The “favored nations” (most favored pricing) clause in supply agreements is employed to contractually bind product suppliers to price reduction adjustments based on the price the products are sold to other customers. These clauses, sometimes overlooked as harmless, are often hidden in pricing adjustment or other innocuous provisions of a supply agreement.
The favored nations clause requires that a customer receive the lowest price that the supplier is offering the product for sale to any other customers during the term of a supply agreement, all without the burden of an arms-length negotiation.
Such clauses should not be casually agreed to under the mistaken assumption that a customer will not enforce. They are “snakes in the grass” and potentially very costly to suppliers, especially given the increasing number of third-parties offering contingent fee recovery arrangements to customers based on favored nations clauses.
If a supplier is unable to negotiate the deletion of the favored nations provision, suppliers can reduce their exposure by negotiating a “market check” or “meet or terminate” provision in their supply agreements, or implement other creative tactics to counter favored nations clauses.