Most-favored nation clause (MFN): Overview, example and definition
What is a most favored nation clause?
A most favored nation (MFN) clause is a contractual term that ensures one party gets the best terms offered to any other party in a similar agreement. Essentially, it guarantees that the party with the MFN clause isn’t disadvantaged compared to others who strike deals with the same company. This clause is often used in business agreements like supplier contracts, licensing deals, or partnerships.
For example, if a supplier agrees to sell products to a distributor at a specific price and then offers a lower price to another distributor, the MFN clause ensures the first distributor gets the same lower price.
Why is a most favored nation clause important?
An MFN clause is important because it ensures fairness and prevents one party from being undercut in competitive business relationships. It allows the party with the MFN clause to maintain a level playing field and benefit from any better terms or deals the other party offers to someone else.
For businesses, an MFN clause can provide confidence in long-term agreements, ensuring they don’t lose out if more favorable terms are given to others. However, these clauses must be carefully managed, as they can complicate negotiations or trigger disputes over what qualifies as a “better deal.”
Understanding a most favored nation clause through an example
Imagine a software company licenses its platform to multiple clients. One client negotiates an MFN clause in their contract, requiring the software company to extend any lower subscription prices offered to future clients to them as well. If the company later offers a reduced price to another client during a promotion, the MFN client is entitled to that same lower rate.
In another scenario, a film producer might sell distribution rights to a streaming service with an MFN clause. If the producer licenses the same film to another platform with additional perks, such as earlier release windows, the first streaming service can claim those perks too.
An example of a most favored nation clause
Here’s how an MFN clause might look in a contract:
“The Seller agrees that the terms offered to the Buyer under this Agreement shall be no less favorable than the terms offered to any other party for similar goods or services. If the Seller provides more favorable terms to another party, the Seller shall notify the Buyer and extend the same terms to the Buyer immediately.”
Conclusion
A most favored nation clause ensures one party receives the best possible terms, creating fairness and trust in business relationships. It’s a valuable tool for maintaining competitiveness and protecting against disparities in similar deals.
By clearly defining how and when the MFN clause applies, businesses can use it to secure advantageous agreements while avoiding confusion or disputes. It’s a practical way to ensure equitable treatment in competitive industries.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.