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What Is a Take-Or-Pay Contract?

A contract is a legal agreement that is binding onto the parties who have agreed to an exchange. There are many forms of contract that exist such as a quasi-contract or an implied contract. One other type of contract is a take-or-pay contract wherein a buyer pays for the goods or services rendered by a seller upon the delivery of said goods or services. Otherwise, the buyer must pay a fine or a penalty to the buyer for failure of taking the product or service.

A take-or-pay contract is commonly used in business agreements within the agricultural industry. For example, a local farmer enters into a take-or-pay contract with a supermarket. The supermarket is under obligation to purchase whatever goods both parties have agreed on. If the supermarket decides to reject the produce offered by the farmer or in any event that the produce of the farmer is not bought by the supermarket, the supermarket is still under obligation to pay, even if it is a reduce amount, the local farmer. However, the farmer still has the freedom to sell the produce that has not been bought by the supermarket.

The main purpose of a take-or-pay contract is to compensate for the expenses incurred by the seller in the event that the buyer no longer wishes to buy the product. If the product or service is not delivered by the seller under the terms of the contract, the buyer is under no obligation to pay for the goods or services that were not delivered.

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