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Advertising agencies and the law: Essential terms in an advertising contract (part 2)

02 June 2020

#Technology, Media & Telecommunications

Advertising agencies and the law: Essential terms in an advertising contract (part 2)

Apart from determining whether an advertising agency contracts with third parties as agent of its client or principal (as discussed in our previous instalment here), the client or agency contract should also set out key terms of the relationship. 

In this second instalment of our four-part series, we focus on the unique relationship between an agency and its client and explain how this affects certain essential contract terms between them. 

Duration and termination of the contract
Depending on the size and capabilities of the agency, it is common for staff to be employed to work on a particular campaign or client. Additionally, agencies will often commit to having one client in a particular sector (so not acting for competitors) so certainty in respect of its medium to long term client base becomes important. The commercial reality of this is that the duration or term of the agency or client contract is very important to agencies. Accordingly, a minimum term and, ideally, a substantial period of notice (at least 90 days) for termination should be specified. 

A standard notice period will ensure that the agency is able to negotiate arrangements with employees and contractors with confidence and to fulfil its duties as an employer in the event of termination of the contract. 

The contract should be thorough in setting out the services which are customarily performed by an advertising agency in the handling of a client's advertising, including: 

  • the products and brand names that are the subject of the campaign
  • the planning and development of strategies, concepts and advertising
  • the creating, producing and arranging of the production of advertisements
  • any monitoring of the advertising once published
  • the way that contact between the client and the agency will operate throughout the provision of these services. 

The fees that will be payable under the contract are obviously of commercial importance and should be set out unambiguously in the agency or client contract. In relation to the payment of fees and other amounts, the following points should be included: 

  • the basis on which they are payable
  • who is responsible for third party payment, for example to the media
  • who is responsible for subcontractor payments
  • the accounting procedures to be followed 
  • period for payment. 

The basis on which the fees will be payable is naturally of great importance to both the agency and the client. It is current practice for agencies to usually be paid on a fee-for-service basis. Other ways that agencies may be paid include by reference to sales revenue or, perhaps, some additional payments dependant on the life of the advertisement. Additional remuneration may also be paid to the agency if it achieves key performance indicators. 

It is arguable that some ability to make changes in fee arrangements is desirable and realistic, especially over a longer term contract. One issue is whether the agency should have the right to claim additional payments in certain circumstances. This includes where an advertisement produced by the agency has a long life, meaning that it is repeatedly printed or broadcast for an extended period of time. 

This is parallel to the way that actors may claim residuals for the repeated and ongoing broadcast of work in which they have appeared. This argument similarly applies to advertisements that are created towards the end of the agency and client contract, where the costs of creation may not be adequately covered in the service fee payment arrangement. 

Intellectual property
Who owns the intellectual property developed in the course of providing the services, and potentially beyond, is such an important question that we will address this in a separate part of this series.

Dispute resolution
Agency or client contracts should contain a dispute resolution clause which sets out what will occur if the rights and obligations of the parties come into contention. Most parties will prefer negotiation and/or mediation to litigation, other than in the case of urgent interlocutory relief.

Indemnities and liability
It is customary for an agency to indemnify its client for any liability that may arise from advertisements created by the agency for the client to the extent such liability is caused or contributed by the agency. 

Conversely, the client should indemnify the agency for any liability incurred by the agency as a result of information and materials provided by the client to the agency for inclusion in advertisements, or for its use of any advertising material contrary to the purposes it was intended – for example, circulation of an advertisement on its own social media platforms outside the licence terms negotiated by the agency. 

The client or agency relationship will invariably involve the disclosure of confidential information from the client to the agency, for example, the disclosure of market sensitive and confidential information about a client's new product. The law of confidence protects ideas, information and materials with the necessary quality of "confidence", meaning that it is not in the public domain and was disclosed in confidence. The agency, in pitching for work, should also seek to keep its ideas and materials confidential. 

The agency or client contract should contain a confidential information clause which dictates how each party under the contract can use and disclose the information. It is common for a contract to limit the use of confidential information to the purposes of properly carrying out an agency's obligations under and in accordance with the terms of the client or agency contract. It is also common for disclosure to be limited to third parties in specified circumstances, for example, to facilitate sub-contracting. 

It is important that confidentiality be dealt with in the contract to impart in clear terms the confidential nature of certain information. In the event of a breach of confidence, this ensures that the clause can be used as the basis of appropriate action including injunctive relief. 

Click here to revisit our first instalment on how to determine the right agency-client relationship and here for our next instalment on issues that can arise when advertising agencies develop creative materials as part of the agency-client relationship.

Authors: Ian Robertson AO & Emily Booth

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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