Some specifics of contractual provision “Most favorable nation” in investment activity




Within the framework of investment activity lawyers are faced with the inevitable need to conclude contractual relations with foreign companies, which is due to both the globalization of the world economy and specifics of investment activity, which involves the diversification of the investment portfolio. The agreements, memoranda and other contractual structures with foreign elements have a wide range of legal regulations, which objectively cannot be the subject of a comprehensive analysis, limited by the volume of a separate paper. In this article, the authors will try to consider briefly some key aspects of such a remarkable contractual provision as the most favorable nation (MFN).


In the beginning of the MFN analysis, it should be emphasized that this legal provision has little in common with the public law clause of the same name in international law, although it has directly evolved from the latter. For example, experts of United Nations Conference on Trade and Development (UNCTAD) note that the application of the most-favorable-nation clause differs in international trade and in the field of investment[1], however, in both cases the public legal sphere and the corresponding understanding of this concept were under consideration. It should be noted that MFN clause is used in various private-legal spheres from wholesale oil sales to medical insurance, while it may be criticized by competition law experts in cases where the use of MFN will lead to restraining the entry of new companies into the market, reduction or withdrawal of smaller competitors from the market, as well as damaging consumers[2]. Thus, in the case of sales of gasoline with antiknock agents in the case of E.I. du Pont De Nemours & Co. v. FTCD 1984, the U.S. Court of Appeals for Second Circuit ruled in favor of economic entities using the MFN clause, the essence of which was that buyers of antiknock agents could not sell gasoline with such agents below the price of other buyers[3]. Another striking example of use of MFN clause in the private legal sphere is its usage in the field of sale of electronic books, which can be sold through various Internet platforms, in this case, the MFN clause means that electronic stores reserve the right to change the original terms of the "commission trade" (we allow this term for a better understanding the essence of things within the framework of the Kazakh legal system) in case of obtaining some advantage from another – competing "commission agent"[4], some difficulties with antimonopoly legislation may also arise[5]. Thus, MFN can be used in various fields and in this diversity there are common features of MFN, namely, the creation of certain limits of provisional choice and definition of conditional equality of competing economic entities.


In the initial analysis, the external manifestation of MFN in the field of investment contractual relations in alternative financial instruments may be in the form of a booklet containing a number of contractual terms, which, at the investor's discretion, can be recognized as an integral part of the main investment agreement. This practice takes place if the MFN clause is included in the main investment agreement, for example, the Limited Partnership Agreement (LPA), which is the main form of interaction between an investor and an investment manager when investing in private investment funds, or it can be formalized by an additional agreement (side letter). Therefore, there are cases when provisions on application of MFN are included in LPA contracts, however, today, the application of the MFN clause is mainly documented by signing a side letter[6]. The primary reason for implementation of MFN by forming a contractual "booklet" is that bilateral investment agreements between governments of different countries imply the existence of MFN clause in public meaning of this legal institution, which subsequently led to the need for private investment funds to disclose to investors preferential contractual provisions with respect to those conditions that were provided to other investors. The provision that protects the investor by granting the investor the same rights and benefits that other investors receive if such rights and benefits are more favorable than originally agreed. As a result, we have a practice in which an MFN clause is formed in LPA or in the side letter, followed by a number of negotiation processes resulting in special conditions for individual investors, which are systematized in the form of MFN booklet and provided to all investors (in case of their equal status in the investing fund) for consideration and selection, which further makes certain conditions an integral part of the main investment agreement.


As noted by Reynolds Porter Chamberlain (RPC) expert William Jones, side letters often contain the following provisions that can be included in MFN booklets:

•preferential opportunities for joint investment in possible future investments;

•discounts on investment management fees;

•the right to refuse to make certain investments;

•consultation and/or veto over certain amendments to the fund's documentation[7].


It should be noted that investors seek to achieve the most favorable conditions through negotiations on the one hand, and investment managers seek to regulate all the variety of contractual provisions, preventing infringement of the rights of individual investors. At the same time, investment managers are also forced to seek to limit the provisions of MFN booklets, since an excessively wide scope of optionality can completely negate the main contractual provisions of the LPA.


Thus, when using the MFN clause in the investment sphere, both of the above-mentioned MFN features are available, in particular, the limits of optionality and an equal approach to competing entities. It is important to note that this ensures a uniform attitude within the framework of differentiated final contractual provisions, which reduces the possibility of claims on discriminatory grounds. The latter is important precisely in the field of investments, since investments are implemented by various entities from different jurisdictions of the world and, accordingly, what is good for some investors may become an unacceptable for others.


[1] United Nations Most-Favoured nation treatment. UNCTAD Series on Issues in International Investment Agreements II. New York and Geneva, 2010, 29-30 pp. //

[2] Steven C. Salop and Fiona Scott Morton Developing an Administrable MFN Enforcement Policy// Antitrust, Vol. 27, No. 2, Spring 2013//

[3] E.i. Du Pont De Nemours & Company, Petitioner, v. Federal Trade Commission, Respondent.ethyl Corporation, Petitioner, v. Federal Trade Commission, Respondent, 729 F.2d 128 (2d Cir. 1984)//

[4] Wright J. Apple and Amazon E-Book Most Favored Nation Clauses//

[5] Brodkin J. Amazon’s most-favored nation clauses slammed in lawsuit filed by Washington, DC//

[6] Jones W. Most favoured nation provisions and their use in private equity funds//

[7]  Jones W. Most favoured nation provisions and their use in private equity funds//


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