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Long term gas sale agreement
CAN A TAKE OR PAY CLAUSE IN A LONG TERM GAS SALE AGREEMENT AMOUNT TO A PENALTY AGAINST A PARTY TO THE CONTRACT: A LEGAL REVIEW
ABSTRACT: Long Term GSA is fundamental to the development of the natural gas market because the inherent nature of gas makes any development of it highly capital intensive and market oriented. A gas producer will only undertake a significant upfront capital investment for gas where there is an available market backed up with guarantees to assure minimum cash flow to the gas producer, provide collateral security to lenders to support the investments. To ensure that the purchaser buys and pays for the gas, Top provisions are provided for in a GSA.
Situations however arise where a purchaser is in breach of his TOP obligation and wants to avoid liability by alluding to payment made pursuant to a TOP obligation as a separate obligation constituting penalty. This paper will seek to answer the question by examining the concept of TOP, its features, Objectives and components and the concept of Penalty under English Law. This paper will review the competing judicial views of the UK and the USA regarding the legal character of TOP. Finally, this paper will review the case of M & J POLYMERS LTD V IMERYS MINERALS LTD and analyse the willingness of Burton to entertain the possibility of the penalty rule applying in certain circumstances, review the circumstances, make findings of fact and answer the question as to whether or not the Top clause can constitute penalty.
* The author is a practicing Petroleum & Energy Industry lawyer with requisite experience in oil and gas, power, transnational investments and commercial transactions. Admitted as a Barrister and Solicitor of the Supreme Court of Nigeria, he holds an LLM in Commercial Law and he is currently an LLM candidate of Petroleum Law and Policy of the CEPMLP, University of Dundee.
TABLE OF CONTENTS
LIST OF ABBREVIATIONS 3
1. INTRODUCTION 4
2. CONCEPT OF TAKE OR PAY 6
2.1 Meaning 6
2.2 Objectives 7
3. COMPONENTS OF TAKE-OR-PAY PROVISIONS 9
3.1 Make Up Rights 9
3.2 Carry Forward Rights 10
4. CONCEPT OF PENALTY UNDER ENGLISH LAW 11
4.1 Meaning and Features of Penalty 11
4.2 Relevance of Penalty Rule to TOP Provisions 13
4.3 Distinction between Penalty and Liquidated Damages 14
4.4 Review of M & J Polymer’s Case 15
4.5 Review of Burton, J’s conclusions
5. CONCLUSION 17
LIST OF ABBREVIATIONS
ACQ – Annual Contract Quantity
ATOPQ – Annual take-or-pay Quantity
BCM – Billion Standard Cubic Metres
CEPMLP – Centre for Energy, Petroleum and Mineral Law and Policy
DCQ-Daily Contract Quantity
EC – English Court (or High Court of England and Wales)
GSA – Gas Sales Agreement
IEA – International Energy Agency
LNG – Liquefied Natural Gas
MDQ-Minimum Daily Quantity
OECD – Organisation for Economic Co-operation and Development
TOP – Take-or-Pay
UK – United Kingdom
USA – United States of America
ROI – Return on Investment
Natural Gas developments are financed by significant upfront fixed costs through the use of long term GSA. This is because their development takes longer than that of oil due to the longer pay back period for Gas which is required because of the high investment and operation costs as well as the long nature of gas sales contracts. 
GSAs are simple contracts that bring the gas producer and purchaser into a network monopoly relationship with clearly defined rights and obligations arising from the significant upfront capital investment involved in gas fields and other long term infrastructure to bring the gas delivery points to the purchasers.
Peter Roberts  has argued that the customary allocation of risk in a GSA is that the seller is responsible for the economic and operational risks involved with developing and completing the gas project to ensure gas gets to the purchaser, whilst the purchaser is responsible for the commercial and regulatory risks associated with ensuring a sustaining market for the gas.
These contract provide the medium through which the aspirations of the gas producer and purchaser are maintained because whilst it offers the gas producer guarantees of minimum cash flow and by extension collateral security to the lender, it offers the purchaser regular, albeit flexible supply of gas.
Parsons describes the use of long term contracts as
“The vast majority of natural gas field development and LNG projects are organised and financed using long term take or pay contract for the sale of the gas..........’’ 
Long Term contracts have been utilised for many years to deal with the long term nature and high specificity of investments in all parts of the gas chain from exploration and production to the final consumer, such that production is linked to the final consumer in a way that allows the participants to hedge their long term risks of gas supply and earn an adequate return on investments (ROI) or compensation for a final source. 
The natural consequence of delivering a gas project is a high capital cost such that gas producers are usually reluctant to invest in high fixed gas project without the comfort of a long term purchase commitment to protect their investment. 
Natural gas investments are only undertaken where there is potential demand because of the substantial capital outlay involved;  in the absence of a market, gas producers need to be assured that the buyer will buy and pay for the gas to enable them get the necessary financing and minimum returns on Investment.
To ensure that buyers pay for gas, gas producers introduce the concept of Take-or-Pay (TOP) obligation into gas contracts where a purchaser is under a contractual obligation to pay for a pre-agreed minimum quantity of gas whether or not the quantity is actually taken during the contract period. The Top obligation is often expressed as a percentage of the Annual Contract Quantity (ACQ) for each year, subject to such adjustments of makeup and carry forward rights that may accrue to the purchaser.
The obligations between the gas producer and the purchaser are diametrically opposed to each other to the extent that regardless of fluctuations in demand, the gas producer must necessarily rake in some minimum revenue, whilst the gas purchaser takes the sole responsibility of the contract because whether he takes the minimum quantity or not, he must pay for the gas.
Situations however exist under a GSA where gas purchasers are in breach of their TOP payment obligations and to escape liability consequent upon their breach, have tended to allude to the TOP payment as a separate obligation and therefore a penalty.
This paper will adopt the analytical approach and seek to examine the role of a TOP obligation in a long term GSA, its features, objectives and components in chapters 2 and 3 vis-a-vis an examination of the concept and features of penalty under English law in chapter 4 with the aid of Judicial authorities. This paper will also review the competing views on the legal character of TOP to aid our understanding of the differences between liquidated damages and penalty.
Finally, this paper will review the case of M & J Polymers Ltd v Imerys Minerals Ltd  and analyse the willingness of Burton to entertain the possibility of the penalty rule applying in certain circumstances, review the circumstances, make findings of fact and conclude in Chapter 5 by answering the question as to whether or not the Top obligation can constitute penalty.
CONCEPT OF TAKE-OR-PAY
The existence of an available market is fundamental to the development of a Natural Gas Market and in the absence of a market, gas purchasers need to be sure that the purchaser will buy and pay for the gas before any investment is made. The mechanism to ensure that the buyer pays for the gas is the TOP Clause because it assures minimum cash flow to gas producers, guarantees collateral security to lenders for capital intensive projects in the energy sector and security of supply to purchasers. 
Johnson has described the TOP clause as the most important provision next to the pricing provisions in natural gas sale contracts.  and a purchaser is under a contractual obligation to pay for an agreed minimum quantity of gas whether or not the quantity of gas is actually taken during the contract period. The TOP obligation is expressed as a percentage of the Annual Contract Quantity (ACQ) for each year, but given its objective, there is no reason why it cannot be averaged over a longer period up to and including the life of the contract subject to such adjustments by way of carry forward and makeup rights that may accrue to the purchaser. 
The TOP is a device to overcome the price and volume risks by obliging the buyer to take and pay for a certain quantity of gas at anytime or by securing revenue stream under a take or pay commitment.  because the buyer may require the flexibility to take delivery or not to take delivery of gas as its operational needs dictate with a subsequent right to recover the quantities that have been paid for but not taken. 
According to Masten, the purchaser of gas is required through TOP to pay the seller for a contractually specified minimum quantity of output, even if delivery is not taken so that the seller obtains minimum revenues regardless of the effect of changes in consumption. 
The existence of alternative obligations has been stated as fundamental to Top provisions because if the contract required the consumer to’ take ‘ a certain minimum quantity of gas and stopped ,and the consumer breached this provision, the measure of damages would be extremely nebulous 
A Top Clause must of necessity be distinguished from the Take-and- Pay Clause which requires a seller to sell and deliver gas and the buyer is required to take delivery of and to pay for such gas. A fundamental difference is that the obligations under a Take and Pay provisions are conjunctive as distinct from the alternative obligations under a Top clause  such that if the purchaser does not take the minimum quantities of gas, he is not in breach.Also, the Take and Pay obligation does not give purchasers enough flexibility like the Top and for this reason it is unattractive to gas purchasers  . .
2.2 Objectives of a Top provision
A Top provision ensures that a gas purchaser buys and pays for gas; it guarantees a certain minimum revenue to the gas producer so that the gas producer can achieve bankability of the production guaranteeing cash flow to the gas producer, provides the lender with a greater security and creates the opportunity to consider limited recourse financing 
Dr. Thomas Walde  has advised that a long term commitment to take the output is required to encourage gas development and that a Government guaranteed long term sales contract is similar to a take or pay contract and is desired for a fledging and undeveloped local market, because of its guarantee of reliability of demand.
A Take or Pay is a veritable tool in the evolution of the infant gas market because of the security of revenue stream it guarantees for the gas producer and the development of new gas infrastructure; TOP provisions not only guarantee minimum revenues for the producer, but also allow such producers to stay in business due to the fact that producers frequently borrow money to finance their exploration and development programs, on the security of income from their producing properties. 
lt has been stated that TOP provisions also allow a hedge for the volatility of prices such that it distributes the risk of gas production and sales between the producer and the purchaser with the producer bearing the risk of production and the purchaser bearing the risk of market demand. 
3. COMPONENTS OF TAKE-OR-PAY PROVISIONS
3.1 Make-up clause
Make-up or recoupment provisions allows the buyer to take, without payment a quantity of gas valued at the amount of the deficiency payments paid in previous periods  . This clause is often inserted in the TOP provision to protect the buyer so that he can recoup any minimum payments paid to the producer: this pre-supposes the buyer takes in excess of the minimum quantity and sets off this excess against any prior minimum payment. 
A make-up clause should ideally be the solution for all the purchaser’s problems only if he is able to take some gas in one period, he can then recover the payments already made being the value of the gas in the next periods of the contract.ln practice however, the application of make-up clauses have some limitations which impede the equality of the quantity paid to the quantity taken. These limitations to total recovery of payments are: 
The purchaser’s opportunity to recoup make up gas always has a time limitation such that if the purchaser does not exercise its right to recoup within time, possibly a five year period, the purchaser will lose all rights to minimum payments not recouped.
The TOP clause is a function of a maximum quantity of gas available- Maximum Daily Quantity (MDQ) – established in the sale contract (generally the TOP quantity is set as a percentage of the MDQ). In this sense, the producer is obliged to provide that quantity of gas and no more. It does not matter if the demand is higher; he has to contend with the maximum quantity available.
Thus, the maximum quantity clause may prevent complete recapture or payments if the buyer needs more gas than the maximum allows.
Reduction or Limitation of production capacity
A depletion of the well or reduction in the production capacity of the producer may prevent total recoupment because other wells producing for the same formation could deplete the reservoir or decrease its production capacity before a purchaser could recoup gas paid for, but not taken.
At the end, taking “make-up gas" is commonly referred to as “recoupment" of the TOP. As a result, top payments do not always represent a loss to the purchaser, however, if a purchaser exercises its make-up rights, Top payments may function as an advance payment for gas actually taken. 
3.2 Carry-forward Clause
Carry forward clause works exactly opposite to the make-up clause. It pre-supposes a reward for the purchaser, who at a particular period took and paid for quantities above the TOP limit, thus allowing him the right to transfer the volume taken above the contracted quantity to the next periods, in order to bring the quantity he has taken to his TOP limit.
4. Concept of Penalty under English law
In Robophone Facilities Ltd. V Blank  the court stated that a provision under English Law which has the object or effect of acting as a penalty against a party in order to secure the performance of an agreement by that party will be rendered unenforceable.
Thus, the English law rule against penalties prohibits contractual provisions which operate as a penalty against a defaulting party, for example the rule renders unenforceable a provision which provides that upon a breach of a contract by one party, a sum shall become payable to the non defaulting party in circumstances where the amount due is not a genuine pre-estimate of loss.
The Law regarding Penalties and liquidated damages is a function of active case law resulting in the case of Dunlop Pneumatic Tyre Company Ltd V. New Garage and Motors Company Ltd  , where Lord Dunedin outlined a series of rules to help ascertain whether a stipulated sum constitutes penalty or Liquidated damages.
Whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into, the predominant contractual function of the provision was to deter a party from breaking the contract (in which case it is a penalty) or to compensate the innocent party for breach with a genuine pre-estimate of damage (in which case it is a liquidated damage clause)
A clause will be construed as a penalty clause if the sum specified is “extravagant and unconscionable" in comparison with the greatest loss that could have been proved to have followed from the breach.
A clause is likely to be a penalty if the breach of contract consists only of not paying a sum of money, and the amount stipulated as damages is greater than the sum that ought to have been paid.
There is a presumption (but no more) that a clause is a penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage".
An agreed payment clause is not a penalty merely because a precise pre-estimation of loss is impossible.
Aside from the above requirements, the court in Export Credits Guarantee Department v Universal Oil Products Co  has held that for a provision for payment to constitute penalty it must provide for payment upon breach of contract.
Regardless of these rules, the courts  are generally reluctant to interfere with parties freedom of contract or conclude that a particular clause is oppressive or penal especially when it has been agreed by commercial parties who are capable of protecting their own interest in the bargaining process.
The English High Court has held in General Trading Company (Holdings) Ltd v. Richmond Ltd.  that the penalty clause jurisdiction is the exception and not the rule. The fact that the penalty clause jurisdiction is the exception and not the rule does not mean it should be ignored for example a clause which takes account of the interests of one party only and fails to acknowledge the legitimate interests of the other on termination of the contract was considered a penalty clause in Cine Bes filmcilik Yapimcilik V. United International Pictures. 
There are however three ways to evade the penalty rule viz
First is that the penalty clause rule does not apply to a clause which simply accelerates an existing liability, for example a contract that requires payment immediately on entering into the contract and allows the other party to pay by instalments. However, if there is a default in the instalmental payment, then the balance becomes immediately due and payable; the court held in Protector Loan Company V. Grice  that this type of provision is not subject to the penalty rule.
Second is to state that the amount is payable on an event which is not a breach of contract. The penalty clause rule applies only to sums of money which are payable on breach of a contract as was the case in Euro London Appointments Ltd. V. Claessens International Limited. 
Third is to avoid specifying that a particular sum of money will be payable on breach of a contract. If the parties make particular obligations conditions of the contract, then if one party fails to perform that obligation, the innocent party can accept the breach as a repudiatory breach of contract and he will be entitled to damages as held in Lombard North Central Plc. V. Butterworth. 
4.2 Relevance of Penalty Rule to TOP Provisions
Take or Pay Clauses are for the benefit of the gas producer and the purchaser; the gas producer gets a guaranteed minimum cash flow with regards to the sale of gas, whilst the purchaser is guaranteed security of supply subject to flexibility to change his nominations based on his operations and make up rights enabling the purchaser within a specified period to take gas paid for but not taken.
The penalty rule is relevant to the Top provisions because of the similarity in the likely financial consequences between a penalty clause and a liquidated damages clause which is attendant upon a breach of a take or pay provision.
There were two features of a usual Top obligation which were not in the M&J’s Case which made it potentially like a penalty. The first is an alternative obligation which is independent of a breach of contract; Take or pay clauses only require the buyer to pay a minimum amount whether he takes the gas or not.Conversely,for a TOP clause to be a penalty clause there is usually a separate obligation consequent upon a breach.
In M&J Polymer’s case, there was a separate obligation and it is likely that the existence of that obligation was what informed Burton J’s willingness to entertain the possibility that a take or pay clause could amount to penalty in certain circumstances because the take or pay provision was inextricably linked to the obligation on the purchaser to order a certain minimum quantities of the product which when breached resulted in a sum becoming payable.
There are two competing views, regarding the legal character of a TOP clause, one of which is that the obligation is a contingent obligation independent from a breach whilst the other is that it is a separate obligation, the breach of which results to damages.
The second feature of a TOP clause that was absent in the instant case is that the payment of the take or pay amount in this case did not entitle the purchaser to any make up or recovery rights as the existence of a make up right could vitiate the purchaser’s claim to the Top clause being a penalty clause
4.3 Distinction between Penalty Rule and Liquidated Damages
There are two competing approaches regarding the legal character of a Top obligation i.e. whether it constitutes a penalty or a liquidated damage.
The American approach as illustrated by the case of Colorado Intestate Gas Co Inc V. Chemco Inc. 
considers the Top Payment to be a separate obligation amounting to liquidated damages for the breach of contract.
The British approach as illustrated in the case of Coneco. Ltd V. Foxboro Great Britain  considers a Top obligation is to be a contingent obligation to pay a minimum bill independent of the breach of contract claims.
Liquidated damages clauses have come under heavy criticism as they are couched like penalty clauses, there is however a very thin line between whether a term that provides for certain amount to be paid in the event of a breach of contract will be construed as a liquidated damages clause or a penalty clause.Generally,a liquidated damages clause is one that allows the parties to know their potential liability in advance and set amount is recoverable and enforceable, whilst a penalty clause may not be enforced beyond the actual loss of the innocent party.
Following the basic rules established by the courts in determining such clauses, a clause would be considered a liquidated damage and enforceable if the clause represents a genuine pre-estimate of the loss which is likely to be occasioned by the breach.
The function of that clause is to fix the sum which is repayable irrespective of the actual loss suffered by reason of the breach. The sum stipulated in the liquidated damages clause is recoverable, even though that sum is greater or smaller than the loss which has actually been suffered.
However, if the sum stated in the clause is not a genuine pre-estimate of loss, it is a penalty clause and un-enforceable. The aim of such a clause which the courts have held impermissible is to punish the party in breach;
The distinction between whether a clause is a liquidated damages clause and a penalty clause rests ultimately on the intention of the parties at the time the contract was entered into, that is, was the clause a genuine bona fide attempt to assess the loss likely to be occasioned by the breach or was it designed to punish the party in breach.
The House of Lords in the Dunlop Pneumatic Case evolved the ‘genuine’ requirement followed by a different approach of the ‘reasonable’ requirement substituted by Jackson, J. in Alfred McAlphine Capital Projects Ltd. V. Tilebox Ltd  .
The Court in Elphinstone v. Monkland Iron and Coal  have held that the fact that the Parties have described the clause as a liquidated damages clause or a penalty clause is a relevant fact but not conclusive as the court will consider as a question whether it is a penalty or a liquidated damages clause.
4.4 Review of M&J Polymer’s Case
Before attempting a review of the conclusions in M&J Polymer’s case, it would be relevant to state the facts.
M&J Polymers (the Claimant was supplying chemical dispersants for use in breaking of clay to Imerys Minerals (the Defendant). The supply contract contained a take-or-pay clause requiring the defendant to either take or pay for a minimum quantity of the product. Specifically, the supply contract provided that the defendant would pay for minimum specified quantities, “even if they together have not ordered the indicated quantities during the relevant monthly period". A dispute arose between the parties regarding the quality of the product. The supply contract was terminated by the defendant who had claimed the product was not within the agreed specification (the court found this to be a wrongful termination). In the period prior to the termination of the supply contract, the defendant was taking less than the required minimum quantity of product and not paying the maximum amount specified for such minimum quantity.
One of the issues before the court was whether:
The Take-or-Pay clause constituted a penalty and that the Claimant should be limited to a general claim in damages for breach of the defendant’s obligation to order the specific minimum quantities.
In considering this issue, Burton J considered a series of cases cited by the Claimant and concluded that “as a matter of principle, the rule against penalties may apply (to a take or pay clause)". However, he went on to determine that a take-or-pay clause was not the “ordinary candidate for such a rule".
Burton J, referred to the following principles to assist him in determining whether a take-or-pay clause would offend the rule against penalties.
Whether a Take-or-Pay clause was oppressive.
Whether the Take-or-Pay clause was commercially justifiable.
Whether the primary purpose of the take-or-pay clause was to deter the breach of contract; and
Whether the parties enjoyed equal bargaining power
Based on the application of these principles, Burton, J. concluded that take-or-pay clause in question did not offend the rule against penalties in this case.
Review of Burton J’s Conclusion
A review of the M&J Polymer’s Case will centre on one of Burton J’s conclusion that “as a matter of principle, the rule against penalties may apply (to a take-or-pay clause)".The TOP provision is not exclusive to the energy sector only as is obvious from the instant case and because of this, there are fundamental differences between the TOP clause in the energy sector and the others
Burton J. found that the purchaser had breached an obligation to order the minimum quantities required by the contract because the take-or-pay provision was inextricably linked to the obligation on the purchaser to order certain minimum quantities of the products which when breached, resulted in a sum becoming payable and on the face of it amounting to a penalty.
The natural question is the rationale for this conclusion and whether the conclusion is right or otherwise.
As previously discussed under relevance of the penalty rule to take-or-pay provisions, two usual features of the Top obligation were missing from this case and their unavailability could have impacted on the mind of Burton, J in concluding the way he did.
The first feature is a contingent obligation to pay a minimum amount with no separate minimum order obligation independent of an alleged breach of contract and as a consequence; failing to order the minimum amount would therefore not amount to a breach of contract, it would just trigger the minimum payment obligation. Looking at the conclusion of Burton, J, it is clear that the payment obligation in this case was a separate obligation to purchase a minimum amount of chemicals. Thus, it was a provision meant to deter or punish the party in breach and therefore amount to a penalty.
Dennis Stickley  has suggested the existence of paradoxes in gas contracts when he contended that the complexities in negotiating a GSA are compounded by the commercial environment of the gas industry that creates a set of seemingly irreconcilable paradoxes. That the obligations between the gas provider and the purchaser may not be symmetrical, which is most evident in the Top liability of the purchaser in contrast to the limited exposure of the gas producer for failure to deliver
Another feature of a take or pay provision is the make up or recovery rights which operate to reimburse to the purchaser, the value of the take or pay payment through the subsequent delivery of gas, which will do much to reduce the basis of any allegation of a penal nature by so re-aligning the parties economic interests.
In this present case, there was no provision for make up rights which clearly fell foul of the four principles Burton, J. referred to in determining whether a take or pay clause would offend the rule against penalties.
Dr. Thiele Heino  argues that it does not seem justified to limit the period of the make up rights at all, since the protection of a minimum income which is always cited by producers as the reason for take or pay provisions is actually achieved by the purchaser’s payment for the gas not taken. He further contends that the expiry of make up rights simply gives the gas producer an opportunity to sell a second time (after the expiry of the make up right) gas already paid for and that under these conditions, take or pay take on a penalising character because upon the expiry of the make up period, money paid for gas not taken is forfeited just as in the case of contractual penalty.
He also argues that provisions regarding gas not taken being paid for at the full contract price also penalises the purchaser and that if take-or-pay clauses were not to penalise the buyer, the price for the gas not taken would have to be lower than the full contract price.
However, regardless of these portions in support of a Top obligation being a penalty clause, this author holds a contrary view. The basic objectives for a TOP provision in a Gas contract must always be borne in mind primarily because a Long term Top GSA is like a marriage with rules made at the beginning of the marriage and these clauses usually operate to the benefit of both the gas producer and purchaser as the purchaser is given the flexibility to vary his gas nominations subject to the minimum quantities, whilst the producer is guaranteed minimum cash flow revenue. To suddenly wake up a few years down the line to change the was would not be permissible.
There is therefore a commercial justification for including a provision like this in a gas contract, which is a possibility for why Burton held that the TOP clause did not amount to a penalty as the clause was freely negotiated between parties of comparable bargaining power and was commercially justifiable and did not amount to a provision in ‘terrorem’
Another reason why this author holds a contrary view is a function of the economic model developed in 1985 by Masten and Crocker that shows that TOP provisions are a mechanism for effecting appropriate incentives for contractual performance. They pointed out that efficient breach considerations define an optimal take percentage as a functional of characteristics of the transactions. That in long – term relationships, the need for adaptation to changing circumstances may be substantial which is why there is need to include flexible arrangements.
Another reason this author holds a contrary view is that a TOP provision also allocates the risks of natural gas production and sales between the parties, with the seller bearing the risk of production and the purchaser bearing the risk of market demand.
According to Hubbard and Weiner  , the natural gas well is a good example of transaction specific capital, which has little savage value outside the trading relationship. Considering that the investment is sunk, the consumers would strong incentives to appropriate some of the rent from production(Quasi-rents).As a result, the producer demands not only long term contract, but also adjustment clauses.
This paper has examined the concept of take-or-pay from the point of view of being of benefits to the gas producer and the gas purchaser.
Additionally this paper has examined the concept of the English Law of penalty and the thin line between liquidated damages and penalty. The English case of Dunlop Pneumatic has laid down fundamental rules as to what would constitute a liquidated damages clause or a penalty clause.
This paper has reviewed extensively the case of M&J in relation to the willingness of the Judge to entertain in principle a take or pay provision as a penalty clause and the possible rationale for that position.
This paper has reviewed the fundamental objectives of a Top clause and this author begs to disagree with the position of the learned judge because a take or pay clause as used in resources contracts, contains a contingent obligation (and not a separate TOP obligation) which is independent of a possible breach of contract and cannot amount to a penalty within the rules established by Lord Dunedin in the Dunlop case
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