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What is best practice in Most Favored Customer clauses?

February 26, 2015

An IACCM member posted this question on the IACCM Forum. I am not a fan of such clauses: they always were open to manipulation and today they are even more so. They strike me as a lazy and ill-considered approach to a legitimate issue – and they carry various dangers that can undermine value.

Most Favored Customer (or Nation) clauses are inevitably problematic unless there are independent sources of price comparison. In many cases, even if there are research companies offering data, the most highly negotiated deals are protected by confidentiality undertakings. And even when some data can be accessed, it is usually possible for a supplier to claim that price variations reflect other differences – for example, in risk allocation, availability, volume or term of agreement etc. This means, in my experience, MFN clauses are of limited meaning or value.

However, this does depend to some extent on how much you trust the integrity of the supplier and whether you are clear about your own goals. For example, do you really need to have better prices than all other customers, or is your real sensitivity that you want better prices than your competitors? Must you really be best, or perhaps it is sufficient to be in the top 5 or 10%? Does price really matter anyway, or should you be measuring cost of ownership?

You might make such a provision subject to periodic confirmation by the supplier, making it clear that misrepresentation would be a fundamental breach of the agreement. You can require independent audits, though few large suppliers will agree to this and the cost may be prohibitive. You could commission periodic research which, depending on the market and the nature of the service, may yield practical results.

I would suggest that the real concern here is that you want to ensure pricing remains fair and reflects market trends. Often the only way to test this is by regular market testing via competitive bidding. Such an approach has little attraction for the customer or the supplier – it is expensive and potentially disruptive. So you might consider a clause modelled around the principle that the supplier has responsibility to demonstrate not only that the prices they offer you are the best they offer, but also that they are among the best available in the market. But be cautious that in your focus on price you do not lose sight of broader issues of value. There will always be someone cheaper, but what is the cost associated with ‘being cheap’?

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