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What Is a Most Favored Nation Clause in a Contract

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Various documents examining the use of most-favoured-nation clauses or similar structures in natural gas contracts support the above discussion. Mulherin (1986), who analysed the use of most-favoured-nation clauses and arrangements for taking or paying in the natural gas industry on the basis of contracts during the period 1940-1954, concludes that the best explanation for the use of these provisions in the given case seems to be the desire to minimise transaction costs by introducing a contractual structure that prevents opportunistic behaviour of the pipeline from any by ensuring „an execution time“ Adaptation to changing market conditions (Mulherin 1986, 112-113). Crocker and Lyon (1994) also provide empirical support for the use of most-favoured-nation societies to introduce price flexibility into long-term contracts with high fixed costs specific to the relationship, without risking opportunistic behaviour, as opposed to clauses motivated by the desire to facilitate coercion. Footnote 12 Canes and Norman (1986) also describe the role of most-favoured-nation clauses in the natural gas industry in a similar way: long-term contracts encourage investment with high fixed costs, while most-favoured-nation clauses in turn provide a cost-effective mechanism for adjusting contract prices to market conditions. Trade experts believe that most-favoured-nation clauses have the following advantages:[citation needed] As noted above, a most-favoured-nation clause has traditionally been defined as an agreement whereby the seller accepts that the buyer receives terms at least as favourable as those offered to any other buyer (Stenger 1989; Dennis, 1995). However, with the popularization of retailers from the most favored countries in multi-sided markets, a different structure was added to the category of „most-favored-nation enterprises.“ Indeed, in many cases, commentators have not distinguished between traditional most-favoured-nation countries and most-favoured-nation retailers, despite differences in structure and thus some differences in terms of impact on competition. Footnote 8 The possibility of excluding competitors has been one of the main concerns in antitrust investigations of retailers in the most favoured countries. Thus, in the above-mentioned HRS decision, BKartA asserts that „most-favoured-nation clauses also impede market access for new competitors“ (FCO 2013c, para. 160) by preventing access to cheaper offers through lower commissions or another advantageous strategy for hotels. In this context, the FCO refers to the example of Justbook, a new mobile booking channel that offered hotels more favorable conditions, but whose request for cheaper room offers was rejected due to the presence of retail companies from the most favored countries that protect HRS. Compared to contemporary most-favoured-nation clauses, where the seller is only responsible for offsetting the lower prices it offers that occur at the same time as the most-favoured-nation holder`s purchase (or at least within a relatively short period of time), most-favoured-nation retroactive clauses (which require the seller to indicate the same low price as previous sales) may pose a greater risk to the competition. The more „retroactive“ a most-favoured-nation clause becomes, the higher the number of bids covered – and thus the „tax“ on a discount and the resulting effect in the form of a brake on competition. Similarly, the ability of the cartel members to stabilize the cartel, or of a monopolist, its bargaining power vis-à-vis buyers waiting for better prices, will depend on the retroactivity of the most-favoured-nation airlines.

The ability of retailers in the most favoured countries to curb price competition has been an important element of the recent antitrust review of these clauses. In its study of the online hotel booking platform HRS, the BKartA stated: „The pricing freedom of hotels and hotel portals is also negatively influenced: most-favoured-nation clauses prevent hotels from offering rooms at lower prices, and there is no economic incentive for [hotel portals] to charge lower commissions“ (BKG 2013c. para. 186). HRS offered hotel brokerage services for a commission based on the rooms booked on the website, i.e. operating according to the agency`s model. HRS had imposed on participating hotels most-favoured-nation treatment, which required, among other things, to treat HRS no less favourably than other online booking platforms, which prohibited hotels from offering cheaper prices elsewhere, including the hotel`s website, as well as offline channels such as an offer via the hotel reception (FCO 2013c, para. 173). Because of these obligations, hotels could not pass on the impact of lower commissions to guests, even if another agent decided to sacrifice their commission to include a better offer. We argue that a model guideline should discuss the specific efficiency gains that can be achieved through the use of most-favoured-nation clauses and the specific contexts in which most-favoured-nation clauses can have particularly strong pro-competitive effects. In particular, in the case of EU law, the identification of potential pro-competitive effects would guide the first element of individual exemption analyses under Article 101(3) TFEU, where the grant of an individual exemption is subject to the condition that the agreement in question contributes `to improving the production or distribution of goods or to promoting technical or economic progress`.

Since its creation in gatt in 1947, the MFN has crossed the boundaries from the international trade arena to the business world. Outside the field of law and international relations, most-favoured-nation clauses most often serve two purposes: (1) to strengthen or maintain relationships with key customers, customers or suppliers, and (2) to provide certain assurances to early risk-takers. In accordance with the obligation under the World Trade Organization (WTO) accession treaties, WTO Member States automatically extend most-favoured-nation group status, unless otherwise specified in the agreement or timetable notified to the WTO by that Member State. Under this provision, India has extended most-favoured-nation status for goods to most WTO Member States. [Citation needed] A most-favoured-nation (MFN) clause requires a country to grant concessions, privileges or immunities granted to a nation under a trade agreement to all other Member States of the World Trade Organization. Although its name implies a preference for another nation, it refers to the equal treatment of all countries. After the Second World War, tariffs and trade agreements were negotiated simultaneously by all interested parties within the framework of the General Agreement on Tariffs and Trade (GATT), which eventually led to the World Trade Organization in 1995. The WTO requires members to grant each other „most-favoured-nation“ status. A „most-favoured-nation clause“ is also included in most post-World War II bilateral investment treaties between capital-exporting and importing countries. [Citation needed] If the market dynamics are so great that buyers might be tempted to hold on in the hope of obtaining better terms in the future, the use of a most-favoured-nation clause can be used to mitigate these resistance problems by ensuring equally advantageous terms for those making early commitments (Baker and Chevalier 2013; Van der Veer 2013; Salop and Scott Morton, 2013). The efficiency generated by mitigating resistance issues can be particularly high when an initial level of advance purchases is required for subsequent network effects or costly relationship-specific investments (Salop and Scott Morton, 2013). Samuelson, M., Piankov, N., and Ellman, B.

(2012), Assessing the effects of most-favored nation clauses, aba section of antitrust law spring meeting 2012, Retrieved 26 June 2015. The development of a guide that provides an opportunity to shed light on relevant competition law issues in its entirety and on an ex ante basis therefore seems to be the much more advantageous alternative from the ideal point of view of antitrust compliance and enforcement than leaving the treatment of most-favoured-nation clauses to possible developments in case law. Indeed, the development of a guideline would (1) reduce legal delays and transaction costs by providing guidance on potential legal issues in an easily accessible manner, (2) reduce legal uncertainty, especially for relatively young competition jurisdictions where case law may not yet be sufficiently developed, and (3) allow competition authorities to conserve their resources; addressing non-problematic cases due to shelters covered by the relevant Directive. . . .