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“Most Favoured Customer” clauses

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Commercial law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

“Most favoured customer” clauses in commercial contracts provide that the supplier will always give the customer its best price and terms. They usually provide that if the supplier gives another customer a better deal then it has to pay the “favoured customer” the difference. These are fairly common in the United States and are becoming more common in the UK.

If the favoured customer finds out the supplier has given someone else a better deal then, in addition to claiming the price difference, the contract may give the customer the right to terminate the agreement forthwith.

Good negotiating tactic

These clauses are good for negotiating as they do not necessarily have to be directed at getting the lowest price. They can be used very effectively for getting better terms on an ongoing basis which may prove more valuable to the customer long term than a small saving on price.

Price comparison

The simplest clauses can work only on price. In other words it is like a “price promise” which retailers often make. The clause can allow customers to claw back money if goods or services are supplied within a specified period at a lower price.

Special terms for favoured clients

More complex clauses cover the terms upon which customers are supplied. This is more likely when supplies of services are involved. It can be used to ensure only the most experienced and best employees are allocated to the customers work or that time is recorded in a certain way.

Supplied first

The clauses can also provide for the favoured customer to be supplied before any other customer so that delays in receiving supplies are minimised. This effectively creates a two class system for customers.

New systems

They can also include any new product or way in which goods and services are being supplied. So if a more efficient way of supplying a customer is developed, then the favoured customer must have it offered straight away to him.

Bigger customers

Because bigger customers are in a better position to get “most favoured customer” status they operate to the detriment of smaller customers. There have not been any cases about claims by customers who may have been prejudiced as a result of this though inevitably this will happen.

Contracting

The above works to the detriment of customers who are not favoured customers. It is helpful when negotiating with a supplier to ask for a clause to be put in your contract that the supplier will not enter into a most favoured customer with someone else.

December 2017
David Anderson
Solicitor-Advocate and Chartered Tax Adviser