The off-take vocabulary problem
The phrase 'off-take agreement' is used loosely enough in the off-market trade community that it has lost most of its useful meaning. I receive documents described as off-take agreements that are, on examination, expressions of interest, brokered indications, non-binding memoranda, or, occasionally, advertisements. None of these is what an institutional or project-finance counterparty means by an off-take agreement. The vocabulary problem matters because off-take agreements are the document on which project financing, production planning, and counterparty pricing are anchored. A real off-take agreement supports a credit decision. A document described as an off-take agreement that does not support a credit decision is, by definition, something else.
This article is an outline of what a legitimate off-take agreement actually contains, written for producers preparing to negotiate one and for intermediaries who would prefer to recognise the difference between the real document and the document that uses the same words.
The minimum substantive contents
An off-take agreement is a forward sale-and-purchase contract. It binds a buyer to take, and a seller to deliver, a defined quantity of a defined product over a defined term, at a defined price formula, under defined commercial terms, with defined remedies if either side fails to perform. Each of those elements is specific. The absence of any of them is the difference between an off-take agreement and the documents that adopt its name.
| Element | What is specified | Why it matters |
|---|---|---|
| Term length | Years of contract; typically 3-7 years for project-finance off-takes, 1-3 years for term contracts | Length supports the buyer's planning and the seller's financing case |
| Volume bands | Annual minimum, annual maximum, monthly delivery profile, take-or-pay tolerance | Defines the obligation precisely; supports lender modelling |
| Pricing formula | Fixed, floating to a published reference, or hybrid; with discount, premium, or differential expressed in basis points or absolute | Distinguishes a real contract from an indication of interest |
| Quality specification | Reference standard (ASTM, ISO, GAFTA, FOSFA, etc.); tolerance bands; rejection criteria; price adjustment for off-spec product | Eliminates ambiguity at delivery and supports inspection regime |
| Delivery schedule | Loading windows, nominations procedure, vessel acceptability, demurrage and laytime | Operational backbone; without it, the contract cannot be performed |
| Incoterms 2020 | FOB, CIF, CFR, EXW, DAP — defining cost and risk transfer | Determines who bears freight, insurance, and discharge risk |
| Payment terms | Documentary letter of credit, cash against documents, open account with credit insurance — with confirming bank named | Determines cashflow and seller's recovery rights |
| Force majeure | Defined events; notification requirements; suspension of obligations; termination thresholds | Allocates the risk of disruption explicitly rather than implicitly |
| Penalty / liquidated damages | Consequence of failure to deliver or take; expressed as a per-tonne or per-day amount | Distinguishes binding obligation from soft commitment |
| Dispute resolution | Governing law, arbitral seat, arbitral institution (LCIA, ICC, SIAC, GAFTA arbitration, etc.), language of arbitration | Determines forum and procedure if the relationship breaks down |
The list above is not optional. A document that omits any of these elements has, in commercial substance, omitted the obligation the missing element was meant to define. A 'pricing formula' that says 'to be agreed at the time of each shipment' is not a pricing formula. A 'force majeure clause' that lists no events is not a force majeure clause. A 'dispute resolution clause' that names no forum is not a dispute resolution clause. The institutional reader treats each of these as the question they are: where is the actual obligation?
The pricing formula in particular
The pricing clause is the element that most distinguishes a real off-take from a soft document. There are three legitimate formats, and a number of hybrids that combine them.
- Fixed. Price stated as an absolute number per unit, typically with an inflation indexation clause if the term is long enough to warrant it. Fixed pricing is rare for commodities with active forward markets but common for processed products with thin published references.
- Floating to a published reference. Price expressed as a published reference, plus or minus a defined differential, applied at a defined pricing window. The reference must be a recognised price source — Platts, Argus, ICE, LME, CME, GAFTA, FOSFA, or comparable — and the pricing window must be defined unambiguously. 'Brent average for the month of loading' is a pricing formula. 'Brent at a price to be agreed' is not.
- Hybrid. Combines a floating reference with a floor, ceiling, or band, often used to allocate market risk between the parties. Hybrid pricing is common in long-term project-finance off-takes where the lender requires a minimum revenue floor for modelling purposes.
The format that appears most frequently in the soft documents I receive — 'pricing to be agreed at the time of each shipment based on then-prevailing market conditions' — is none of these. It is, in commercial substance, an agreement to negotiate, not an agreement to sell. It does not support project finance, does not support lender modelling, and does not bind either party to perform if the market moves. It is appropriate for spot trading. It is not appropriate for any document described as an off-take.
Incoterms 2020 and what they actually allocate
Incoterms determine where cost and risk transfer between seller and buyer. The four most commonly used in commodity off-take are FOB, CIF, CFR, and DAP. Each allocates differently and each is appropriate for different commodity classes and counterparty types.
| Incoterm | Cost transfer | Risk transfer | Common use |
|---|---|---|---|
| FOB (Free On Board) | At ship's rail, loading port | At ship's rail, loading port | Bulk dry commodities, crude exports from producer |
| CFR (Cost and Freight) | At discharge port (seller pays freight) | At ship's rail, loading port | Refined products, where seller arranges shipping |
| CIF (Cost, Insurance, Freight) | At discharge port (seller pays freight + minimum insurance) | At ship's rail, loading port | Standard for commodity term contracts; widely used |
| EXW (Ex Works) | At seller's premises | At seller's premises | Where buyer collects; uncommon in commodities |
| DAP (Delivered at Place) | At named destination | At named destination | Where seller delivers fully to buyer's facility |
Documents that describe themselves as off-take agreements but do not specify an Incoterm are, again, not specifying an obligation. Either the seller delivers to the loading port and the buyer takes from there, or the seller delivers to the discharge port and the buyer takes from there, or some other allocation applies. Without the term being named, the freight, insurance, and risk-of-loss obligations are undefined. No counterparty's compliance or operations function will accept that.
Force majeure and what it actually covers
The force majeure clause is the element that allocates the risk of events neither party can control. A serious force majeure clause lists the events that qualify, the notification procedure, the consequence (typically suspension of obligations), and a termination threshold (typically a defined number of days or weeks of continuous force majeure). It does not consist of the words 'force majeure as customary'. The customary clause does not exist in any reference text. The clause that the parties agree is the clause that applies, and an undefined clause is not enforceable as a definition.
Inspection regime and quality dispute
An off-take agreement that does not specify an inspection regime is not, in commercial substance, specifying a quality obligation. Institutional contracts name the inspection company (SGS, Bureau Veritas, Intertek, or comparable), the point at which inspection occurs (loading, discharge, or both), the method of sampling, the reference standard against which the sample is tested, and the procedure for resolving a dispute between loading and discharge results. The inspection report at the agreed point is, in most institutional structures, definitive for payment purposes; quality disputes are then handled through a defined adjustment mechanism rather than through suspension of payment. Without these elements, the buyer's recourse against off-specification product is indeterminate, and the seller's recourse against a buyer who claims off-specification product without basis is equally indeterminate. Neither party benefits from the ambiguity.
The MoU that is not an off-take
A memorandum of understanding that uses the language of off-take but does not specify volume bands, pricing formulas, Incoterms, force majeure, and dispute resolution is, in substance, an expression of mutual interest. It is not commercially binding; it is not financeable; it cannot be relied on by a project lender or a buyer's procurement function. It has its uses — as a framework for further negotiation, or as a public statement of intent — but it is not the document on which production decisions, financing decisions, or supply commitments are made. Treating it as such is the most consistent way I see producers and intermediaries waste a year of effort.
The institutional reader, on opening any document described as an off-take, looks for the same ten elements in the same order, regardless of who has signed the document or how senior the signatories appear. The ten elements either are or are not present. If they are, the document is an off-take agreement. If they are not, the document is something else, and treating it as an off-take is the reader's mistake to avoid.
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