In September 1998, the IPA, the Incorporated Society of British Advertisers and the Chartered Institute of Purchasing & Supply published their jointly drafted “Suggested Terms And Provisions For Use In Client/Agency Agreements”. Nick Johnson investigates.
In September 1998, the IPA, the Incorporated the IPA, the Incorporated Society of British Advertisers and the Chartered Institute of Purchasing & Supply published their jointly drafted “Suggested Terms And Provisions For Use In Client/Agency Agreements”. Advertising law specialist Nick Johnson analyses the usefulness of the terms and looks in detail at a few particular areas where ground appears to have been conceded by the IPA, with the potential for the terms to approximate to model or best practice. [01.04.99]
Overview
Prior to September 1998, the IPA had published its own set of suggested contract provisions which, as one might expect, were weighted in favour of the agency. ISBA also had its own suggested standard contract, which it made available only to its members. In creating the ISBA/CIPS/IPA terms, ISBA and the IPA had to negotiate to try to bridge the gap between these two positions and strike a balance that would be broadly acceptable for both advertisers and agencies.
The terms are, on the whole, clear and well drafted. For above-the-line creative agency-client agreements in particular they offer a very useful checklist of issues to be considered.
That said, it remains to be seen whether the introduction of the joint terms will change behaviour. Most agencies and clients will be familiar with the situation where correspondence and drafts are sent backwards and forwards until the parties’ energies are diverted onto more pressing matters. The draft contract remains unsigned and ends up gathering dust until the client decides it wishes to put the account up for review.
These suggested terms will generally just be the starting point for contractual negotiations between agency and client, not least because many brand-owners and agencies have invested significant time and resource over the years producing documentation that they believe is crafted to reflect their way of doing things.
Nevertheless, it is hoped that over time, a number of provisions will be accepted as industry standards, allowing agencies and their clients to focus upon the issues that really matter to them.
When are the suggested terms appropriate?
Like any precedent document, the joint terms can’t be all things to all people. They represent something of a middle position, and may not be appropriate for all situations. A large multi-national brand owner will expect the robust contractual protections in its standard purchasing contract to be, in practice, non-negotiable. Equally, a well established agency dealing with a smaller than usual client may feel able to seek to impose its own terms.
The suggested terms are also biased towards dealing with issues that arise out of above-the-line activities at the expense of other key marketing activities, such as media planning, media buying, market research and below-the-line campaigns. This means that:
media planning and buying agencies will probably not find them particularly suitable;
with “full service” above-the-line agencies, both agency and client will probably benefit from some fleshing out of the media aspects of the contract; and
where an agency is doing through-the-line work, this can also create some extra issues that it may be preferable to deal with in the contract.
Particular issues
Although there are many points that brand owners and other agency clients need to be aware of when using the standard terms, what follows is an overview of 3 key areas where particular care needs to be taken, namely, the provisions dealing with:
the scope of an agency’s services;
audit rights; and
client conflicts.
Description of services
The level of commitment
The suggested provision (5.1) setting out the Agency’s service obligations under the joint terms is as follows:
“In order to provide the Advertising, the Agency will perform for the Client the services detailed in Schedule 3 to this Agreement (the “Services”).”
Qualitatively, the descriptions of the activities set out in the menu at Schedule 3 are reasonably detailed, although to avoid any uncertainty it would be wise to insert the words “in relation to the Territory” prior to the words “(the “Services”)”.
Quantitatively, however, there is no maximum limit or minimum level set in terms of the Agency’s commitment. Depending on the remuneration provisions of the agreement, this may be an issue for one or both of the parties. For example:
Uncapped “time spent” basis
Even where remuneration is structured on an uncapped “time spent” basis, the Agency may still (in terms of its provision and deployment of resources) want some sort of guidance in the contract as to the maximum number of executions that the Agency has to produce, or perhaps as to the number of hours that will be required of each type of Agency personnel in any week/month. Indeed, the Agency may also want some sort of minimum requirement. The client, on the other hand, may want pre-estimate provisions and/or remuneration limits in order to keep some control over the cost of the advertising.
Retainer or capped “time spent” basis
Where remuneration is on a retainer basis or a capped “time spent” basis, the profitability of the contract for the Agency will be directly affected by the actual level of service that is required from it. The Agency should therefore give careful thought as to whether it is worth taking on the risks involved in giving its client the suggested unlimited service commitment for the duration of the contract. If not, the Agency may want to seek some limit on the levels of resource to be deployed by it (subject perhaps to review at evaluation meetings). Conversely, with a retainer basis, the client may want to fix some minimum levels of service or output (eg. the equivalent level of work to that required to produce two original 30’ TV commercials and one national poster campaign per year).
Commission
Where remuneration is commission based, it may be desirable for the Agency to place limits on certain types of non-commission-bearing services that it is to provide (for instance in relation to development of merchandising schemes).
A contractual right to access to key individuals?
The joint terms also contain an optional “Key Individuals” clause (5.2):
“[The Agency will procure that the Key Individual(s) named in Schedule 4 [is] [are] actively involved in the provision of the Services. Should any Key Individual leave the Agency, the Agency will with the Client’s consent appoint a suitable replacement, such consent not to be unreasonably withheld or delayed.]”
In one sense, this provision is potentially harsh on the Agency: it may find itself in breach of the obligation through no fault of its own if, say, a Key Individual leaves or is absent due to sickness or maternity leave. One way to address this would be to insert the words “use all reasonable endeavours to” after “The Agency will” in the first sentence and replace the second sentence with “Should any Key Individual leave the Agency or be absent for more than [5 days], the Agency [will inform the Client and] will at the Client’s request appoint a suitable replacement.”
Looked at from the brand-owner’s point of view, there may be circumstances where the Client’s advertising and the Client relationship are so closely tied to one or more individuals, that the Client will want the ability to terminate the contract in the event that the individual(s) leave. Where this is desired, the second sentence could be replaced by “Any breach of this sub-clause 5.2 will be considered “material” (including for the purposes of sub-clause 29.1.1)”.
Particularly where the contract period is short, it may be desirable for both parties to deal with issues relating to Key Individuals’ annual leave. Can the Key Individuals take their annual leave at any stage during the Term without reference to the Client, or does the Client have some say in the matter?
Sometimes, the Client may want to specify as Key Individuals particular people who are not employees of the Agency but are freelancers or other contractors. If this is the case, the Agency should ensure that its contracts with the freelancers/contractors concerned give it the ability to comply with its own obligations under this clause.
Generally, the whole concept of a client having a contractual right to access to named individuals from an agency is a growing and worrying trend. It will inevitably lead to brand owners insisting that such people are subject to appropriate non-competition and confidentiality covenants in their service agreements (and that the agency will, on request and as necessary, enforce them). It will also lead to agencies insisting that clients cannot poach such key staff.
Audit rights
Perversely, given the widespread use of the word “agency”, marketing services businesses act, in most cases, as principals at law rather than as agents. This means that in the absence of express provision in an agency-client agreement, an advertiser will not usually have an implied right of audit in respect of its agency’s financial dealings on its behalf.
These dealings may be many and diverse. Creative agencies are likely not just to incur incidental expenses but also to make payments on their clients’ behalf to all sorts of suppliers. Media agencies will incur expenses and may contract out research tasks and other functions. They may also receive volume or swift payment discounts from media owners/sales houses.
It is in the advertiser’s interests, therefore, to seek an express audit right in its agreement with its agency.
Most agencies are prepared to accommodate such a request and many in fact make a selling point out of their financial transparency. Audit rights clauses vary, however, in their scope, and agencies need to be conscious of the burdens and risks that go with different degrees of openness.
The ISBA/CIPS/ISBA terms include the following provisions:
2.2.1 “In respect of all expenditure which is reimbursable by the Client under this Agreement the Agency shall maintain such accounts and records (the “Records”) as are reasonably necessary for the purpose of enabling the Client to conduct an audit of that expenditure.
2.2.2 “The Agency will allow the Client by its own personnel or by a professionally qualified independent auditor access to all the Records during the Term and for 12 months afterwards on not less than [ ] days written notice at any time during normal business hours for the purposes of auditing or otherwise inspecting them [provided that in the absence of exceptional circumstances the Agency shall not be obliged to allow such access or inspection more than once during any [ ] month period]”.
2.2.3 Should any audit or inspection of the Records by the Client reveal that the Client has been overcharged the Agency shall reimburse to the Client the amount of the overcharge within 7 days.
2.2.4 The Agency will afford to the Client all reasonable assistance in the carrying out of such audit, whilst the Client and its auditor will ensure that any information obtained in the course of the audit concerning the Agency’s business is kept in the strictest confidence and not used for any purpose other than the proper conduct of the audit.”
As the notes to the terms point out, this clause deals only with reimbursable remuneration, and would not give a right to audit, say, the amount of time spent by agency staff. Also, there are no provisions permitting the Client to pass the costs of the audit on to the Agency in the event of a major discrepancy being discovered.
Other points that both Agency and Client should consider in relation to any audit rights clause are as follows:
Should the provisions specify what is included in the expression “all reasonable assistance” at sub-clause 2.2.4? Would this include making Agency staff available for a few days to assist in retrieving computer records?
In the event that the Agency continues to hold the account for a number of years, for how long must records be kept? Furthermore, should the right be limited to an annual review which, if not conducted, effectively prohibits the client at a later stage from going back into the dim and distant past?
To avoid arguments, would it be helpful to specify the particular records that the client is entitled to have access to? For instance, does the audit give the Client access to the Agency’s management accounts?
Should the audit be exercisable by the Client or just by independent auditors?
Should the Agency be reimbursed for expenses incurred in connection with the audit?
Is the Agency entitled to receive a copy of any audit results? It is not inconceivable that auditors would find that the Agency is owed money by the Client.
Client conflicts
Both the Court of Appeal and the House of Lords recently had to consider (in Prince Jefri Bolkiah -v- KPMG) the issue of client conflicts. Although considered in relation to accountancy firms, issues such as confidential information, conflict of interest and “Chinese walls” which were raised in the case have much relevance for advertising and media buying agencies, particularly now that large brand-owners like Procter & Gamble are apparently starting to relax their previously strict stances on conflict. Many brands are being stretched across a range of goods and services.
For marketing services businesses, the over-riding principle arising from the Prince Jefri case is that they may be vulnerable if they do not have realistic and workable operational systems in place that prevent disclosure of confidential client information held by one client team to a team working for a competing client.
It seems unlikely that contracting through a 100% sister or subsidiary company will be a sufficient measure on its own to put an agency in a position where it can defend an injunction to prevent it from taking on potentially conflicting business.
Curiously, the relevant clause in the ISBA/CIPS/IPA terms is drafted along traditional lines, ignoring the possibility of there being Chinese Walls or other protective systems and instead baldly envisaging that the agency will not take on conflicting accounts, and offering two alternative definitions of what a conflicting account is. The provision (8.1) looks like this:
“During the Term the Agency will not without the Client’s written agreement [nor will any agency which either owns more than 50% of the issued share capital of the Agency or in which either the Agency or any subsidiary of the Agency owns more than 50% of the issued ordinary [sic] share capital] act in the Territory in connection with the advertising of:
Insert one of the following:
a direct market competitor with any of the Accounts [or any of the Client’s other products or services as of the Commencement Date].
a product or service which is [by manufacture or commercial classification in a category] similar to any of the Accounts [or any of the Client’s products or services as of the Commencement Date].”
However, the balance in the industry has shifted recently. We may now have reached the point where it is more realistic for the contract to allow for conflicting accounts to be handled, but to set out strict guidelines as to how the agency must operate. These could include:
physical separation of staff working on competing accounts;
maintaining internal policies preventing discussion of client issues by people on opposite sides of a “Chinese wall” (and possibly incorporation of a term into staff contracts to the effect that a material breach of this policy counts as gross misconduct);
separation of computer networks (either physically or through a “firewall” system) so that information cannot cross the “Chinese wall” electronically;
ensuring that any subcontractors/suppliers used in common for both clients have adequate systems in place to deal with potential conflict problems; and
some ability for the client to police the above measures through audit or inspection.
Conclusion
The introduction of the ISBA/CIPS/IPA terms is to be applauded. If nothing else, they are a reminder to the industry of the value of having a written contract. However, they should also serve to increase levels of understanding generally of the various provisions that are typically found in agency-client contracts.
Anecdotal evidence suggests that the terms have been helpful in some instances in bringing contract negotiations to a swifter conclusion. However, bearing in mind the fact that the terms are a negotiated compromise between the IPA and ISBA, and with the marketplace fast changing, neither marketing services businesses nor their clients should assume that all the provisions of the terms are appropriate for them in every circumstance.
