Further Confirmation That A 'Take Or Pay' Clause Can Be A Penalty

This case concerned a clause in a contract (not drafted by lawyers) which stated that: "The [Department] hereby undertakes to purchase a minimum of 500 days of Consultancy from [E-Nik] per year based on project requirement...". The question arose as to whether the Department was required in all circumstances to purchase 500 days, or whether it was only required to do so if the relevant project so required. This in turn gave rise to questions as to whether E-Nik could claim any shortfall in days purchased as a debt (rather than damages for breach of contract) and whether the provision was an unenforceable penalty.

The High Court (Mr Justice Burton) found in favour of E-Nik:

On the evidence, the construction of the clause was such that the Department had agreed to take at least 500 days per year. On the debt point, the issue was whether the services had to be "specifically demanded" or whether they simply had to be made and remain available. The judge found that there was no need for a request. E-Nik kept the services available, and there was provision for the services to be paid for upfront. These factors pointed in favour of a debt. On the penalty point, the judge referred to his previous decision in M&J Polymers v Emerys Minerals Limited [2008] (noted in a previous bulletin) where an agreement to pay for minimum quantities could qualify as a penalty clause, even though in that case there was plainly commercial justification for it. Similarly in this case, the minimum payment clause was potentially a penalty, but commercially justifiable since E-Nik had to, and...