*Basic

An offtake agreement is an arrangement between a producer and a buyer to purchase or sell portions of the producer's upcoming goods.[1] It is usually negotiated before the construction of a factory or facility to secure a market and revenue stream for its future output.[2] Offtake agreements are used to help the selling company acquire project financing for future construction, expansion projects, or new equipment through the promise of future income and proof of existing demand for the goods.[3]

**Intermediate

The provisions of the agreement usually specify the purchase price for the goods and the delivery date, even though the agreement is reached before any goods are produced and any work starts on the new facility.[4] However, companies can usually back out of an offtake agreement through negotiations with the other party and with the payment of a fee.[5] Offtake agreements are often used in natural resource development, where the capital costs to extract resources are significant, and the company wants a guarantee that some of its products will be sold.[6] The offtake agreement serves an important role for the producer. If lenders can see the company has clients and customers before production begins, they are more likely to approve the extension of a loan or credit.[7] So offtake agreements make it easier to get financing to construct a facility. In addition to providing a guaranteed market and source of revenue for a company's product, an offtake agreement allows the producer/seller to guarantee a minimum level of profit for its investment.[8] Since offtake agreements often help secure funds for the creation or expansion of a facility, the seller can negotiate a price that secures a minimum level of return on the goods, thereby lowering the risk associated with the investment.[9] Offtake agreements can provide a benefit to buyers too, functioning as a way to secure goods at a particular price. That means prices are fixed for the buyer before the manufacturing begins.[10] Doing that may act as a hedge against future price changes, especially if a product becomes popular or a resource becomes scarce, causing demand to outweigh supply.[11] It also provides a guarantee that the requested goods will be delivered. Offtake agreements also include default clauses that outline penalties either party has in case there is a violation of any clauses.[12]

***Advanced

Most offtake agreements include force majeure clauses.[13] These clauses allow the buyer or seller to cancel the contract if certain events occur deemed outside the control of either party and if one puts unnecessary pressure on the other.[14] Force majeure clauses often provide protection against he negative impact of certain acts of nature, such as flooding and wildfires.[15]

Sources

[1] Editors. Offtake Agreement. uk.practicallaw.thomsonreuters.com
[2] Editors (2022). What is an Offtake Agreement? Investingnews.com
[3] [15] Editors. Offtake Agreement – Meaning, Explanation, Types, Examples. Wallstreetmojo.com
[4] Editors. Offtake Agreement. Content.next.westlaw.com
[5] Gordon, J (2023). Offtake Agreement – Explained. Thebusinessprofessor.com
[6] [13] Editors. Form of Offtake Agreement. Sec.gov
[7] Editors. Key Issues in an Offtake Agreement. Hoganlovells.com
[8] Ahmed, I (2022). What is an Offtake Agreement? And How Can it Benefit Your Business! Linkedin.com
[9] Editors. Supply and Offtake Agreements: Definition and Sample. Contractscounsel.com
[10] [14] Editors. Offtake contracts – key issues for project finance lenders. Lexisnexis.co.uk
[11] Editors. Guaranteed offtake contracts. Gfi.org
[12] Editors. Off-Take Contracts for Project Finance Investors. Advance.lexis.com