What is the purpose of a Most Favored Customer clause in a business contract?

A Most Favoured Customer (“MFC”) clause usually states that the Supplier will treat the Buyer as their most favoured customer, which means that the Buyer will get Pricing terms that are no less favourable than any of the Supplier’s other customers. The MFC clause may even state that the Buyer will get better pricing than other customers.

Some clauses go further and promise that: 

1. If the Supplier offers better terms to another customer after the agreement is executed, the Supplier will offer the same to the Buyer.
2. If the lower price is accepted, any amounts charged and paid in excess will be refunded or credited back to the Buyer.
3. The Buyer will have the right to audit the Supplier’s records to ensure compliance with the MFC clause.

While many businesses give preferential pricing to select customers, an MFC clause in a contract is rare because it turns a normally fluid discretionary pricing strategy into a static legal obligation. Buyers who manage to secure an MFC clause tend to have leverage that comes from a long-standing relationship and/or because the Buyer is already the Supplier’s MFC, whether because the Buyer was a big “catch” or because they provide a steady stream of revenue. 

There is no hard and fast rule regarding what an MFC clause must contain. The above points can be included, amended or excluded altogether. Or, the parties could choose not to make it a clause but instead include the same concept in a warranty. However, if an MFC clause is being discussed, it should be expected that an audit right will be sought by the Buyer. The clause has no real “teeth” without it. 

If a Supplier is amenable to an audit right, they will likely want to specify the type of information that will be disclosed, to safeguard confidential business information. For example, a Supplier could stipulate that a redacted spreadsheet with only unique numeric identifiers and percentages above or below the Buyer’s price will be provided. Or a Supplier could offer to provide a letter on a specific date confirming that they have complied with the MFC clause. Confidentiality of the MFC clause and any information disclosed under it could be mentioned in the Confidentiality clause of the Agreement, to deter sharing of the Supplier’s information.

Further, a Supplier could put guardrails around the amount of information that will be disclosed by limiting disclosure to customers in the same customer segment (i.e. comparator group) - the same geographic market, the same industry, paying in the same currency, of the same size, and during a specific time period.  That type of focused benchmarking should narrow disclosure to only what is truly important for both parties.

Retroactive price adjustments and refunds or credits are a purely financial and strategic issue. A Supplier could choose to decline a clause including price adjustments. Or they could insist on a time limit for price adjustments (e.g. no adjustments or refunds after six months of the Effective Date of the Agreement) or place a cap on refunds or credits. A Supplier could also try to re-coup the losses of agreeing to in-term price adjustments by negotiating in upward price adjustments when the Supplier experiences an increase in operating or fulfillment costs.  But, upward price adjustments would have to be managed in a way that maintains the Buyer's MFC status.

The point is that whatever terms are agreed to, if at all, there are ways to limit the impact of them and/or counterbalance their effects. As with all pricing-related terms, dealing with these issues on a case-by-case basis is risk laden.  Instead, a business could create a policy that outlines a generalized approach with a clear approval and information dissemination process, with input from various stakeholders like the finance, strategy, and sales teams. Of course, there is always the possibility that having an internal policy is enough to retain a great customer without creating a legal obligation in a contract, but that is a business decision.