Introduction

If you’ve ever come across the term “most favored nation”, you’d be forgiven for thinking it’s something related to diplomacy. But in the business world, it’s not about countries or political alliances—it’s about contracts and getting the best deal. Think of it as the “no one gets a better deal than me” clause.

But what does a most favored nation clause (or MFN clause for short) actually mean, and why is it such a big deal in contracts?

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What is a most favored nation clause?

A most favored nation clause is a contract term that ensures one party receives the same, if not better, conditions than anyone else the other party deals with. Simply put: if you're partnering with me, you need to give me your best offer.

For example, imagine you own a clothing brand and have a contract with a supplier. You've negotiated excellent fabric prices, but you don't want the supplier to offer lower prices to your competitors later on. The most favored nation clause makes sure that no one else gets a better deal than you. If the supplier offers someone else a better rate, they must extend that same rate to you.

Think of it like being first in line for a store sale—you want to know about the discounts first and receive the same savings without any exceptions.

Where are most favored nation clauses used?

Most favored nation clauses aren’t just limited to supply deals—they can pop up in a lot of different contexts, from entertainment to technology to licensing agreements. Here are a few examples of where most favored nation clauses are commonly used.

Distribution agreements

In distribution agreements, most favored nation clauses help ensure that a distributor receives the best possible terms when compared to other distributors in the market. This means that if the supplier offers better pricing, payment terms, or conditions to a competitor, the distributor with the most favored nation clause is entitled to those same benefits. This clause can help maintain a competitive edge and ensure fair treatment in a crowded marketplace.

Technology licensing

When it comes to licensing software or technology, an most favored nation clause can be a game-changer. It protects the licensee from being charged higher royalties or fees than other licensees.

For example, if a software company offers a discount to one customer, those with an most-favored nation clause would be entitled to the same discount. This fosters a sense of fairness and transparency in pricing and helps maintain trust between parties.

Media and entertainment

In the entertainment industry, most-favored nation clauses often find their way into talent contracts. Whether it’s actors, musicians, or other performers, these clauses ensure that no one else in the same production or project is receiving better perks—be it salary, billing position, or accommodations like trailers.

This helps maintain harmony and fairness among the cast and crew while also ensuring that negotiations are consistent across the board.

Procurement contracts

In procurement contracts, businesses that are purchasing goods or services might include most-favored nation clauses to guarantee they receive the lowest prices available in the market. This means if a supplier offers better rates to another client, the buyer with the most-favored nation clause can benefit from those same rates. It’s a way to keep costs down and ensure competitive pricing in an ever-evolving market.

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Why would you want a most favored nation clause, anyway?

The idea behind the most favored nation clause is simple: protection. It’s about making sure you’re not getting a raw deal when someone else is getting better terms.

Here’s a deeper look at why it’s useful.

Level playing field

In the competitive landscape of business, fairness is key. You certainly don’t want your competitors snagging better pricing, enhanced services, or added benefits while you’re stuck with a less favorable deal.

A most favored nation clause ensures that if another party secures a sweet deal, you’re entitled to those same perks. It’s like being part of an exclusive club where everyone enjoys the same benefits, keeping the competitive environment healthy.

Cost savings

When it comes to pricing agreements, a most favored nation clause can be a wallet-friendly feature. If your supplier suddenly decides to offer a lower price to another client, the most favored nation clause allows you to tap into those savings without the need for lengthy negotiations. This means you can keep your costs down and improve your bottom line, making it a win-win for your business.

Who doesn’t love saving a few bucks?

Long term security

In the world of long-term contracts, stability is crucial. Markets fluctuate, and prices change, but with an most-favored nation clause in your corner, you can maintain a competitive edge without constantly renegotiating your agreements. It provides peace of mind, knowing that you won’t be left vulnerable to unfavorable terms as the market shifts.

Instead, you can focus on growing your business while enjoying the assurance that your agreement keeps pace with any changes.

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But…why could it be a bad thing?

While a most favored nation clause sounds like the ultimate contract perk, it can also be a double-edged sword.

Slows down negotiations

Imagine trying to cut a new deal when you know you have to honor existing most favored nation clauses. You might find yourself stuck in longer negotiations because you have to consider how the new terms impact your old contracts.

Limits flexibility

Most favored nation clauses can limit your ability to offer special discounts or incentives to attract new business. You might want to offer lower rates to a new customer to secure a deal, but the most favored nation clause forces you to offer the same terms to everyone else with a most favored nation clause in their contract.

Complicated tracking

If you’ve got multiple most favored nation clauses with different partners, keeping track of who’s entitled to what can become a logistical headache. One new deal could trigger a series of most favored nation clause adjustments across multiple contracts. Not ideal.

An example of a most favored nation clause in action

Let’s say you own a restaurant, and you’re sourcing fresh produce from a local supplier. Your supplier agrees to sell you tomatoes at $2 per pound, and you include a most favored nation clause in your contract. A few months later, your supplier starts selling tomatoes to another restaurant down the street at $1.75 per pound.

Thanks to your most favored nation clause, you’re now entitled to that same $1.75 per pound price—meaning you’re still getting the best deal in town, even without having to renegotiate. It’s like you’re always first in line for the best price, even if you weren’t aware the price had changed.

Most favored nation clauses in the real world: Entertainment industry

Most favored nation clauses are particularly popular in the entertainment world. Think about Hollywood movies—actors often have most favored nation clauses in their contracts. If one actor negotiates a higher salary or better perks, other actors with a most favored nation clause are entitled to match those terms.

This can be great for actors, but it’s a bit of a nightmare for producers. Imagine agreeing to pay one actor more and suddenly having to bump up everyone else’s pay just because of a most favored nation Clause. Talk about a budget blowout.

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Alternatives to most favored nation clauses

While an most favored nation clause can be great for ensuring fairness, it’s not always the best tool for every contract. Here are a couple of alternatives:

Price matching agreements

Price matching agreements work like most favored nation clauses but with a crucial difference: they only apply when the customer can demonstrate that a competitor is offering the same product for a lower price. If they can demonstrate this, the seller will either match or better that lower price.

Exclusive agreements

If you want to avoid competitors getting any deal at all, you might negotiate an exclusive agreement that guarantees you’re the only one receiving certain terms or benefits.

Impact of most favored nation clauses on small businesses

Most favored nation clauses might sound like something only big corporations should worry about, but they can have a big impact on small businesses too. Here’s why: imagine you’re a small business owner who’s worked hard to negotiate a deal with a supplier, locking in what you think is a pretty sweet price. Then you find out that your supplier gave an even better deal to a bigger competitor. Ouch.

If you had a most favored nation clause in your contract, you’d automatically get the same terms without having to go back and renegotiate. It’s like having a “best price guarantee” in your back pocket. Sounds good, right? Well, not always.

Negotiation challenges

Let’s face it—small businesses don’t usually have the same bargaining power as big corporations. When you ask for a most favored nation clause, suppliers might push back or refuse to offer the same deal at all, worried about having to extend those terms to bigger, more lucrative clients. This could leave you with a “take it or leave it” situation, which isn’t great when you’re trying to get your business off the ground.

Limited flexibility for growth

Let’s say you managed to get a most favored nation clause included. Congratulations. But now, every time you want to offer a discount to a new customer to grow your business, you’ll have to extend the same terms to all your existing partners with most favored nation clauses. This could stifle your ability to adapt pricing strategies and stunt your growth.

Increased administrative burden

Small businesses often operate with lean teams, meaning you might be wearing a lot of hats—CEO, marketer, janitor, and now, contract enforcer. Keeping track of multiple most favored nation clauses can become a logistical nightmare, adding a layer of complexity and paperwork that small businesses can find overwhelming.

Strained relationships with partners

Let’s say you’re working with a few suppliers or distributors. If you have most favored nation clauses in place, you might find yourself in a tricky spot when one partner gives you a better deal than the others. Do you go back to everyone and demand the same terms? That could strain relationships and create tension with partners who might not be happy to match the deal.

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Legal considerations of most favored nation clauses

Antitrust laws

Including a most-favored nation clause might seem like a savvy business move, but it can sometimes get you into hot water legally. Why? Because in certain contexts, most-favored nation clauses can be seen as anti-competitive. If a dominant player in the market includes most-favored clauses in its contracts, it could limit competition by discouraging suppliers from offering better terms to smaller rivals. That’s the kind of behavior that antitrust regulators like to scrutinize.

Potential for legal disputes

Another legal risk of most favored nation clauses is the potential for disputes over their interpretation and enforcement. If your most favored nation clause isn’t crystal clear, you could find yourself in a contract dispute faster than you can say, “Wait, what did we agree to again?”

Common issues with most favored nation clause

Ambiguity in terms

If the most favored nation clause isn’t specific about what it covers—pricing, terms of service, delivery schedules, etc.—it could lead to disagreements over whether or not the clause has been triggered. For example, if you’re in a supply contract, and your competitor gets a better delivery time, does that count as a breach of your most favored nation clause? It all depends on the wording.

Retrospective claims

Let’s say you discover that a competitor has been getting better terms for months. You might be tempted to ask for a refund or backdated benefits. This can lead to messy, prolonged legal battles as you try to prove that your supplier should have applied the most favored nation clause from day one.

Breach of confidentiality

If you’re enforcing a most favored nation clause, you may need to ask your supplier for information on their other agreements to make sure you’re getting the best deal. This could lead to breaches of confidentiality clauses, making you, and your supplier, vulnerable to legal action from other parties.

Contractual limitations

Some contracts will include limitations on how and when most favored nation clauses can be enforced. For example, your most favored nation clause might only apply to new contracts, not renewals, or might exclude certain categories of products. Missing these nuances can lead to costly legal mistakes.

Navigating the legal minefield

To navigate these legal complexities, it’s essential to have a well-drafted, airtight most favored nation clause that clearly outlines what the most favored nation clause covers (e.g., pricing, terms, delivery schedules), how and when the clause is triggered, the time frame for which the clause is valid, any exceptions to the clause (such as specific products or services that aren’t covered), and procedures for resolving disputes related to the most favored nation clause.

Consulting with a lawyer who specializes in contract law is a smart move to ensure your most favored nation clause does what you want it to without stepping into legal quicksand.

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How to negotiate a most favored nation clause

Negotiating a most favored nation clause is all about striking a balance. You want the protection and benefits it offers without tying yourself up in knots. Here are some strategies to help you get the best out of a most favored nation clause without it becoming a contractual straitjacket.

Define the scope clearly

When negotiating a most favored nation clause, one of the first things to do is to clearly define what it covers. Is it only about pricing, or does it include other terms like delivery times, product quality, or additional services? If you’re the one proposing the clause, you’ll want it to cover as much as possible. If you’re on the receiving end, limit it to the essentials—say, just the price.

Example: If you’re negotiating a supply contract, you might specify that the most favored nation clause only applies to the price per unit, not to the overall volume discounts or other terms. This way, you get the best price without being locked into other potentially disadvantageous terms.

Include time and volume limitations

A most favored nation clause doesn’t have to apply forever. You can negotiate time limitations so that the clause only applies for a certain period, like the first year of the contract. Alternatively, you could include volume limitations, such as only applying the clause to orders above a specific size.

This keeps you flexible and ensures that the clause isn’t a permanent barrier to offering unique deals in the future.

Example: “This most favored nation clause applies only to orders exceeding 1,000 units and is valid for the first 12 months of the contract.”

Build in exceptions and carve-outs

When you’re negotiating a most favored nation clause, make sure to include exceptions or carve-outs that protect you from having to match every little deal. For example, you might exclude short-term promotional discounts, special launch pricing, or deals with specific types of customers (like nonprofits or government entities).

This way, you retain the ability to offer flexible deals to different customers without having to worry about triggering the most favored nation clause every time.

Example: “The most favored nation clause does not apply to promotional discounts offered for limited periods or to special pricing agreements with educational or nonprofit organizations.”

Specify how compliance will be monitored

A most favored nation clause can become a nightmare to manage if there’s no clear mechanism for monitoring compliance. Make sure your contract specifies how you’ll check that the clause is being honored. Will you have access to the other party’s contracts or pricing information? If so, under what conditions?

This adds transparency to the agreement and avoids disputes over whether the clause is being followed.

Example: “Upon request, the supplier will provide a certified statement from their accountant confirming compliance with the most favored nation clause, including details of pricing and terms offered to other customers.”

Consider an opt-out option

Sometimes, you might want to negotiate a way out of the most favored nation clause. For example, you could include an opt-out fee that allows one party to exit the clause without breaching the contract. This could be useful if market conditions change dramatically or if new opportunities arise that don’t fit neatly within the clause’s constraints.

This way, both parties have an escape route if the clause becomes too restrictive.

Example: “Either party may opt out of the most favored nation clause by paying a fee equivalent to 5% of the total value of orders placed under this agreement.”

Include a review and negotiation clause

Markets change, and what’s a good deal today might not be one tomorrow. Including a review or renegotiation clause in your most favored nation agreement can provide an opportunity to revisit the terms if market conditions shift significantly. You can set a periodic review—say, every 6 months—to ensure the clause remains fair and relevant.

This allows for adjustments and ensures the clause remains beneficial over time.

Example: “The parties agree to review the most favored nation clause every six months to ensure it reflects current market conditions. Either party may propose modifications to the clause, subject to mutual agreement.”

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Conclusion

A most favored nation clause can be a powerful tool in a contract, helping you secure the best possible terms and ensuring that you’re not left behind when others get a better deal. But like any good thing, it comes with its challenges—like complicating negotiations and limiting your flexibility.

If you’re considering adding a most favored nation clause to your contracts, think about the long-term implications and whether it’s the right fit for your business. And if you’re on the other side of the deal, beware: honoring a most favored nation clause could mean offering those favorable terms to more than one party.

At the end of the day, a most favored nation clause might keep you competitive—but make sure it doesn’t end up keeping you in contractual handcuffs.

How Cobrief can help with contract review

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