CAREFUL DRAFTING-- MFC CLAUSE-- COMPETITION LAW --- An analysis

CAREFUL DRAFTING-- MFC CLAUSE-- COMPETITION LAW An analysis Not only the Most Favoured Customer (“MFC”) but also Benchmarking clauses are the critical clauses in the service agreements as well as in the outsourcing contracts. The drafting and negotiation of these clauses are most onerous task requiring dexterity and expertise. MFC clause has virtually similar meaning to the Most Favoured Nation (MFN) treatment under the GATT Agreement.s. 1. MFC is synonymously called “Pricing Warranty”, “Preferred Pricing” or “Preferred Client”. 2. The effect of an improperly drafted/negotiated MFC may have severe financial consequences to the business. 3. Even if not formally invoked, the MFC’s mere existence in the contract can also be used as leverage by the client to the demand a price negotiation and may call for violation of Anti-Trust Laws. MFC binds the contracting party to provide its most attractive pricing to the client. Although this can be sheltered under the maxim “Caveat Emptor”, it may trigger the basic soul of the competition laws i.e. promotion of competition in a way, as these provisions directly or indirectly limits the contracting parties to charge the lower price to the new customers. Depending upon how the language is drafted, it can be applied in a way that makes it virtually impossible to accept business from new clients unless the same pricing terms are offered to the existing clients. Benchmarking is the practice of measuring the price of entity’s services against similarly situated competitors. Benchmarking is a risk management tool designed to overcome the risks of fixed price long-terms contracts. In its simplest format, a benchmarking process compares a contract price to a market price and the contract defines the legal obligations of the parties as a result of that comparison. The quest for comparable price using benchmarking methodologies leads only to an approximation of a market price. In commercial transactions, approximations may result in legally binding changes in price, provided that the procedures are predictable and objectively verifiable and thus enforceable by the court. Benchmarking provisions in outsourcing contracts requires a series of decisions, which inter alia includes listing of several issues in the use of benchmarking as a price adjustment technique like. • Prior determination of a third party that is to conduct the benchmarking process; • The contents of the data that is used to refer to “market” price; • The process by which that data base was collected; • The age of the data that are used for comparison purpose; • The definition of a comparable transaction; • The number of comparable transactions between the benchmarker and the parties to the outsourcing transaction; • The relationship of comparable transactions to the pricing structure of the comparable transaction; • Whether a change in price will become mandatory, and if non-mandatory, the process by which a non-mandatory change might occur; • The impact of a miniature or negligible discrepancy between the benchmarking results and the contract price; • The impact of a price discrepancy; and whether the degree of price discrepancy (miniature, average or outsized) has any binding legal impact upon the parties or their rights to change the agreement’s terms; • The scope of process (whether for individual SOW or the entire agreement); • The financial elements or payment, timing and time frames as to which may changes will apply; • The “due process” or “fairness” elements of the benchmarking overall Benchmarking provisions are typically used by the clients to exert leverage on the service providers to reduce the cost of its services. Whether or not benchmarking exercise occurs, the mere existence of a benchmarking provision can have far reaching effect of forcing price negotiation. The question is whether Benchmarking and MFC provisions will trigger the provisions of Anti Trust Laws/Competition Laws or not is required to be examined. Position under Indian Laws: The (Indian) Competition Act, 2002, provides that any agreement entered into between enterprises or association of enterprises or persons or associations of persons or between persons and enterprises or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade or goods or provision of services, which – (a) directly or indirectly determine purchase or sale price. Further, any agreement amongst enterprises or persons at different stages or levels or the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, trade in goods or provisions of services, including inter alia – refusal to deal shall be an agreement in contravention of sub-section (1) of Section 3. Further, as no enterprise or association of enterprises or persons or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provisions of services, which causes or is likely to cause an appreciable adverse effect on competition within India. For the purpose of this Sub-Section, “refusal to deal” include any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought; it further provides that the following arrangement shall not be affected by the above provisions i.e. the right of any person to restrain any infringement of or to impose reasonable conditions as may be necessary for protecting any of his rights which have been or may be conferred upon him under the applicable law. And the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provisions of services for such export. The plain reading of Section 3 suggest that the benchmarking provisions and MFC provisions may trigger Competition Act provisions in India if its causes or is likely to cause an appreciable adverse effect on Competition in India and it does not fall within the purview of the exceptions set out in Sub-clause 5 of section 3. Till now no such issue on either the MFC or bench marking has been decided by the CCI. However, the literal interpretation of some terms used in the Act shall be given wide interpretation by the CCI in case any matter is referred to the Competition Commission. Finally MFC clause and the benchmarking clause should be used with great caution and diligence so that the provisions of anti-trust laws should not get attracted. ________________________________________ A TRUE LAWYER IS ONE WHO PUT TRUTH AND SERVICE IN FIRST PLACE AND THE LAW IS NOT AN INTELLECTUAL LEGERDEMAIN TO MAKE BLOCK APPEAR WHITE AND WHITE APPEAR BLOCK AND IT IS A CEASELESS ENDEAVOUR TO ENTHRONE JUSTICE .— --FATETHER OF THE NATION “ MAHATMA GANDHI” ----------------------------------------------------------------------------------------- KPKUMAR@LAWSERVICES