Mark Pestronk
Mark Pestronk

Q: A corporate client of our agency has asked us to agree to a "most favored nation" clause. What would such a clause provide for? What are the risks of such a clause, and how do we mitigate them?

A: A most favored nation (MFN) clause is a misleading term because it has nothing to do with nations and does not mean that the client will be "most favored" over any other client. It simply means that your fees will be no higher than the fees that you charge to the client to which you charge the lowest fees.

In other words, "most favored nation" means "equal to your most favored client." It means that the client's fees will match your lowest fees.

The word "nation" is used because the term comes from diplomacy. In international trade agreements, it requires Country A to provide to Country B all the concessions that Country A has already granted to Country C, its most favored trading partner. Although its name implies favoritism toward Country B, it actually denotes the equal treatment of Countries B and C.

In business, the term typically refers to prices. Seller A must agree to provide Buyer B with prices that are the same as those offered to Buyer C, if Buyer C gets Seller A's lowest prices. In corporate travel management, a typical MFN clause is as follows:

"The Parties intend that Client shall have the status of a most-favored customer with respect to matters of pricing and contract terms for the Deliverables provided hereunder.  If a travel management company (TMC) offers more favorable prices or contract terms at any time during the Term to any of its other customers, TMC shall immediately notify Client, and Client shall be entitled to the more favorable prices and contract terms for all Deliverables provided hereunder after the date of such offer.  Upon Client's request, TMC shall certify to Client in writing that it is in compliance with this provision."

In corporate travel management, TMCs' lowest fees are typically provided to large corporations and government agencies. So, your client is asking for you to agree to provide your lowest fees to it regardless of its size or complexity.

The problem with such clauses is that no two large clients are really alike in terms of service levels. Even if their transaction volumes are identical, the amount of work required for the clients is never the same.

For example, a corporate account with 1,000 complex international travel transactions per year will require far more expertise and staff hours than one with 1,000 transactions between the same two domestic cities. Yet, under the clause quoted above, the former would be entitled to the same fees as the latter.

So, if you are willing to agree to an MFN clause in concept, you need to carefully add qualifying conditions so that you would have to match only accounts that are truly similar in volume and complexity. Ideally, another condition would be the client's commitment to use your agency exclusively, if your lowest-fee account has also so committed.

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