This second article in a three-part series, produced in collaboration with Penningtons Manches Cooper, examines the enforceability of take-or-pay clauses in Pakistan’s energy sector. In light of rising energy costs, declining demand for grid-based electricity, and the Government’s decision to prematurely terminate several Power Purchase Agreements (PPAs), it explores how Pakistani courts, including the Supreme Court, have addressed disputes arising from such clauses. By analyzing recent case law, including the landmark Orient Power decision, it highlights judicial trends that shape contractual risk allocation, investor protection, and the long-term sustainability of energy projects in a rapidly evolving market.
Earlier this year, the Government of Pakistan announced the premature termination of Power Purchase Agreements (PPAs) with five independent power producers (IPPs), a move driven by soaring energy prices, which are amongst the highest in the region. With many households transitioning to solar energy, demand for grid-based energy has plummeted, resulting in a supply glut. This second article in a three-part series, authored in collaboration with the international disputes team at Penningtons Manches Cooper, examines the nature of ‘Take or Pay’ clauses in the context of recent judicial decisions.
What is a take-or-pay clause?
Under ‘take-or-pay’ contracts with many IPPs, the Government of Pakistan guaranteed to pay ‘capacity charges’ irrespective of whether it purchased energy units.
Take-or-pay provisions are a common practice in long-term energy and infrastructure agreements, requiring the buyer to either take delivery of a specified quantity of a commodity (such as electricity or gas) or, alternatively, pay for the agreed-upon amount regardless of actual consumption. The purpose is to provide revenue certainty to the supplier and ensure the financial viability of large-scale energy projects, which require substantial upfront investment.
Take-or-Pay provisions were introduced in Pakistan to attract private investment in the energy sector in the 1990s, particularly under the Power Policy 1994 and the Power Policy 1998, initiated in the 1990s. Given Pakistan’s history of energy shortages and inconsistent demand patterns, these provisions were designed to mitigate risks for investors and lenders by guaranteeing a minimum revenue stream. The objective was to encourage private sector participation in power generation and ensure the availability of sufficient energy capacity, even when demand fluctuated. However, this structure, while initially intended to attract investment and ensure energy security, has now become a significant financial burden. This is owing to declining demand for grid-based electricity due to the widespread adoption of solar energy, coupled with the rigid take-or-pay commitments to IPPs under PPAs.
While the termination of these IPPs appears to have happened with mutual consent, concerns have been raised about the Government’s broader approach to renegotiating contracts with other IPPs. In a letter to the Government of Pakistan on 18 February 2025, eight Development Finance Institutions (“DFIs“)—which have financed $2.7 billion in power projects over the past 25 years—criticised the Government’s handling of wind and solar contract revisions.[1] The lenders, including the World Bank’s International Finance Corporation, the Asian Development Bank, the Islamic Development Bank, and four European development finance institutions, cautioned that pressuring IPPs into accepting revised terms could undermine investor confidence. Their warning suggests that IPPs may not be renegotiating on an equal footing, and also raises questions about the circumstances in which these contracts have been terminated.
This is not the first time that take-or-pay clauses have come under scrutiny. In fact, the enforceability of take-or-pay clauses has been litigated previously under Pakistan law. In a recent dispute between Orient Power Company Limited and Sui Northern Gas Pipelines Limited, the Supreme Court of Pakistan upheld a foreign arbitral award and held that take-or-pay clauses are enforceable under Pakistan law.[2]
Enforceability of take-or-pay clauses in Pakistan: The Orient Power case
In Orient Power Company (Private) Limited vs Sui Northern Gas Pipelines Limited, Sui Northern Gas Pipelines Limited (“SNGPL”), a government-owned gas supply company, entered into a Gas Supply Agreement (“GSA”) with Orient Power Company Limited, a private IPP generating and selling electricity to the Government. In October 2016, the parties encountered a dispute regarding Orient Power’s responsibility to take or pay the gas supplied by SNGPL. This obligation was outlined in Clause 3.6 of the GSA (the “Take or Pay Clause”):
“Section 3.6: Take or Pay/Make-Up Gas
3.6(a): From and after the Commercial Operations Date and during a Month in the Firm Delivery Period, the Buyer shall take and if not taken pay for a minimum quantity of gas (the “take or pay Quantity”) equal to fifty percent (50%) of the Daily Contract Quantity multiplied by the difference between the number of days in that Month (or portion thereof) and (i) the number of days (or fractions thereof) of Force Majeure Events declared by the Seller or the Buyer in that month, (ii) the number of days (or fractions thereof) of non-delivery of Gas by the Seller in that Month for any reason, including a breach or default by the Seller or maintenance undertaken by the Seller pursuant to Section 12.1, and (iii) the number of days of Scheduled Outages in that Month notified to the Seller pursuant to Section 12.2.”
“Section 3.6(c): Except for the Gas taken or paid by the Buyer pursuant to Section 3.6(b) above, any Gas paid for by the Buyer pursuant to this Section 3.6(a) above during a Contract Year but not taken prior to the time of payment (“Make-Up Gas”) may be taken with payment by the Buyer of the difference between the Gas Price prevailing at the time the Make-Up Gas is taken by the Buyer and the Gas Price used to determine the payment for the Take or Pay Quantity, using the “first in, first out” method and any increase in taxes on the sale and purchase of Gas applicable to Gas sales hereunder, during the Firm Delivery Period of the immediately following one (1) Contract Year of the Term, provided that the Buyer shall have first taken and paid for a quantity equal to but not less than the Take or Pay Quantity in the applicable Contract Year and provided further that in no event shall the Seller’s obligation to deliver the Gas hereunder on any Day exceed the Daily Contract Quantity. At the end of the Gas Allocation, the Buyer shall be entitled to the Make-Up Gas during the immediately following twelve (12) Months on as-available basis.”
The dispute was referred to arbitration at the London Court of International Arbitration (the “LCIA”), which rendered Interim and Final Awards in 2017 (the “Awards”). The Arbitrator upheld the take-or-pay clause, rejected Orient Power’s jurisdictional challenge, and awarded SNGPL Rs. 104,133,296 in Late Payment Surcharge. Orient Power’s claim of Rs. 603,202,083 under six invoices was recognized, with 6% simple interest awarded from October 31, 2011, until payment.
SNGPL sought, and was granted, recognition and enforcement of the Awards from the Lahore High Court under Section 11 of the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 (the “2011 Act”).
Orient Power appealed the recognition and enforcement of the Awards. It argued that enforcing the take-or-pay clause led to unjust enrichment, violating Section 74 of the Contract Act, which allows an injured party to claim reasonable damages for loss incurred, limits the recovery to actual damages proven, and prohibits penal or excessive compensation. It claimed Clause 3.6 of the GSA was penal and that it was entitled to make-up gas beyond the March 2011 cut-off date. It was, therefore, argued that enforcing the take-or-pay clause was against the public policy of Pakistan. In response, SNGPL asserted that Clause 3.6(c) only allowed make-up gas until March 2011, which Orient Power failed to utilize.
The court, relying on Amoco v Teesside Gas, dismissed Orient Power’s appeal and ruled that the take-or-pay clause was a standard contractual term, valid under Section 74, and that the terms of the GSA were negotiated and agreed upon by both parties, including the take-or-pay clause.
Supreme Court of Pakistan’s ruling on the take-or-pay clause
Orient Power then appealed to the Supreme Court of Pakistan, which considered the application of Section 74 vis-à-vis the take-or-pay clause, along with the question of public policy.
The Supreme Court interpreted Section 74 of the Contract Act and in this light, discussed the claim for unjust enrichment. The Court observed that for a claim of unjust enrichment to succeed, it must fulfil the following ingredients[3]:
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The plaintiff must prove that the defendant has become enriched by the receipt of a benefit;
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This enrichment is at the expense of the plaintiff;
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The enrichment and/or its retention is unjust (absence of “juristic reason”); and
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The defendant can legally be compelled to compensate the plaintiff.
Furthermore, it affirmed that “[u]njust enrichment occurs when a person retains money or benefits which in justice, equity and good conscience, belong to someone else… The doctrine of unjust enrichment, therefore, is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery under the doctrine of “unjust enrichment” arises where retention of a benefit is considered contrary to justice or against equity.”.[4]
The court maintained that “for a claim of unjust enrichment to succeed, there must be enrichment at the expense of the plaintiff and this enrichment must be unjust in such a way that there should be no lawful justification for the same.”. [5]
The Supreme Court held that there was a valid ‘juristic reason’ for SNGPL’s enrichment in this case, as SNPGL was entitled to forfeit the Make-Up Gas amount paid as the cut-off date had expired. While it may appear, prima facie, that SNGPL was receiving payment for the same gas twice, the situation stemmed from Orient Power’s failure to take the gas. Orient Power was entitled to receive the make-up gas, under the take-or-pay clause, until the cut-off date only. Therefore, Orient Power’s claim that SNGPL had been unjustly enriched by the gas which Orient Power had paid for but not received under the take-or-pay clause was not justified. The Supreme Court assessed the take-or-pay clause in light of Section 74 and determined that one of the four necessary conditions for a “claim of unjust enrichment was not satisfied”, thereby ruling that the case on this issue was not established. Thus, the take-or-pay clause was found not to be a penal clause. The public policy ground was important for the reason that it is one of the few grounds available under Article V of the New York Convention, under which foreign arbitral awards may be challenged.
Implications of the Supreme Court’s ruling in Orient Power for investors
The High Court used freedom of contract as its basis for the ruling noting that “the policy of the law is to uphold freedom to contract.”[6]. The Supreme Court’s approach was different where the Court relied upon the jurisprudence of the claim for unjust enrichment and used non-fulfilment of an essential ingredient, i.e. the absence of juristic reasons for the enrichment, as its basis for upholding the take-or-pay clause in the GSA.
This may imply that a take-or-pay provision would be strictly interpreted within the context of the agreement, leaving room for the claim of unjust enrichment to be successful, in the absence of juristic reason to forfeit money. The interpretation depends upon the specific facts and circumstances of this case to determine whether, and if so, the take-or-pay Clause offends against Section 74 of the Contract Act.
Accordingly, while a thorough understanding of Pakistan’s legal framework governing take-or-pay clauses is essential for structuring robust supply contracts, it is equally critical to consider the enforceability of contractual rights through arbitration mechanisms. This is particularly relevant in cross-border energy transactions, where the recognition and enforcement of foreign arbitral awards can be decisive in safeguarding investor interests.
This article was co-authored by Kamran Rehman and Richard Raban-Williams of Penningtons Manches Cooper.
References
[1] A copy of this letter is not available, however, this has been reported by print and electronic media at the following link: https://www.dawn.com/news/1894232.
[2] Orient Power Company (Private) Limited vs Sui Northern Gas Pipelines Limited, reported as 2021 SCMR 1728.
[3] Arabian Sea Enterprises v. Abid Amin Bhatti (PLD 2013 Sindh 290)
[4] Sui Northern Gas Pipelines v. DCIR (2014 PTD 1939)
[5] 2021 SCMR 1728 / 2021 CLD 1069 SC – Orient Power Company (Pvt) Ltd. Vs Sui Northern Gas Pipelines Limited, para 96.
[6] Esso Petroleum Co. v. Harper’s Garage (Stourport) Ltd., [1967] 1 All E.R. 699 at 712 (H.L.).
