E-Sourcing Forum » Most Favored Nations Clause?

Most Favored Nations Clause?

February 8th, 2006 at 11:26am David Bush - Iasta

To use or not to use…that is the question. In the Iasta SmartSource e-RFx system, our administrators have the ability to create templates for re-usage quickly. In some of our client’s template libraries, there exist clauses that the suppliers must accept a Most Favored Nations clause. Not every one uses this type of clause and they can have some benefit, although it is typically modest.

What is the clause? Here is an example of typical language:

“In the event of a price decline, or should you at any time, during the life of this agreement, sell the same materials or service, under similar quantity and delivery conditions, to ________, at prices below those stated herein, the agreement vendor will immediately extend such lower prices to ________.”

I am not sure of the history of the clause but I suspect that there is cross-pollination from the public sector that led to this idea to bleed over occasionally to the corporate world.

The drawbacks for including such terms would include:

Suppliers have generally been extremely resistant to agree to such language, so you are risking a limited supply base or a tumultuous beginning.
How do you enforce this? The amount of work that would be necessary to track down these competitive bids is prohibitive and might not be legal, in some cases. For that matter, why not just run a reverse auction if you suspect better pricing is available?
Lastly, this is a tool typically used by governments to create an artificial feeling of doing a good job. As with many public-private comparisons, this clause is ineffective for the governments, so it is very unlikely to work for the private sector.

However, there is one argument for these clauses. If you are signing a long term contract and you fear that major changes could impact the market and prices, a MFN clause could allow you the flexibility down the road to make significant changes to the agreement. This scenario may not present itself very often but is something to consider.

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Entry Filed under: General, Suppliers, e-RFx

2 Comments Add your own

1. Jon Cox | February 13th, 2006 at 9:07 am

Audit Rights (terms and 3rd party audit firm to be specified) must also be included in the contract if a Buyer is going to adopt the MFN clause in contracts. I have used the clause, but like you said, it’s quite a process to enforce.
2. Matthew W. Grant | February 25th, 2006 at 7:01 pm

The first thing I always think of when seeing this clause is enforcement. Even if one were to have audit rights and a specified 3rd party audit firm, how would one know to start looking? Since pricing is always confidential, one company should not know what another company is paying anyway. (Would this clause then override confidentiality?) It is doubtful that the supplier would volunteer the information that someone else is getting a better deal.

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