--Jonathan Hawke (Resn)
--Tamir Scheinok (Fluid)
--Tamir Scheinok (Fluid)
--John Haggis (Sheridans)
--John Haggis (Sheridans)
--Berry Driessen (IE)
--Jonathan Hawke (Resn)
Fair allocation of risk and liability in industry contracts, whether between a traditional agency and a digital shop or between brands and their agency partners, is a trending topic affecting all points of the digital spectrum.
Looking for lessons from past experiences, current best practices and a gauge for future growth, The SoDA Report editorial team sat down with four industry leaders to begin a much-needed conversation on this sensitive subject.
(from left to right)
- Jonathan Hawke, Executive Producer, Resn (NZ)
- Tamir Scheinok, Chief Operating Officer, Fluid (US)
- John Haggis, Partner, Sheridans (UK)
- Berry Driessen, Managing Partner, IE (AU)
Q1: How can agencies and prodcos work better with clients (and/or other agencies) to avoid disproportionate amounts of risk and liability?
Jonathan Hawke (Resn): It’s important to clearly state your position on risk allocation and responsibility prior to engagement. However, as each project will have unique and specific roles, it is also a good idea to discuss your position further within the context of a specific project.
Discussions should tackle both the overarching risk allocation philosophy and the risk associated with the specific project. We need to identify and apportion the specific risk that each party can control themselves, and what risk is in “no-man’s land.”
No-man’s risk then needs to be negotiated/removed/mitigated proportionately between both parties. Yes, this requires some time and effort. Don’t be lazy.
Tamir Scheinok (Fluid): Engage first with the client business stakeholders (not lawyers or procurement) to agree on terms related to scoping, payment, termination provisions and patent indemnity. Limit damages to direct damage (no consequential damages), and agree that liability limits should be proportionate.
In 25 years of delivering on commercial contracts, I have only personally been involved in two kinds of issues: payment and patents. That doesn’t mean the other stuff isn’t important as I’m quite certain lawyers have seen many other types of issues. Here are my recommendations in priority:
Payment Terms – Whoever has the money when a dispute arises usually wins.” This is the best legal advice I ever got (from Ted Wang / Fenwick + West). Litigation is time consuming and expensive. Unless the dispute is above a few hundred thousand dollars, litigation isn’t a great option. So, bill large percentages of the work upfront without blinking twice. And don’t let the client get behind on payments.
Termination Provisions – Agencies often have to schedule teams 30-60 days out. If the client suddenly terminates, it can take 90 days to close and kick off new work. That leaves agencies with the option of eating the costs or laying off that account team. Neither are good options.
I prefer to completely remove the client’s ability to terminate for convenience. Leaving a termination for convenience clause in your stock paper just prompts a difficult negotiation down the road. If it does come up later, I would ask for 90 days (as it’s easy to justify) and go as low as 30 days for smaller gigs.
Patent Indemnity – Many of us have been dragged into patent litigation. The legal fees can put a mid-size agency out of business. It’s not practical to actually know if you are violating a patent (save for things like 1-click). We have tried many approaches to argue this. Usually, the business teams aren’t able to negotiate this successfully so Executive Leadership typically has to get involved. We have found the best practice to be:
- Agree to broad patent indemnity language, but get aggressive about carve-outs. It’s a “yes, but” argument. One key exclusion we can typically secure (because it’s reasonable) is that we should not be held liable for a patent complaint that stems from following the client’s specifications, requirements or designs. From what I have seen, most patent cases are about the fact that the website or platform does something in particular. Very rarely do the cases focus on the details of how the work was done. So if the client’s requirements were to connect X and Y and you did, you shouldn’t be on the hook.
- Limit damages to direct damage (not consequential damage). Our clients are almost always larger than us. Three hours of web sales for a large retailer could put an agency out of business. The argument here is that commercial services contracts are about fee for service, not to provide operating insurance to clients. You should only be liable for direct damages (cash the client has to pay someone else).
- Agree that liability limits should be proportionate. The first step to avoid disproportionate risk is to get the client’s business team to agree that their US$30k discovery gig shouldn’t put you out of business if it goes south. Maybe you are liable for what the client paid, or perhaps two times that amount. Everyone can agree that a figure 100x the amount the client paid doesn’t make sense. So ask for liability limits. If the client is sensitive, go with different limits for different things. Avoid unlimited liability except for gross negligence or intention misconduct.
Scoping Issues - Make certain that you are on the hook for material conformance to specification rather than strict conformance.
- Make certain that your acceptance procedure has objective criteria that you can manage.
- Avoid ADA, PCI, PII obligations if you can.
John Haggis (Sheridans): The parties need to share and be more open when it comes to how each party’s business and industry position works. Prodcos should be treated as true partners.
Too often, ad agencies or clients set out unreasonable terms with the prodco, perhaps because they do not understand the prodcos’ perspective on risk and how production companies actually go about creating the work.
By way of example, an ad agency may opt to sign a contract with particularly inequitable terms with their client. They may see the deal as worth it based on their own business priorities. Time and again they attempt to pass on those terms – including significant risk and liability –to their prodco partner who is actually executing the work. Typical arguments are, ‘we agreed to it so why can’t you?’ or ‘well you have insurance, don’t you?’
So I agree with Jonathan that it’s key for the client and ad agency to be engaged with the prodco early on so that they can come to a consensus on risk allocation and responsibility.
It’s sad that Tamir seems to have had a negative experience with some lawyers when it comes to getting deals done. But, to be honest, we sometimes feel the same way with lawyers who are on the other side of a deal. They may hide behind arguments such as ‘it’s always been this way and this is how it will always work’ when in fact they are putting forward a position that simply doesn’t work for digital production. While their stance may make sense for traditional advertising production (such as a print ad or TV spot), we know that digital initiatives can be much more complex – involving not just software development, but also hosting, third party API’s, privacy concerns, personal data, retention of IP and a whole host of other issues.
Lawyers can be a problem when they see the negotiation as an intellectual argument without understanding the project itself. Rather than working together to make sure a contract is reached that reflects the project at hand, there are unfortunately times when the starting point for the agreement bears no resemblance to the work and services being provided.
Put simply, if the lawyer is causing problems on the deal, get another lawyer. Lawyers should be there not just to protect you, but also to facilitate – rather than hinder – the deal.
Also, if production companies could band together to adopt the same message and same position on liability points, then eventually the message will get through and industry positions will change.
When we’re working on a deal, we create a checklist of about 10 key points for each agreement. Don’t sweat the small stuff. Ultimately, once the MSA is signed and the work is underway, the SOW will be the document referenced throughout the project. Meanwhile, the MSA terms and conditions will typically be put away in a folder and only looked at again if there is a dispute. So, when approaching agreements, take a look to ensure (a) it sufficiently allows you to do your job and get paid (after all, that’s why you’re doing it) and (b) doesn’t put you out of business if you do happen to go wrong.
I would also add that it’s essentially pointless for an ad agency or client to mandate that a production company sign an onerous and massively one-sided contract when it comes to risk and liability. Any payout by the production company is likely to require help from the prodco’s insurance company. Of course, the insurance company, for its part, will review the agreement and find any excuse it can to get out of paying. If the claims aren’t insured, then the insurance company obviously won’t pay. In such a scenario, the prodco will be put out of business and the agency/client won’t get the damages they are seeking. So, excessively onerous contracts actually serve no one if the insurance companies end up being able to deny the claim.
Berry Driessen (IE): We are heavily involved in ecommerce work, and what we have learned (painfully I might add) is that it is nearly impossible, and becoming more and more difficult by the day, to have a solid handle on the requirements and work required to create a new ecommerce / online platform for a client. A growing level of complexity coupled with dependencies on other systems – such as fulfillment, ERP, shipping, inventory and CRM, among others – have increased the scope and difficulty of our work. Clients have traditionally tried to outsource these risks to their agency.
We are addressing this challenge from different angles:
- The way we sell – We have stopped pitching fixed-scope, fixed-cost projects. We sell based on credentials, and we can provide a fixed scope and budget for a strategy / exploration phase, but not for the build of an actual platform or system. This fundamental change in how we work with clients goes hand in hand with client education and our delivery methodology.
- Client Education – We are trying to get our clients to (better) understand the complexity of their requests. We are digital experts and know our stuff really well. We also want each and every one of our clients to have a better understanding of how their digital systems and platforms work together.
Clients cannot expect us to fully understand their systems and platforms at the beginning of a project. We have extremely talented people who are here to help our clients, but we also need our clients to provide the necessary expertise as required by the project. We see under-resourcing & lack of client-side expertise as two of the largest risk factors we face. We have started to define a set of expectations that we have for our clients (resourcing, expertise and availability) and we share these expectations with them prior to project kick off.
- Delivery methodology – We have fully embraced Agile. It’s now the only methodology we use for software delivery projects. As part of the process, we are happy to agree to a fixed budget, but that means the scope needs to be variable (or vice versa).
- Legal protections – Similar to Tamir’s comments, we have started to take a closer look at our contracts to ensure the legal framework backs us up. In such legal reviews, we focus on three key principles.
- As Tamir suggests, we work to limit the agreement to direct losses only and do not accept consequential losses.
- Liability can never exceed the total value of the account over a 12-month period.
- If we see the scope change, we have the right to deliver a variation note to the client which they must respond to within 5 working days
Q2: What are some of the biggest pain points you’ve experienced when it comes to the fair distribution of risk and liability?
Hawke: Being asked to take on risk for things we cannot control. For example, we’re often instructed to come up with an innovative idea. If we do not deliver on that mandate, we will be in breach. If the idea infringes on a third party’s rights, we are liable.
We must take responsibility for what we can control, which is the way we execute instructions and ideas. If we are contributing ideas, we must take on that risk (one reason why creative needs to be priced accordingly). If we are executing someone else’s idea, we should not be liable for that risk.
On the liability front, another pain point is not being able to control our own defense. If the action involves our client (and the client wishes to control the defense), our insurance may be deemed null and void. Also, the client may arrive at a settlement out of court over which we have no control, but still remain liable. Sad face.
Haggis: The main issues we see are: (a) agreeing on what type of claim should be filed (i.e., an indemnified claim or a breach of contract claim) and (b) determining what the production company should be liable for.
When it comes to remedies for the injured party, there is a big difference between indemnified claims and breach of contract claims. All too often, the position of the ad agency/client is that the prodco should indemnify them for any breach of the contract as opposed to restricting liability to a limited and controllable set of factors. Patent infringement is also a major concern for prodcos if they’re simply delivering against the functional and design requirements of the agency or client rather than defining those requirements themselves.
Oftentimes, prodcos are expected to assume liability over matters completely out of their control, particularly when the ad agency or client doesn’t fully understand how the project is going to be developed. I was once told by a lawyer on the other side of a deal that they wanted our production client to sue Amazon if the hosting went down. This is a good example of lawyers completely missing the commercial and legal point in a deal and failing to understand how the industry works. Even lawyers can get frustrated by lawyers.
Candid discussions around the use of third-party service providers should take place during the pitch process. If the prodco establishes a relationship with a third party on behalf of the agency of client, that client needs to understand that the deal is being done on an “as is” basis. If the ad agency or client wants something better, they should ink the deal with that third party themselves. To be fair, prodcos sometimes oversell, telling their client that they will take care of everything without ever fully explaining what that actually means.
We’re normally able to get pretty fair deals on risk and liability that make the prodco and the client happy. Even if the liability terms look bad on paper, we explain to our clients how they can avoid the risk. We also add in mitigating steps in case the clause comes into play (i.e. insisting on a cure period for a breach, letting the indemnifying party take control over the defense to rectify their mistake, etc.). Our clients tend to accept the risk for liabilities that are directly under their control and that they are comfortable can be avoided. However, pushback is required if the other party is asking our client to assume risk for liabilities that are outside of our client’s control (or that are uncapped).
Driessen: It’s obviously a problem that clients are pushing risk to the agency. In the past, we’ve made the mistake of accepting that risk by signing off on fixed-scope, fixed-cost projects. We often end up in client discussions around what’s in scope (or not), and have had disagreements around what the client believes ‘we should have realized & understood from the start’ versus the agency feeling that we could not have reasonably anticipated certain complexities.
Additionally, we often negotiate with clients to reuse code we’ve developed previously for other projects. Clients are almost always interested in having us pursue this approach in order to save time on their project. However, reusing their code for other work they don’t like.
Scheinok: Asking us to indemnity for claims brought by non-practicing entities, imbalance between deal economics and risk allocation (e.g. small deal, lots of potential risk), and asking us to cover consequential damages.
Q3: When it comes to the fair distribution of risk and liability, are there any recent wins or positive developments that hold promise for wider adoption as industry standards?
Driessen: I think the universal trend toward wider adoption of agile is good.
Scheinok: Patent Reform.
Hawke: Not really. Unfortunately, we are seeing a regression from 18 months ago, with agencies seeming to take on greater liability from their clients, which the agencies then require the prodcos to accept.
On a positive note, I recently received an RFP document that included the agency’s legal position on key issues such as IP ownership and risk allocation, so we could then make an informed decision prior to committing to the engagement.
Haggis: Yes. On patent issues, the message is finally, albeit very slowly, getting across. I’ve come across at least one ad agency that has adopted a massively improved position on patent liability as its starting point for negotiations, rather than having to argue for a better position. While that might seem like slow progress, it is good news. Industry bodies – such as the IPA & APA in the UK – are also understanding more about the role prodcos play. They’re working to create new agreements that position prodcos as partners as opposed to ‘just another supplier’. SoDA is creating standard production terms for agencies to help create a unified position. Put simply, it’s very encouraging that the industry is talking about these things and starting to take action. Hopefully, we will continue to see movement toward a more standardized position rather than having to negotiate better positions every time.
Q4: In your opinion, what are the most critical things that need to change in order to make the allocation of risk and liability more just?
Hawke: In our ecosystem, we are the definition of symbiotic (which can be a positive or a negative). We (agencies, prodcos and clients) need to think of ourselves as part of a shared whole. We need each other and we benefit when all the parts of that shared whole are healthy.
We also need to better understand what risk each party can and should assume and we must develop a willingness to help the other parties improve how they control their risk. I’m not talking about trying to ‘cover one’s own ass,’ but about genuinely being interested in the long-term health of your partners.
Driessen: Agencies need to get better at selling time and effort, as opposed to committing to precise outcomes when there are so many unknowns.
Haggis: I would narrow it down to one thing – industry education (i.e., client/agency, prodco/agency, as well as legal and other types of advisors).
Some of these agreements (and the positions therein) have been around for years and don’t necessarily work for modern digital advertising or production. It’s not just about risk and liability, but also about commercial issues such as source code ownership. Once all of the parties understand this, the allocations of risk and liability typically become more reasonable.
It’s important not to lose site of the bigger picture. Parties come together because they want to work together, and that means understanding and respecting each other’s position in order to find common ground.
Speaking purely about lawyers, I believe lawyers need to better understand how their clients actually work and provide their services so that they can then understand what is (and is not) important to them. By understanding the whole industry picture rather than one isolated aspect of it, lawyers can advise on agreements and legal issues from a more informed insider’s perspective. When they don’t fully commit to understanding the industry, lawyers often end up espousing an intellectual legal POV that is divorced from the reality of the project being developed. This is crucial since lawyers are ultimately the ones writing the agreements that allocate the risk between the various parties.
Scheinok: Patent reform and keeping the agency and client/business/teams engaged in the process of allocating risk.
Illustration provided by US-based designer, Tres Swygert.