Legal Definitions - favored-nation clause

A favored-nation clause, often referred to as a most-favored-nation (MFN) clause, is a contractual provision where one party agrees to give the other party the best terms it offers to any third party. Essentially, it's a promise that if the first party later negotiates a more favorable deal with someone else, the party holding the favored-nation clause will automatically receive those same improved terms. This ensures that the party with the clause is never at a disadvantage compared to others.

Here are some examples illustrating how a favored-nation clause works:

• Commercial Supply Agreement: Imagine a small independent bookstore signs a contract with a major book publisher to stock their titles. The contract includes a favored-nation clause stating that if the publisher offers a larger chain bookstore a higher discount rate or more generous return policy, the independent bookstore will automatically receive those same improved terms. This protects the independent store from being competitively disadvantaged by the publisher's deals with bigger retailers.

• International Trade Treaty: Two countries, Nation X and Nation Y, sign a trade agreement that includes a most-favored-nation clause. This means Nation X commits to treating Nation Y's goods and services no less favorably than it treats those of any other country. If Nation X later negotiates a deal with Nation Z that significantly lowers tariffs on imported textiles, Nation Y's textile exporters will automatically benefit from those same lower tariffs, even though they weren't part of the Nation X-Nation Z negotiation. This promotes fair and non-discriminatory trade practices.

• Software Licensing: A technology startup licenses a specialized analytics software from a developer. Their licensing agreement contains a favored-nation clause specifying that if the developer offers a lower annual subscription fee or includes additional premium features at no extra cost to any other similar startup within the next three years, the original startup will automatically have its license terms updated to reflect those better conditions. This ensures the startup doesn't overpay or receive fewer benefits compared to future licensees.