Most favored customer clause: Overview, definition, and example
What is a most favored customer clause?
A most favored customer (MFC) clause is a provision in a contract that ensures a customer receives the best terms or pricing available from the seller, equal to or better than the terms offered to any other customer. The clause typically applies to pricing, but it can also apply to other aspects such as delivery terms, payment terms, or other contractual conditions. If the seller offers more favorable terms to another customer, the MFC clause requires them to offer those same terms to the customer with the clause in their agreement.
For example, if a business signs a contract with a supplier that includes an MFC clause, and the supplier later offers a competitor a lower price for the same product, the business with the MFC clause is entitled to the same lower price.
Why is a most favored customer clause important?
A most favored customer clause is important because it helps ensure that a customer is not disadvantaged in terms of pricing or other conditions in comparison to other customers. For buyers, it offers a safeguard that they will receive the best possible deal available from the supplier or vendor. For businesses, offering MFC clauses can help build stronger relationships with key customers, incentivize long-term contracts, or provide assurances of competitive pricing.
The clause can also help prevent the perception of unfair treatment and foster trust between parties. For sellers, it can ensure that the relationship remains strong with major customers, who may rely on this clause to guarantee that they always receive competitive pricing.
Understanding most favored customer clauses through an example
Imagine a software company that offers a subscription service to various customers. A large enterprise customer negotiates a contract that includes a most favored customer clause. Later, the software company offers a competitor the same service at a discounted rate. Under the terms of the MFC clause, the large enterprise customer is entitled to receive that same discount. This ensures that the customer is always getting the best available price.
In another example, a retail store might negotiate an MFC clause with a supplier, guaranteeing that the supplier won’t offer lower prices to other retailers. If the supplier later reduces prices for other retailers, the store with the MFC clause can request the same price reduction.
An example of a most favored customer clause
Here’s how a most favored customer clause might look in a contract:
“The Seller agrees that the Buyer will receive the most favorable pricing and terms offered by the Seller to any other customer for the same goods or services. If the Seller offers better terms to another customer, the Seller will offer the same terms to the Buyer, effective immediately.”
Conclusion
A most favored customer clause ensures that a buyer receives the best pricing and terms available from the seller, promoting fairness and competitive pricing. For businesses, having an MFC clause in a contract provides assurance that they won’t be left with less favorable conditions than others. For sellers, it can help establish trust and loyalty with key customers, though it requires careful management of pricing and terms across different customer relationships to avoid conflicts.
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.