What is the difference between take-or-pay and take-and-pay?

Under take-or-pay the buyer must pay for a minimum quantity each period whether or not it takes delivery, so the seller has a revenue floor. Under take-and-pay the buyer pays only for what it takes, and may commit to nothing more than buying from this seller when it buys at all. For a lender the first can support debt sized on the minimum; the second leaves the seller exposed to the buyer's demand.

Is a take-or-pay payment a penalty?

It turns on the governing law and wording. In England the Supreme Court held in 2015 ([2015] UKSC 67) that the penalty rule reaches only obligations triggered by a breach, so a payment owed as the alternative to taking delivery is likely to fall outside it, though earlier first-instance decisions had treated some such clauses as capable of being penalties. The High Court of Australia held in 2012 ([2012] HCA 30) that the doctrine is not confined to breach. New Zealand's Supreme Court in 2020 ([2020] NZSC 53) adopted a test of whether a consequence is out of all proportion to a legitimate interest. A lender has the clause reviewed.

What is a make-up right in a take-or-pay contract?

A make-up right lets a buyer that paid for quantity it did not take receive that quantity later without paying again, usually within a set period and after it has taken that period's own minimum. It protects the buyer from paying twice. For the seller and its lender it turns part of a shortfall payment into an obligation to deliver later at its own cost, so the cash arrives early and the production cost follows.

Why do lenders like take-or-pay contracts in project finance?

Because they let a lender size long-dated debt on contracted cash rather than forecast demand. If the minimum payments cover the debt service across the loan's life, and the buyer is strong, the project's main risk becomes whether it can operate and deliver, which engineers and insurers can assess. The lender still checks the buyer's credit, the termination and force majeure clauses, the price review and whether the contract runs as long as the debt.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Take-or-Pay Contract: a Worked Example

The floor is a promise. Read who makes it, and at what price.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

For a lender, a take-or-pay contract is the part of a borrower's revenue that a customer has promised to pay whether or not it wants the goods. That changes the credit question. Instead of forecasting demand, the bank reads a contract: how much the buyer must pay for, at what price, for how long, and on what grounds it can stop. A lender to a plant whose debt service is covered by the minimum payments alone is lending against the buyer's promise, so the buyer's own credit, the exit clauses and the pricing formula carry as much weight as the plant's operations.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

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// 01 — WHY A LENDER COUNTS A PROMISE TO PAY

Most businesses sell into demand they cannot control. A lender sizes their debt on what they have earned and tests it against what a bad year might do. A take-or-pay contract removes part of that uncertainty by moving it to the buyer. Each period the buyer commits to pay for a minimum quantity, and if it takes less it pays the shortfall anyway. The seller still carries the risk of running the plant; it no longer carries the risk that the buyer's own business has a weak year.

That is why the structure turns up where a seller builds something large for few buyers: gas fields and pipelines, processing plants, storage, power and the capacity contracts behind project finance. A lender will commit long-dated debt to an asset whose output has a contracted floor, because the floor can be set against the debt service, year by year, for the life of the contract.

// 02 — HOW THE CONTRACT IS BUILT

Minimum payment = minimum quantity × contract price

Deficiency = (minimum quantity − quantity taken) × deficiency price

Make-up quantity = tonnes paid for but not taken, deliverable later

Wording varies by industry and deal, but the moving parts recur. A contract quantity is set for each year, and the minimum is written as a share of it. The deficiency price may be the full contract price or a discount that reflects the costs the seller saves by not producing. Many contracts give the buyer a make-up right, letting it take the tonnes it paid for but did not take in a later period, often within a fixed window and only after that year's minimum has been taken. Some also let a buyer carry forward tonnes taken above the minimum to reduce a later shortfall.

Around these sit the clauses that decide whether the floor holds: force majeure, which can suspend the buyer's obligation; termination rights; change-in-law provisions; and the price review. A contract can also be pure take-and-pay, in which the buyer pays only for what it takes. That gives the seller a customer, not a floor.

// 03 — THE EXAMPLE

A wood-pellet mill, constructed for this page like every figure in it, supplies a food processor that has converted its boilers from coal. The contract quantity is 150,000 tonnes a year, with a take-or-pay minimum of 120,000 tonnes at US$160 a tonne. The mill's fibre, energy and freight cost US$95 a tonne, its fixed costs are US$3.0m a year and its annual debt service is US$3.6m. These levels belong to the example, not to any market.

Full take: 150,000 × (160 − 95) = 9.75m − 3.00 = 6.75m ÷ 3.6 = 1.88×

Minimum: 120,000 × (160 − 95) = 7.80m − 3.00 = 4.80m ÷ 3.6 = 1.33×

Price reset: 120,000 × (120 − 95) = 3.00m − 3.00 = 0.00m ÷ 3.6 = 0.00×

At the minimum, the debt is still covered 1.33 times, which is the reading the bank is buying. The third line is the same tonnage after a price review that resets the contract to a market price of US$120. The buyer still pays for every tonne it promised, and the mill's margin now only just covers its fixed costs, leaving nothing for the debt. The volume floor held; the margin did not.

Make-up changes the timing, not the total. Suppose the processor takes 60,000 tonnes in a year when one boiler is down, and pays for 120,000. The mill banks US$9.6m for 60,000 tonnes it did not deliver. When the processor later takes those tonnes, it pays nothing, and the mill spends 60,000 × US$95 = US$5.7m producing them. A lender reads the shortfall payment as a prepayment owed back in pellets, and may want some of it held in reserve rather than counted as that year's earnings.

// 04 — WHAT A LENDER READS BESIDE IT

The first reading is the buyer. The floor is worth what the buyer can pay, so the lender analyses the buyer's credit much as it would a borrower's, and a contract with a weak buyer is closer to customer concentration than to security. The second is the exits. A buyer that can terminate on a plant closure, a change of control or a long force majeure event has a way out of the floor, and the lender maps every one against the loan's tenor. The third is enforceability. Whether a take-or-pay payment can be challenged as a penalty depends on the contract's governing law: English law tests only payments triggered by a breach, while Australian law can test a payment that no breach triggers. The lender's lawyers read the clause as well as the price.

The fourth is whether the bank can step into the contract. Lenders commonly take security over it and, in larger financings, ask the buyer to sign a direct agreement acknowledging the security and giving the lenders time to cure a default before the buyer terminates. Those step-in rights keep the contract alive if the seller fails.

DEFINED IN ONE PARAGRAPH → · HOW BANKS READ MANUFACTURING → · DEBT SERVICE COVERAGE →

// 05 — WHERE IT DECIDES A FILE

It decides how much debt the asset can carry and for how long. A lender that sizes on the minimum rather than the expected volume is lending against the contract and accepting that upside sales will not be counted. A lender that matches the loan's final repayment to the contract's expiry avoids lending into years when the floor has gone, which is why the remaining term of the contract often matters more than its headline quantity.

It also decides what the bank asks for in the document: an undertaking not to amend or waive the contract without consent, reporting of the buyer's takes and any make-up balance, and a review event if the buyer's credit weakens. The contract is the primary source of repayment. The bank watches it as closely as the plant.

// QUESTIONS PEOPLE ASK

What is the difference between take-or-pay and take-and-pay?: Under take-or-pay the buyer must pay for a minimum quantity each period whether or not it takes delivery, so the seller has a revenue floor. Under take-and-pay the buyer pays only for what it takes, and may commit to nothing more than buying from this seller when it buys at all. For a lender the first can support debt sized on the minimum; the second leaves the seller exposed to the buyer's demand.
Is a take-or-pay payment a penalty?: It turns on the governing law and wording. In England the Supreme Court held in 2015 ([2015] UKSC 67) that the penalty rule reaches only obligations triggered by a breach, so a payment owed as the alternative to taking delivery is likely to fall outside it, though earlier first-instance decisions had treated some such clauses as capable of being penalties. The High Court of Australia held in 2012 ([2012] HCA 30) that the doctrine is not confined to breach. New Zealand's Supreme Court in 2020 ([2020] NZSC 53) adopted a test of whether a consequence is out of all proportion to a legitimate interest. A lender has the clause reviewed.
What is a make-up right in a take-or-pay contract?: A make-up right lets a buyer that paid for quantity it did not take receive that quantity later without paying again, usually within a set period and after it has taken that period's own minimum. It protects the buyer from paying twice. For the seller and its lender it turns part of a shortfall payment into an obligation to deliver later at its own cost, so the cash arrives early and the production cost follows.
Why do lenders like take-or-pay contracts in project finance?: Because they let a lender size long-dated debt on contracted cash rather than forecast demand. If the minimum payments cover the debt service across the loan's life, and the buyer is strong, the project's main risk becomes whether it can operate and deliver, which engineers and insurers can assess. The lender still checks the buyer's credit, the termination and force majeure clauses, the price review and whether the contract runs as long as the debt.

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