As the pandemic has thrown many in the ad industry into financial turmoil, it is now more important than ever that you take the necessary steps to ensure your company is protected in all of your agency contracts against the risk of becoming victim to double liability. The ACA does not accept double liability. This is an aspect of the advertising services relationship between advertisers and agencies which, if not adequately addressed, can expose advertisers to unexpected and potentially significant additional media and other supplier costs.
What is Double Liability?
Essentially, the risk of double liability is that an advertiser who has already paid the agency for media, production, or other supplier costs may, if the agency fails to pay the supplier, find itself liable to pay the same amount again, this time directly to the supplier.
How Does It Happen?
Double liability results when supplier contracts, including the IAB Standard Terms and Conditions, are entered into by the agency (primarily with media) which either expressly or implicitly characterize the agency as the agent of the advertiser and/or expressly stipulate that both the agency and the advertiser are liable for payment. If the agency acts as the agent of the advertiser, that relationship creates a contract directly between the advertiser and supplier.
How Can You Prevent It?
Taking the following precautions are designed to address the double liability issue with your agency(ies) for media, production or other suppliers.
The advertiser, as part of its agency authorization procedures, should require that any provision in a supplier contract which purports to impose liability on both the agency and the advertiser be deleted. A clause stipulating single liability should be inserted as follows:
“LIABILITY FOR PAYMENT FOR SERVICES UNDER THIS CONTRACT IS THE EXCLUSIVE RESPONSIBILITY OF AGENCY NAME.”
If a double liability provision is not deleted the advertiser should notify the supplier in writing that the agency is acting as principal and not as its agent, that the agency is solely responsible for payment, and that it, the advertiser, will not be responsible for payment.. Note that the supplier may reject these changes to its standard contract form and, in the case of a media supplier, refuse to run any advertising unless the advertiser’s disclaimer of liability is removed.
Ensure Your Agency is Acting as the Principal, Not the Agent
Advertisers, should ensure that your Master Services Agreement with your agency and all contracts entered into by the agency with third party suppliers in connection with your account clearly indicate that the agency is acting as principal in dealing with third-party suppliers, and not as agent for the advertiser.
The advertiser should ensure that the Master Services Agreement with its agency includes a provision for it to review third party supplier agreements, including media, at any time, for compliance with this requirement and for inclusion of the single liability stipulation. In addition, the advertiser should ensure that the media audit provision includes examination of electronic interflow of documents between the agency and third-party suppliers.
Direct Payment of Suppliers’ Invoices
If you are not able to put in place a single liability provision and supplier acknowledgement that the agency is acting as principal, not agent of the advertiser, you should stipulate direct payment of suppliers’ invoices. A clause of this nature does not change the legal relationships and financial liabilities among advertiser, agency, and supplier, but simply stipulates that the advertiser will make direct payment of the net amount of supplier invoices.
Pay Supplier Invoices Into A Trust Account
An alternative to making direct payment to suppliers is to provide that funds advanced to the agency in respect of all third-party suppliers be placed in a trust account pending payment to the supplier.
Advertisers can require that payments to third-party suppliers (including media) are made promptly (e.g. within 30 days) and that you are notified immediately of any disputes with such suppliers. In fact, the agency typically has an obligation to obtain all available prompt payment discounts on media and other supplier purchases.
Monitor Financial Soundness of the Agency
Ensure you undertake financial due diligence with respect to your agency’s financial soundness on a regular basis.
The following two methods of payment will significantly reduce advertiser’s risk.
Two additional good health measures.
What is the Legal Difference Between An Agent And A Principal in the Advertising Industry?
In strict legal terms an “agency relationship” involves one party (the “agent”) who has authority to enter into legal obligations on behalf of the other party it represents. In making commitments to third parties in its role as agent, the agent creates a legal obligation on the other party.
For example, an advertising agency that contracts on behalf of an advertiser for the services of a photographer creates a contract between the photographer and the advertiser, even though the agent may actually sign the contract on behalf of the advertiser. As a result of this contract, the advertiser is required to make payment to the photographer for the services performed.
The relationship that exists between most advertisers and their advertising agencies allows the advertiser to direct, or at least authorize, the supplier purchases and the commercial terms that should be agreed to by the advertising agency.
A court, in the event of litigation, could conclude that whatever label is attached by the parties to their relationship, an advertising agency is, in law, the agent of the advertiser. An advertiser should ensure that the agreement with its agency specifically states that the agency is not the agent of the advertiser. Furthermore, it should require supplier contracts entered into by its agency to stipulate that the agency is solely responsible for payment.
If you have questions or need more information contact your lawyer, refer to the ACA’s Marketing Communications Services Agreement or contact Judy Davey, Vice-President, Media Policy & Marketing Capabilities at (416) 964-3805 ext. 1008 / 1-800-565-0109 or by email.