Most Favoured Nations Clause- Climbing the Mountain

Thursday, February 20th, 2014

In a sample of 100 buyers it is probable that >70% will not have heard of the ‘Most Favoured Nations Clause.’ Some will have heard of price matching clauses but are likely to be hazy about the detail.

We’ve got for you here – a brief case study that step by step explains the importance and application of the “Most Favoured Nations Clause”

The City of Los Angeles’ Controller’s Fraud, Waste & Abuse Unit have conducted a review of the City’s contract with Iron Mountain Management Inc. The City’s contract includes standard base pricing for 25 separate line items for different line items for different types of services. These include a monthly storage charge per box, retrieval/pull charge per box, refilling, regular and rush delivery, data entry and shelving, permanent removal, transfer, destruction, etc.

The applicable section of the contract terms is:

Most favourable government prices

Supplier shall treat City of Los Angeles as a most favourable customer. Supplier represents that the prices for storage and services furnished to City of Los Angeles under this Agreement are not less favourable than the prices and provisions offered to any of the supplier’s other customers, unless the other customer receives lower prices or more favourable non-price treatment because of the higher volumes of storage and services, after taking into account the cost structure in a single district and the service requirements profile of other customers.

If supplier offers lower prices or more favourable provisions to any other customers than those offered to City of Los Angeles under this Agreement (taking into account volume, account cost structures in single district and service requirement profiles) for similar storage and services, then supplier agrees to concurrently extend such prices or provisions to City of Los Angeles and this Agreement at City of Los Angeles’ option, shall be deemed amended to provide such terms to the City of Los Angeles.

There is an interesting intellectual exercise for procurement specialists, versed in contract detail. What, if any, criticisms do you have of the above clause?

The findings of the review included,

“This review demonstrates the significant weaknesses in the language of the contract terms. This clause was intended to provide assurance that the City receives the best possible pricing. However, it provides for so many exceptions and variations, it renders it both ambiguous and meaningless. Due to the broad parameters that could impact ‘best pricing’, the City must rely on the vendor to consider these issues among their different customers, and voluntarily inform the City if there is a need to reduce the City’s pricing. This weak contract language impairs the City’s assurance of vendor compliance, and makes testing price comparisons extremely burdensome and difficult to question.”

The report concludes,

“We encourage all City Departments to carefully draft their vendor agreements to help ensure that the City obtains the lowest possible pricing for high-quality services. Such definitive and unambiguous contract language is imperative for Departmental contract administrators and City management to ensure that vendor comply with their agreements.”

If you tackled the wording of the clause you can now compare your conclusions with those of the auditors (see the emphasis below). The emphasis show the weaknesses in wording within the clause.

Supplier shall treat City of Los Angeles as a most favourable customer. Supplier represents that the prices for storage and services furnished to City of Los Angeles under this Agreement are not less favourable than the prices and provisions offered to any of the supplier’s other customers, unless the other customer receives lower prices or more favourable non-price treatment because of the higher volumes of storage and services, after taking into account the cost structure in a single district and the service requirements profile of other customers.

If supplier offers lower prices or more favourable provisions to any other customers than those offered to City of Los Angeles under this Agreement (taking into account volume, account cost structures in single district and service requirement profiles) for similar storage and services, then supplier agrees to concurrently extend such prices or provisions to City of Los Angeles and this Agreement at City of Los Angeles’ option, shall be deemed amended to provide such terms to the City of Los Angeles.

There is potential risk created in every contract due to loose wording. What safeguards exist in your organisation to manage this risk?

At Brian Farrington we love the intricacies of contracts.  If you have a  clause or contract issue that could do with a chat through – give us a call.  We are happy to share our insights and work with you to figure out interpretations, meaning and and most importantly applications to deliver value.  Please call (we wont bite!) on 01744 20698 or drop an email to Steve.

Thanks

Steve

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We now recommend you read “Is it just a Lotto?- How Buyers Evaluate Tenders”

 

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One Response


  1. Thursday, February 20th, 2014 at 9:37 am

    […] We now recommend you read “Most Favoured Nations Clause- Climbing the Mountain“. […]