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Advertising agencies and the law: Determining the relationship between agency and client (part 1)

26 May 2020

#Technology, Media & Telecommunications

Advertising agencies and the law: Determining the relationship between agency and client (part 1)

The nature of the relationship between an advertising agency and its client is not clear-cut. This is particularly so when the relationship between the parties, and the key issues at play, are not adequately set out in a contract or there is no contract in writing at all.

In this four-part series, we will focus on the relationship between the agency and its client and the consequences that may flow from that relationship, including:

  • liability of the agency and client to third parties
  • indemnities that may be provided by the agency and the client
  • intellectual property rights in material produced before and during the course of the relationship between the agency and the client
  • key contractual terms such as services, price and termination.

We kick off this series by defining the various roles an agency can play for and on behalf of their client, and key questions for contracting parties to consider before determining the right relationship.

Back to basics
The presence of the word 'agency' within the term 'advertising agency' suggests that the relationship between advertising agency and client is one where the advertising agency acts as the agent of its client. This suggestion is ultimately misleading.

In reality, a client may engage an advertising agency to act as principal in its dealings or to act as an agent of the client. Further, if the advertising agency is an agent it will most likely be what is called a ‘del credere agent’ in its dealings with the media – a type of agent which is itself liable for the debts it incurs on behalf of its principal.

Determining the relationship between agency and client therefore becomes an important early step in understanding the terms on which the agency and client contract and is an overarching and recurring theme when analysing the key features of any advertising agency and client contract.

Importance of whether the agency is actually an agent
Advertising agencies regularly deal with third parties on behalf of their clients, including talent, photographers, media, production companies and musicians.

For this reason, it is important to consider at the outset of establishing an agency or client relationship, whether the agency is making contracts with third parties as principal, or as agent of the client.

 If the agency is to be considered to be an agent, the agency will most likely be able to bind the client in its dealing with third parties although, in practice, in the case of liability to the media, the agency will usually continue to itself bear the liability.

On the other hand, if the agency contracts with third parties as principal, the agency will be exposed to liability to third parties, subject to any indemnity provisions which may be provided for in its contract with its client.

Del credere agents in media transactions
If an advertising agent contracts with providers of media services as agent, it usually contracts as a 'del credere' agent and will itself be liable for paying the media. This is consistent with the usual practice of the media to pursue the agency rather than its client in the event of a dispute concerning the contract or non-payment by the agency.

The term 'del credere' refers to a type of agency where the agent assumes a superadded duty to ensure that a third party with which it deals with is paid. This duty is usually compensated by payment to the agent of a del credere commission.

Defining the relationship in the contract
As outlined above, determining whether an advertising agency contracts as principal or as agent is ultimately a matter for the contract between the advertising agency and its client. Often, however, an agreement will be made between the agency and the client that is unwritten, verbal or implied.

In these cases, determining whether the agency has contracted as principal or agent will be determined on the basis of an analysis of the surrounding circumstances and usual practice. This is not an exact science and, where possible, it is prudent to ensure that a written contract dealing expressly and clearly with the relationship is entered into.

In order to determine what should be included in the contract, the answers to the following questions may provide some guidance as to whether it is better for the advertising agency to be considered as an agent or principal:

1. What is the client seeking from the agency and how is this likely to be achieved?
How the advertising agency proposes to undertake the production of advertisements for the client (for example, the level of third party involvement) may influence whether the advertising agency takes on the role of agent or principal.

The higher the involvement, the more appropriate it might be for the agency to act as a principal, as it will take away some of the back and forth in negotiating contracts with third parties.

2. What is the level of control that the client wants over the terms of the engagement of third parties?
When looking at control of the client over the work of third parties, there are two standard approaches:

  • the first is for the client to reimburse the agency for all third party expenses properly incurred in the creation of the advertisement for the client
  • the second is for the reimbursement to take place only if those expenses were incurred after the client approved the expenditure.

If the first approach is preferred by the client, it may be more appropriate for the agency to act as agent.

3. What indemnities will be inserted into the contract to carve out the agency or client relationship?
The specific indemnities may also influence the determination of the agency or client relationship as they will most likely alter a strict approach of the agency acting either as principal or as agent.

The agency should push for comprehensive indemnities in the agency or client agreement if the agency will have liability to the third parties, and ultimately, the compliance by the agency with its obligations to third parties may be influenced by the actions or inaction of the client.

After agreeing on the type of relationship between the agency and client, how does this affect the essential terms in a contract between these two parties? Read our second instalment here for insights.

Authors: Ian Robertson AO & Emily Booth

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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