Legal Nature and Validity of Take-or-Pay Clause in Longterm Gas Sale Agreements: A Comparative Study

Take-or-Pay clause (T-o-P), as an essential element of long-term off-takeand supply contracts in energy sector, particularly in Gas SalesAgreements.The philosophy of T-o-P clause is based on the importance ofthe fact that the seller will receive a level of revenue guaranteed under theagreement that covers massive financial commitments and debts arising fromthe upstream project. Although T-o-P clause is frequently considered inGSAs, the validity and applicability of this condition is subject to controversyamong different legal systems. Some lawyers have treated this provision as apenalty clause which is invalid and unenforceable. However, others regard itas a valid and enforceable liquidated damage clause.This paper first focuses on uncertainties and ambiguities regarding the legalstatus of take-or-pay provision, particularly in English legal system. Then, itdiscusses the issue by considering the fundamentals of Islamic contract rulesand jurisprudence, particularly Iranian legal system reflected in the IranianCivil Code