Imposing an obligation on another business to offer the best prices and terms that it offers to all other customers can often seem attractive – but such clauses are not always straightforward. In this briefing, we explore some of the difficulties and discuss the key points to consider for both customers and suppliers when negotiating such clauses.
- What are "best prices" or "most favoured customer" clauses?
- Key considerations for customers
- Key considerations for suppliers
- Competition law issues
- More information on pricing and payment issues
1. What are "best prices" or "most favoured customer" clauses?
In commercial contracts between businesses, "best prices" or "most favoured customer" clauses typically require the supplier to offer goods or services on prices and other terms that are no less favourable than the terms offered to the supplier's other customers. In a pricing context, such clauses effectively require the supplier to adjust its prices to match whatever happens to be its best offer to current customers.
Other commonly used terms: "MFN" and "parity" clauses
Sometimes the term "MFN" clause is also used. This stands for "most favoured nation", which is a reference to the origins of this type of clause in state-to-state agreements, where one state would typically agree not to treat businesses from the other state less favourably than businesses from other countries.
Another term sometimes used is "parity" clauses. For example, as discussed further in section 4 below, price comparison websites or other online platforms/marketplaces may seek to impose "retail parity clauses" on businesses wishing to feature on their platforms, such as hotels or insurance firms; these require them to submit their best prices to the site and prevent them from offering lower prices on their own websites (so-called "narrow" parity, or MFN, clauses) or also on competing platforms/marketplaces (known as a "wide" retail parity clauses). This highlights how these clauses do not always "bite" on the purchase price charged by suppliers/service providers, but can instead sometimes be used by the latter to restrict the retail prices charged to the end consumer. However, in this briefing, we are going to focus mainly on the use of "best prices" clauses imposed by customers in an attempt to secure a better deal from their suppliers (i.e. "wholesale" MFN clauses), rather than MFNs that impact prices at the retail level.
2. Key considerations for customers
Some customers may feel that they have nothing to lose and everything to gain from inserting a "best prices" clause. But there are reasons to be sceptical about their value, which may explain why we don't see them all that often in practice:
Issues with "best prices" clauses
- Verifying compliance: How will you know if the
clause is being breached? We would advise strongly against talking
to your competitors about what they are being charged, because this
is often likely to give rise to a significant risk of breaching
competition law, which could lead to enforcement action and
substantial fines. Benchmarking and audit rights may be worth
considering (see below); whilst they may add complexity to the
clause and the appointment of a third party may be costly, these
additional rights do improve a customer's ability to enforce a
"best prices" clause.
- Competition law risks: As noted above, attempts to verify compliance with a "best prices" clause may prompt staff to engage in potentially risky contact with competitors about the prices they are paying to the same supplier – although as discussed below, this type of competition law risk can be minimised by the appointment of an independent auditor or benchmarker and limiting the customer's access to sensitive commercial information. In addition, "best price" and other types of "parity" obligations may also carry other competition law risks, particularly where the party imposing the clause has significant market power and/or the market is covered by a network of such clauses; these are explained in section 4 below.
Given these issues, some customers may conclude that it is preferable to explore some of the alternatives (see under "Price matching rights" below) or to focus their attention on other aspects of the agreement (especially as a supplier may well push back on your initial drafting – see section 3 below). However, others may conclude that a "best prices" clause is still worth having – because, if nothing else, it makes clear your expectation that the supplier should not be treating your business less favourably than other customers in a comparable position and may be used as leverage (albeit that there are challenges with verifying compliance and enforceability).
Points to consider for customers
- Audit rights: One way of addressing the
difficulty of knowing whether the clause has been breached would be
to include a right to conduct periodic audits to verify compliance.
To minimise competition law risk, this would need to be conducted
by an independent third party who will only share their aggregated
conclusions with you, as opposed to all the data they have
examined. If those conclusions indicated a possible breach, the
matter could be referred to an independent expert who could examine
the full data, together with any arguments by the parties, and
reach a determination on breach. See our detailed briefing for more guidance on audit
rights in a pricing context.
- Benchmarking: Instead of an audit right (which suppliers may well resist), a third party could be engaged to conduct a benchmarking exercise based on surveying other customers of the supplier. Again, the full data would need to remain confidential but if the conclusions indicated a possible breach, the matter could be referred to an independent expert, as suggested in relation to audit rights above. However, this depends on other customers being prepared to share information on pricing with the independent third party. Again, competition law would need to be carefully considered.
An alternative approach: price matching rights
A further variant on the benchmarking approach would be to compare the supplier's prices against offerings of other suppliers in the market (rather than focus on what other customers are being charged); if this indicated that the supplier's pricing was not competitive, that could be the trigger for a referral to an independent expert, who would be given access to the supplier's pricing arrangements with other customers in order to determine whether the "best prices" clause had been breached.
Another approach, which also focusses on what other suppliers are offering (rather than what other customers are paying to your current supplier), would be to provide for a price matching right. For example, the customer would reserve the right to seek quotations from other suppliers periodically; if the incumbent supplier was unable to match those terms, the customer would be entitled to terminate and contract with a new supplier. That said, these clauses also require careful drafting, particularly when it comes to the criteria for identifying what is meant by a matching offer – as explained in our briefings on price matching disputes involving Rangers FC and Sports Direct and Liverpool FC and New Balance.
Comparing like with like and spelling out the consequences of breach
Finally, a "best prices" clause may also prove problematic if it fails to make clear:
- What counts as a breach: For example, does any
instance of lower pricing count, even if the circumstances of the
other customer are not comparable (where there may be an objective
justification for the difference in treatment)? If this is not
clearly set out, suppliers may succeed in arguing for an implied
term that the obligation only applies in relation to customers
which are in a comparable position to you.
- The consequences of breach: For example, should the supplier be required to implement lower pricing and will there be a rebate in respect of higher charges paid before the switch to lower prices?
3. Key considerations for suppliers
It will rarely, if ever, be in a supplier's interest to agree to an obligation to offer a customer its "best prices" – and in seeking to resist such provisions, suppliers may find it helpful to refer to some of the difficulties with them outlined in section 2 above. However, sometimes, particularly where the customer has material bargaining power, it may not be possible to resist the inclusion of a "best prices" clause. In those circumstances, suppliers may be able to draw a degree of comfort from those same points, because in practice it may not prove straightforward for the customer to detect breaches and to enforce the provision. Suppliers should also consider the following:
Points to consider for suppliers
- Definition of comparators: The obligation
should be confined to prices offered to other customers which are
in a comparable position to the customer seeking to include the
"best prices" clause. It is worth defining the concept of
"comparable" in a reasonable level of detail e.g. by
reference to volumes purchased, type and complexity of services
provided, location, duration of the agreement etc.
- Definition of breach: Set out the criteria for
evaluating whether the obligation has been breached, once suitable
comparators have been established. For example, should there be a
"de minimis" level where a pricing difference of say,
5-10% or less is stated not to be a breach? If it is difficult to
identify "like for like" comparators, what counts as an
objective justification for a difference in treatment?
- Audit or benchmarking rights: If audit or
benchmarking rights are conceded (see section 2 above), these
should ideally only be exercisable a limited number of times during
the lifetime of the contract. Careful consideration should be given
to the design of the exercise to ensure confidentiality and
competition compliance. By way of example, the person carrying out
the audit should be an independent third party and the customer
should not be entitled to see (or have the ability to reverse
engineer) sensitive commercial information, but only anonymised
conclusions of the investigation, with any supporting data about
customers being provided on an anonymised and aggregated basis.
More generally, the scope of any audit rights should be limited as
much as possible – note in particular the drafting tips set
out in section 3 of our detailed briefing on these provisions.
- Costs: So far as possible, ensure that the customer bears the cost of any audit or benchmarking exercises envisaged under the clause. If the customer insists on costs being shared, seek to obtain some control over who the customer can appoint as auditor or benchmarker and/or to limit your contribution to a share of reasonable costs, reasonably incurred.
4. Competition law issues
One example of a competition law risk with "best prices" clauses is that, in seeking to verify a supplier's compliance with the obligation, a customer may engage in discussions with its competitors about what the supplier is charging them; as highlighted in section 2 above, such behaviour risks breaching competition law, and may lead to burdensome investigations and substantial fines (of up to 10% of global turnover under UK competition law). Risks of director disqualification and private claims for damages may also apply. As discussed in sections 2 and 3 above, these risks can be minimised by the appointment of an independent auditor or benchmarker to undertake the analysis on the customer's behalf and by limiting the customer's access to sensitive commercial information (other than that which is anonymised and aggregated).
Another example, particularly where the customer has a significant degree of market power, is that a requirement on that customer's suppliers to offer their "best prices" may remove any incentive for those suppliers to offer lower prices to other customers in order, for example, to win new business. This arguably distorts competition by preventing the customer's competitors benefitting from the possibility of prices which are lower than those that it has managed to achieve.
In practice, it may not always be wholly straightforward to ascertain what is and is not lawful under competition law when it comes to "best prices" clauses - caution needs to be exercised where the parties involved have significant market power (at either the supply or purchasing level) and/or the market as a whole is covered by a network of such clauses. The significance of the input covered by the "best price" clause, in comparison to the product supplied by the customer to the end consumer (e.g. in terms of the customer's total cost) will also be relevant to level of any competition law risk.
"Best prices" clauses and competition law in practice
There are several examples at both the UK and EU level of competition regulators taking action against parity or MFN clauses. However, these cases have tended to focus on "retail price parity" obligations concerning prices charged to the consumer, rather than "best prices" clauses focused on the prices charged to e.g. distributors at the upstream, wholesale supply level.
By way of example, competition authorities in the UK and elsewhere in Europe have previously investigated retail MFNs imposed by online booking platforms and price comparison websites. Broadly speaking, this has resulted in a general consensus that "wide" clauses (which effectively prohibit businesses featured on those sites from offering lower prices through any other sales channels) are more likely to be problematic than "narrow" clauses (which only prevent the relevant business from offering lower prices through its own website). However, there are differences in approach from jurisdiction to jurisdiction – the UK, for example, has taken a stricter approach than the European Commission by regarding "wide" retail MFNs as "hardcore" restrictions (i.e. akin to prima facie illegal) under the newly adopted UK Vertical Agreements Block Exemption Order. That does not mean that "narrow" clauses do not also still carry at least a degree of competition law enforcement risk – although that will depend on e.g. the platform's market power and the clause's likely effects. Certain other national jurisdictions, such as Germany, have also taken a strict approach in the past, including as regards "narrow" retail MFNs. Meanwhile certain jurisdictions have sector-specific legislation dealing with these clauses and the EU Digital Markets Act prohibits the use of both wide and narrow retail parity clauses by large online platforms deemed as "gatekeepers".
Exactly how such retail MFNs will be analysed may therefore depend on the specific regulator and industry context. However, what is clear is that, regardless of the context, particular caution is advisable before imposing and exercising retail price parity obligations of this type. In the UK specifically, the position remains somewhat unclear, following a successful challenge by Compare the Market to the CMA's decision to fine it £17.9 million for use of a "wide" clause – although much turned on the specific facts of that case and the CMA's approach.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.