A make-whole payment is a lump-sum settlement one party pays to the other to compensate for the value lost when a contracted volume, revenue, or performance commitment falls short. It converts a broken commitment into cash without unwinding the contract.
How a make-whole payment works
A wholesaler commits to purchase 10,000 units per year from a supplier in exchange for a preferential rebate rate. The wholesaler purchases only 7,500 units. The contract's make-whole clause triggers: the wholesaler pays the supplier a sum equal to the margin the supplier would have earned on the missing 2,500 units. The commitment is honoured in cash, the supplier is restored, and the underlying agreement continues.
Formulae vary. Some clauses use lost margin per unit, others use a fixed shortfall rate, and others use a net-present-value calculation for multi-year commitments. The drafting choice decides how predictable the payment is and how enforceable it is in the counterparty's jurisdiction.
Where make-whole payments appear in contracts
Make-whole payments sit inside volume, revenue, or availability commitments in supply, distribution, licence, minimum-purchase, take-or-pay and franchise agreements. The clause anchors a contract obligation, defining what the counterparty owes when the commitment is missed. It is a close cousin to a penalty clause but is drafted as compensation for loss rather than as punishment for breach, which matters for enforceability in civil-law jurisdictions where penalty clauses can be unenforceable.
Make-whole payment FAQ
Is a make-whole payment the same as liquidated damages?
They overlap. Liquidated damages is a pre-agreed sum payable on breach; a make-whole payment is a specific form scaled to the value of the missed commitment.
When is a make-whole payment enforceable?
When it is drafted as a genuine pre-estimate of loss rather than as a penalty for breach.
Who typically owes the payment?
The party that gave the volume, revenue or performance commitment and then failed to reach it.
