in such a way that consideration under a gas sales agreement is not the actual sale of the gas by the seller or of take-off of the same by the buyer, but it is the seller’s performance of its obligation to make the gas/oil/any other items available for delivery to the buyer, it will create reciprocal obligation of buyer to pay for or instead of gas off-take.
In terms of the definition of the debt, once the seller performs this specified obligation, it should be entitled to the consideration amount as is specified in the contract.
Analysing the aspect in light of provisions of Indian Contract Act(ICA), relevant section will be s.38 of ICA, which reads as under:-
“38. Effect of refusal to accept offer of performance.—Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. Every such offer must fulfil the following conditions:— (1) it must be unconditional; (2) it must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do; (3) if the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver.
It could be in such circumstances when the agreement provides for consideration to be paid by the buyer as against the consideration of sailors making the quantity of a given commodity available, fulfilling the obligation of the seller to make such commodity available to the buyer will create a debt and it becomes immaterial whether the buyer complies with its obligation to offtake the quantity made available by the seller or not.”
Thus, in light of s.38, it could be argued that when the seller makes an offer to perform his part i.e. makes the gas available to buyer and buyer does not off-take the same, the seller should be entitled to all its contractual rights (including the payment in terms of TOPC).
Court Pronouncements on the issue
Author has not been able to find any judgments from Indian Courts on TOPC in form of debt claim. However, there are English Court judgments treating failure by buyer to “take or pay” as a breach giving rise to a claim for damages and there are also certain other decisions treating the claim under Take or Pay Clause as a claim for debt as against damages.
M&J Polymers Ltd. v. Imerys Minerals Ltd.1 and E-Nik Ltd v. Department for Communities and Local Government2 conclude that failure by the buyer to “take or pay” is a breach giving rise to claim for damages and decision in White & Carter (Councils) Ltd. v. McGregor4 and Euro London Appointments v. Claessens International5 treat the failure to “take or pay” as debt claim.
UK Supreme Court in the case of Cavendish Square Holdings BV v Talal El Makdessi, being reluctant to disturb a commercial agreement, held that:-
“where a contract contains an obligation on one party to perform an act, and also provides that, if he does not perform it, he will pay the other party a specified sum of money, the obligation to pay the specified sum is a secondary obligation which is capable of being a penalty; but if the contract does not impose (expressly or impliedly) an obligation to perform the act, but simply provides that, if one party does not perform, he will pay the other party a specified sum, the obligation to pay the specified sum is a conditional primary obligation and cannot be a penalty………………………………………………………………..
It is true that clever drafting may create apparent incongruities in particular cases. But in most cases parties know and reflect in their contracts a real distinction, legal and psychological, between what, on the one hand, a party can permissibly do and what, on the other hand, constitutes a breach and may attract a liability to damages for – or even to an injunction to restrain – the breach.”
Contract Drafting Considerations and pleadings for Successful debt claim under TOPC
For the amount to qualify as a debt, it will be required that the contract does not stipulate the obligation to make the payment of such amount as a secondary obligation. For example, if the contract provides “during the term of this agreement, the buyer shall be obligated to take and pay or pay for, if not taken, the awarded sales gas volume as per the provisions of this agreement”, in author’s opinion, it contains a primary obligation to take and pay and only a secondary obligation to pay in case of failure to take the gas.
Such a clause provided in TOPC in the form of a secondary obligation is more likely to qualify as a clause for liquidated damages as against a clause which simply provides that against sellers making the quantity of gas available to the buyer, buyer will be required to pay the specified amount, which is more likely to qualify as a debt.
It will be beneficial to also provide in the contract as to what will be deemed to amount to Making the gas/oil available to the buyer, to avoid any arguments and counterarguments in that regard.
Added to the above it will be essential to clearly make the claim under such clause for the amount against the consideration to the buyer of seller’s making the quantity of the gas available to it. Due care should be taken to formulate the pleadings in the proceedings accordingly and avoid any pleadings indicating that there was a failure on the part of the buyer to meet its obligation resulting in liability (in which case the amount will be more likely to be qualified as damages).
TOPC Claim Post-Termination of Contract
As against a claim of TOPC for actions/ inactions during the currency of the contract, in case, the buyer terminates the contract before the expiry of contract duration, the claim of seller after termination is very much likely to qualify as claim for damages as what seller will be claiming in such case is wrongful termination of the contract making it a case of breach of contract terms.
Author: Ruchika Bhatt & Hiteashi Desai, R&D Law Chambers LLP
Email: info@rdlawchambers.com
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