Maximizing Your Likelihood for Payment: Avoiding Sequential Liability
The following article appeared in the Spring 2011 issue Blakeley & Blakeley's Trade Creditor's Quarterly.
For vendors engaged in the business of advertising and media services, a hotly contested issue that might arise is the use of sequential liability clauses in contracts. Vendors should always seek to avoid sequential liability in order to maximize protection against non-payment.
Sequential liability involves the following three players: the agency, the advertiser, and the media vendor. Advertising agencies handle aspects of creating, planning, and advertising for their clients. The agency is independent from the client, the advertiser. Sequential liability provides that the agency is liable for payment to the vendor only if it has been paid by the advertiser. Until then, the advertiser is solely responsible for payment.
The Roots of Sequential Liability
The American Association of Advertising Agencies' policy used to be that agencies accept sole liability for payment of media services. But in the 1990s, the Association began to favor sequential liability. This practice was put in place to protect agencies from financially troubled clients that left bills unpaid. Generally, the sequential liability clauses read as follows:
The agency shall be solely liable for payment of all media invoices if the agency has been paid for those invoices by the advertiser. Prior to payment to the agency, the advertiser shall be solely liable.
The effect of the sequential liability clause is that it limits the remedies a vendor may seek when faced with non-payment. For example, if vendor sells ad space, and the advertiser fails to pay the agency, the vendor's sole recourse is to go after the advertiser for payment. This can be problematic should the advertiser become insolvent or file for protection under the Bankruptcy Code, leaving the vendor with limited means to recoup the balance owed.
Avoiding Sequential Liability: The Joint and Several Liability Clause
So what is a vendor to do when faced with a sequential liability clause in a contract? Vendors should seek to remove the sequential liability clause from the contract and replace with a joint and several liability provision. Joint and several liability is a form of liability that holds two or more parties either individually or mutually responsible for payment. This will ensure that the vendor can look to both parties for payment.
Hypotheticals
- Advertiser pays advertising agency. Agency goes insolvent. Vendor left unpaid.
- Advertiser fails to pay agency. Advertiser goes insolvent. Vendor left unpaid.
To ensure maximum protection, the vendor should require signed credit applications for both the agency and the advertiser.
Solutions
The advertising or services contract should include a "No Sequential Liability" clause; and should provide a "Joint and Several Liability" clause. Because of the potential for discrepancies between the vendor's contract language and any agreements between the agency and the advertiser, the vendor's contract should provide that any agreements between the agency and the advertiser regarding liability are void. The contract should also provide that the vendor will not release the agency or the advertiser from liability even if a sequential liability clause is included in an invoice, insertion order, contract, or any other correspondence and have both parties sign.
To ensure maximum protection, the vendor should require signed credit applications for both the agency and the advertiser. Credit applications should also include a clause which sets forth a joint and several liability provision. Additionally, vendors should be attentive to any communications received by and between the agency and the advertiser in order to effectively address any alterations in the agreement prior to any payment problems. Restatement of joint and several liability is recommended on all appropriate correspondence, such as invoices, insertion orders, letters attached to contracts, etc, should a dispute ever arise.
Another protective measure for a vendor to consider in this context might be that a vendor could provide a document, which would be signed by the advertiser, confirming that the agency is authorized to negotiate and enter into a binding contract on the advertiser's behalf and including a statement that, if the advertiser entrusts the agent with money to pay Vendor, the advertiser will remain liable if the agency fails to pay. Additionally, the vendor can send the advertiser an agreement signed by the agency notifying the advertiser that the agency has bound him to the liability.
Examples: The drafted terms and conditions below are to be used as a template. The form is based off of the "Standard Terms and Conditions for Interactive Media " version 3.0, drafted by IAB and AAAA as a model to provide a balance for the competing interests of agencies and the media.
- No Sequential Liability.This agreement renders void any statements concerning liability which appear on any contracts and/or correspondence from Advertiser or Agency, and is irrevocable without the written consent of Vendor's Credit Department. It is further agreed that Vendor does not accept IOs [insertion orders], advertising orders or space reservations claiming sequential liability.
- Joint and Several Liability.Advertiser and Advertising Agency are jointly and severally liable for payment. Vendor will not release Advertiser or its Advertising Agency from liability even if a sequential liability clause is included in the IO, contract, purchase order, or any other correspondence from Advertiser or Agency.
As the vendor seeking to avoid sequential liability, be prepared for reluctance on part of the agency and/or the advertiser to agree to a joint and several liability clause. In this type of situation, vendors should keep in mind that demanding payment upfront can be another route to protect themselves.
