There are supply agreements in which the buyer, trying to protect itself, inserts a clause providing that in case supplier sells the same product to a third party to prices lower than the ones agreed in the supply agreement, supplier shall offer to buyer the lower price practiced with third parties. Those clauses are known in the market as "most favoured nation clauses" ("MFN clauses"), after a similar system of the treaties on international trade.
The goal of such MFN clauses is to permit the persons benefited by them to obtain the best prices available in the market for the purchase of raw materials or parts and components, and, by doing so, eliminating any competitive disadvantage they may have vis-à-vis their competitors, which otherwise could buy the same products at lower prices.
As a general rule, only buyers with market power are able to impose on their suppliers MFN clauses, because the economic theory teaches us that sellers will sell at the highest possible prices, and prices are reduced only if so forced by normal competition rules. It makes no economic sense that a supplier, for no compensation of any nature, extends a price charged to client B, resulting from a particular negotiation, to client A, which was not able to negotiate the same level of prices. The supplier will only change the same prices to clients A and B if A is a relevant or strategic client, and it is more important to the supplier to keep client A in its portfolio of clients than the profit margin that will be reduced or lost by the supplier when it extends to client A the better prices might negotiated with client B.
The Brazilian competition laws aim that each player acts in the market and wins based solely on its own efficiencies and merits, not because of its size or economic power only. If client B obtained better commercial terms than client A, why should such better terms be passed on to client A, annulling the benefit obtained by client B by its own merits, whatever they are? Why should the gains of client B freely benefit client A?
The Brazilian antitrust authority, the Conselho Administrativo de Defesa Econômica - CADE, has been very cautions in approving MFN contractual clauses. It normally understands that such MFN clauses are contrary to free competition and should, then, be considered as anticompetitive. Since in Brazil the rule of reason theory prevails - there are no per se violations - the actual contract is to be analyzed , the importance of the product or service to be supplied. This is an alert that such provisions may be barred by CADE, though.
The author is a partner of the Competition Law department of the law firm Demarest Advogados
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