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Approaching the Day of Judgment: Recent Developments in Take-Or-Pay Litigation

Paul E. Strohl, Natural Gas Marketing (1987)

The sharp downward spike in the demand for natural gas late in 1981 destroyed the economic basis for natural gas contracts which had been entered into during the late 1970's and early 1980's. Pipelines, having entered into long-term purchase contracts at above-market prices, faced tens of millions of dollars in take-or-pay liabilities, with no assurance that deficiencies could be made up in subsequent contract years.1 While pipelines sought excuses from performance, producers, under heavy pressure from creditors and investors because of falling prices, demanded enforcement of take-or-pay provisions. In a [10-3] market driven by surplus rather than scarcity, the take-or-pay provision moved into the forefront of the continuing debate over energy policy.

The debate in the courts has been the most heated; however, until quite recently, there had been few judicial decisions specifically addressing the enforceability of take-or-pay provisions in natural gas contracts. Reasons for this are not difficult to find. As noted above, market conditions prior to the early 1980's made take-or-pay litigation unnecessary. Moreover, the modern rules of civil procedure encourage protracted courtroom battles and slow development of precedent across several years in novel controversies. When trial follows several years of discovery, and when ensuing appeals span an additional year or more,