Take-or-Pay Provision, Contract

A provision in a contract or agreement that requires a counterparty to take a specified amount of products or proportion of output at an agreed price or pricing formula. Usually such a provision is linked to a deep discount or is entered into to persuade a manufacturer to invest in production facilities for a product for which demand is uncertain.

Take-or-Pay clauses can be very expensive to unwind, particularly if the supply price of the product drops or the subsequent purpose for which the buyer intended to use the product becomes uneconomic due to falling demand or price. Frequently, much of the cost of terminating manufacture of a high technology product with custom parts results from take-or-pay provisions.

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