Enforceability of take-or-pay provisions in English law contracts – resolved

Abstract

This commentary, ‘Enforceability of Take-or-Pay Provisions in English Law Contracts – Resolved’, comments favourably on the recent resolution by the UK Supreme Court, the highest court in the United Kingdom, of a concern that certain take-or-pay provisions could be held unenforceable under English law. The decision clarifies that take-or-pay provisions should be enforceable, and not considered as an unenforceable penalty.

Notes

1 See (2008) 26 JERL 610.

2 See (2013) 31 JERL 205.

3 Previously, the highest court in the United Kingdom. The judicial function of the House of Lords has since been transferred to the Supreme Court of the United Kingdom.

4 [1998] 2 Lloyd's Rep 209 HL; [1998] UKHL 22.

5 [2001] 1 All ER (Comm) 865; [2001] UKHL 18. The author assisted the successful company as one of its counsel in this case.

6 Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC), [2005] BLR 271 (QBD) (TCC) considered below.

7 [2001] 1 All ER (Comm) 865; [2001] UKHL 18.

8 Hugh Beale, Chitty on Contracts (31st edn, Sweet & Maxwell 2012) vol 1 at para 26–008.

9 See nn 13, 14 and 15 below.

10 [2001] 1 All ER (Comm) 865; [2001] UKHL 18 [24].

11 [2008] EWHC 1265 (Comm).

12 Ibid at [50]. Although Ferryways appealed to the Court of Appeal, it did not appeal this section of Field J’s judgment.

13 [1962] AC 413.

14 [2006] EWCA Civ 385, [2006] 2 Lloyd's Rep 436: ‘The short answer to the client's point on penalty is that the agency was suing for its agreed fee. That cannot be a penalty.’

15 [2008] EWHC 875 (Comm). Although the case proceeded to the Supreme Court on other issues, this finding was not appealed (Office of Fair Trading v Abbey National PLC and Others [2009] EWCA Civ 116; [2010] 1 AC 696).

16 M & J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm).

17 Chitty on Contracts discussing the principle in White & Carter (Councils) Ltd v McGregor [1962] AC 413, see Chitty (n 8) at para 26–183.

18 [2012] EWHC 3027 (Comm).

19 [2012] EWHC 3027 (Comm) [22].

20 In both cases the failure to ‘take’ was held to be a breach of contractual duty, so in fact these cases relate to take-and-pay provisions.

21 [2012] EWHC 3582 (Comm).

22 [2012] EWHC 3582 (Comm) [27]–[29].

23 [2008] EWHC 344 (Comm).

24 [1996] QB 752 (QB).

25 [2013] EWCA Civ 1539 (Patten, Tomlinson and Christopher Clarke LJJ).

26 [2015] UKSC 67.

27 John Andrews & Others v Australia and New Zealand Banking Group Limited [2012] HCA 30. Although not binding, the Supreme Court stated that ‘Any decision of the High Court of Australia has strong persuasive force in this court.’ [2015] UKSC 67 [42].

28 [2015] UKSC 67.

29 [2015] UKSC 67 [13] (Lord Neuberger and Lord Sumption).

30 [2015] UKSC 67 [14] (Lord Neuberger and Lord Sumption).

31 [2015] UKSC 67 [130] (Lord Mance).

32 [2015] UKSC 67 [41] (Lord Neuberger and Lord Sumption).

33 [2015] UKSC 67 [241] (Lord Hodge).

34 [2015] UKSC 67 [14] (Lord Neuberger and Lord Sumption).

35 Despite Burton J being the first-instance judge in Cavendish Square Holdings BV v Talal El Makdessi, meaning that seven Justices of the Supreme Court had the opportunity, had they wished, to endorse this approach.

36 [2015] UKSC 67 [14] (Lord Neuberger and Lord Sumption).

37 [2015] UKSC 67 [74] (Lord Neuberger and Lord Sumption).

38 [2015] UKSC 67 [73] (Lord Neuberger and Lord Sumption).

39 If a take-and-pay provision was held to be void as a penalty, the seller would have to prove damages in law, and to demonstrate its loss. If it could not do so, it would not get paid, despite having made gas available as agreed. Therefore, a buyer that failed to take a minimum volume of gas under a take-and-pay provision would be in a better position than a buyer that had accepted no minimum volume obligation at all, under a take-or-pay provision. This would be a nonsense.

40 [2015] UKSC 67 [255] (Lord Hodge).

41 See n 6 above.

42 [2015] UKSC 67 [32] (Lord Neuberger and Lord Sumption).

43 [2001] UKHL 18.