A most favoured customer clause guarantees pricing that is at least as low as the best pricing options available to other clients and customers.

What Is Most Favoured Customer Clause?

A most favoured customer clause, or MFC, is an agreement that outlines an obligation for a supplier to provide favored customers with pricing that is no higher than the best prices offered to other clients. This is generally referred to as "on no less favorable terms." It can be ineffective and potentially dangerous for a government to obtain services and products for citizens when the focus is only on things like:

  • The lowest available price, without taking value into account.
  • Special terms.
  • Quality of services and products.

While considering the price is certainly important when a contract is being negotiated, it shouldn't be the only thing taken into consideration. When a most favoured customer clause is included in negotiations, pricing becomes one of the primary factors taken into consideration. Most favoured customer clauses can come in a number of forms. The most common, however, appear in energy and resource industries as commercial agreements.

At first glance, a most favoured customer clause can appear to encourage competitive pricing in the sense that they bind suppliers to offer the lowest pricing options available and more competitive terms. Clauses of this nature, however, have given rise to increasing concerns with the authorities that oversee business competition all over the world for the following reasons:

  • They can disincentivize price reductions as discounts being offered to third parties because customers with an MFC clause in place are then entitled to the same reduction in price.
  • The cumulative effects from multiple MFC agreements can cause problems related to price alignment.

In a recent example, the antitrust authorities in the European Union and the United States took a close look at agreements in place between Apple and a number of book publishers in relation to publishing books on Apple devices. These agreements stated that any books published on Apple's platform would have to be priced as low as the same books published on other electronic platforms, specifically Amazon. Authorities were concerned that this agreement would actually negate the incentive for allowing Amazon to publish electronic books cheaply on platforms such as Kindle rather than keeping prices down, which was the original intent.

These concerns arose because the agreements that were in place made it more expensive for publishers to work with Amazon's low price policies, leading to Amazon being forced by publishers into agency agreements and allowing them to directly control the retail prices for any books they sold on the Kindle platform.

Can MFC Clauses Be Construed as Anti-Competitive?

Essentially, the way a most favoured customer clause is operated can potentially cause it to work in ways that may be considered anti-competitive. You might think that a favored customer using its purchasing power and forcing suppliers to sell at lower prices would result in a positive outcome for consumers. However, there is a flaw in this logic when you take the following into consideration:

  • Buyers are not obligated to pass these lower prices on to consumers.
  • Lower prices can result in less demand, essentially punishing sellers for not offering the best available price.

There are two primary competition problems that may arise when most favoured customer clauses are used:

  • Price uniformity.
  • Smaller business can be left out in the cold.

"Price uniformity" is a term used to refer to cases in which prices stay higher and are more resistant to change than they may be if an MFC clause was not in place. In these cases, suppliers have fewer incentives to negotiate pricing with customers on an ongoing basis because the MFC clause increases the costs associated with these negotiations by requiring them to offer the new pricing to any customer with a most favoured customer clause in effect.

Smaller companies that may otherwise be able to negotiate lower pricing terms are left out in the cold when larger companies with most favoured customer clauses can dictate the supplier's pricing. Suppliers can be discouraged from offering lower prices to smaller companies when an MFC agreement states it will also have to offer those same lower prices to the larger companies. This can make it much more difficult for small companies to enter the market.

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