Why the “Most Favored Nation” clause is unfair to your business
The most favored nation clause (MFN) is a term that originated from diplomatic proceedings. However, nowadays, you can find this term in clauses in contractual agreements for business. You may also see it called the “most favored customer clause.”
This post is going to answer all your questions regarding the most favored nation clause. We will explain what it is, how it applies in terms of business, and if you should use this clause for your contracts.
What is the most favored nation clause?
When used in international trade agreements, it refers to the equal treatment of all nations within the agreement. No country within the agreement will receive any concessions, privileges, or immunities unless all nations receive the same.
One real-life example of this is the US diplomatic relations with China and Vietnam during Clinton’s presidency. The debate was whether or not to drop the embargoes on those countries and grant them MFN status. Supporters wanted to give American consumers access to quality goods at low prices while building relations with the two eastern nations. Those opposed to the idea argued that it would not be right to give China and Vietnam MFN status due to their history of human rights violations and the likelihood that cheaper imports could lead to American jobs lost.
In the end, both countries received the MFN status. Was this the best decision?
It turns out, both sides of the aisle were correct. Americans did gain access to cheaper goods in the short term, and diplomatic relations were built stronger for a time. However, American manufacturing jobs were also lost and have still yet to recover. This example shows how such a clause can lead to unintended consequences.
How does the MFN clause apply to business?
When used in business terms, the most favored nation clause means that no client will receive better or worse treatment than another. For example, your fee per hour for one client will be the same fee per hour for the next. This clause is often used to show your customers that you value all of them equally and help your company build stronger bonds with valued clients.
But just as in the diplomatic example, this clause can come with negative consequences for business deals.
What is the harm of MFN for your business?
The problem with using a most favored nation clause for your business is that no two clients are alike. Some clients need a lot of your time, others need more difficult research, and some need both. You might be spending the same amount of time on two clients, but that does not make the workload equivalent.
When a job is more complex, it requires more work from your team, and therefore your fee should be higher. Using an MFN for your organization is just bad business sense.
How do you detect MFN clauses in your contracts?
You’ll need to do an inventory of your company’s contracts to find those containing such clauses. This process can be time-consuming if done by your team to locate each contract.
Luckily, Zendoc has a much easier solution. Zendoc’s AI-powered ongoing contract analysis can easily search through all of your integrated platforms and give you the contracts you need to fix instantly. Our platform will save your team hours of work and let them focus on re-working the clause in the contracts instead.
Your clients might not like the idea of losing the MFN clause, but in the end, your contracts need to be fair to your clients, fair to your team, and fair to your business.
Zendoc is a full-service AI-powered contract automation system that not only organizes all of your agreements into a single database but keeps you up-to-date on what you need to do to extract as much value from your contracts as possible. You don’t have to worry about forgetting your obligations because you don’t have to remember them in the first place.
We offer a 14-day free trial demo so you can experience relief from the pain of managing your contracts. Try us today!
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