Peter Le Guay, Parter at Thomson Geer, talks about the the legal concept of agents of a principal and independent contractors. Together Darren and Peter explore the difference between the two and how the legal concept of an agent or agency is no longer reflected in the practical applications with the advertising, media and marketing category.
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Podcast transcription
Darren:
I’d like to welcome Peter Le Guay, who is a partner at Thomson and Geer. Peter is a friend and colleague who today has come to talk about agencies versus contractors which seems to be a hot topic, especially with what’s been happening in the media agency world particularly. Welcome Peter.
Peter:
Thank you.
What is the legal definition of the term ‘Agent’
Darren:
So, Peter, it’s interesting because we do use the term ‘agent’. In fact, we deal a lot with media agencies and creative agencies and digital agencies. I’m wondering from a legal perspective, what do you think about when someone uses the term agent?
Peter:
Well I think of the legal term ‘agent’ as opposed to the common parlance of the term ‘agent’. Obviously the common parlance of the term ‘agent’ or ‘agency’ is a much broader view and most likely legally incorrect.
The legal definition of an agent is a much tighter, specific form of definition. Actually if I can just give you two versions, a more precise definition of the term agent in the eyes of the law is, “an authority or capacity in one person to create legal relations between a person occupying a position of principal and third parties”.
Or, more broadly speaking, it can be “a person who is able, by virtue of the authority inferred upon him or her, to create or effect legal rights and duties, as between another person which is called his or her principal and third parties.”
So in a nutshell, essentially at law, an agent is somebody who’s legally entitled to create legal relations on behalf of their principal in respect of third parties.
The advertising and agency contractual relationship
Darren:
To me, very superficially, I would say most advertising agencies, be it media, creative or digital, do that because we often see creative agencies for instance, enter into contracts on behalf of their client, to produce television commercials. And, we see media agencies go and enter into contracts with media owners around media buying on behalf of their client. So are they effectively acting as an agent under law?
Peter:
In some respects they may be. In most contracts, you would see these days, and indeed the days of not having a contract between an advertiser and an agency is long gone.
Darren:
Luckily.
Peter:
Yeah. It used to be either a one liner of, “we appoint so and so as our agent for the next twelve months”, or a handshake.
Darren:
Or a letter from the agency.
Peter:
Or maybe even a letter, I’ve seen that before too. But the situation now, is that they’re full blown agreements, and they’ll usually have a clause that says that the agency, or more to the point, the relationship between the two parties – the advertiser and the agency – is not of principal and agent, employer and employee, that they’re independent contractors. Just because you say that, doesn’t make it necessarily so.
So the whole thing about whether or not an agency is being created, is a matter of substance over form. It’s a matter of how the parties conduct themselves in relation to each other and indeed, what the agency is actually permitted to do by the principal on its behalf.
Now, in every sort of advertising agency relationship, if I can put it like that, there are going to be aspects of that, that will be legally an agency type arrangement. But other aspects of it, and probably the great bulk of it, will be more the independent contractor space.
For example, if you take two scenarios of creating a television advertisement for a creative type situation. In that sort of circumstance the principal would’ve said to the agent, “Okay, you create me an ad”, and off goes the agent and it contracts with a whole bunch of sub-contractors to produce an advertisement.
Those sorts of arrangements would be as an independent contractor, where the agent will be liable to all of those sub-contractors. Those sub-contractors aren’t going to be, or more to the point, the principal isn’t going to be liable to those sub-contractors.
What does the current production contract say?
Darren:
That’s interesting because the current production contract set up by the Communications Council in Australia, and used by the majority of production houses, has a clause in it that says, “Acceptance of this quote by the advertiser, not the agency, binds them to all the terms and conditions within this contract”. Now, that means that the agency is actually accepting the quote from the production house effectively on behalf of the advertiser. So the agency…
Peter:
So this is actually coming from the, this is a contract between the…
Darren:
The production company provides the contract to the agency as part of their quote it says, “This contract”; this binds the advertiser, not the agency.”
Peter:
Well that just goes against the entire grain of all contractual principles, There’s a thing called privy of contract and it’s if the agent doesn’t have the authority to enter into that contract on behalf of the principal just because the production company says, “Well your principal is bound”, or, “Your advertiser client is bound”, isn’t going to wash out. I don’t think if it came to it in a court of law.
The agent as an independent contractor
Darren:
But Peter this is the reason why we’re having this conversation, because as you’ve said, I have not seen a contract between an advertiser and an agency that does not define the relationship as independent contractor. I’ve not seen in the last fifteen years…
Peter:
Yeah.
Darren:
A contract that says that it’s an agent relationship.
Peter:
Oh yes, that’s right. Nor have I.
Darren:
They’re all independent contractors.
Peter:
Correct, correct.
Darren:
And yet, almost no one I speak with in both the agency side and the advertiser’s side, actually understand the legal ramifications of what that means.
Peter:
Right, right, right.
Darren:
So that’s why I think you know, the confusion for me is that everyone goes around talking about their agency, but in actual fact the relationship they’ve defined in law is not one of being an agent, it’s being an independent contractor.
Peter:
Correct. And as I say, it does depend on the circumstances, because you could have an actual or ostensible authority in an agency situation. The difference between the actual authority is where the principal says, “You’re allowed to do X, Y and Z on my behalf”.
Ostensible authority is a bit different, where the principal says, “Okay, look you can say that you’re my agent, but you’re only allowed to do X,Y and Z”. If the agent goes out and says, “I’m so and so’s agent”, and they don’t limit that, and the person they’re dealing with – the third party- and quite rightly so, assumes that that agent has the authority – the ostensible authority of their principal – at the end of the day, what would happen is, that might give the third party a right to have an action, or a right against the principal. Except what would then happen is, the principal would then cross claim against its agent and say, “You’ve exceeded your authority”.
Darren:
Yes.
Peter:
So, for example, if I was, as a lawyer, I also am an agent and I mean, I also have certain legislative obligations under the Legal Profession Act and the like, but as an agent, I might be given instructions to settle a case for example for a thousand dollars. And, I end up settling it for two thousand. Well, what would happen there is that my client would have to pay the two thousand dollars, but then they would sue me for the other thousand.
Darren:
Because you’ve gone beyond…
Peter:
Correct.
Darren:
Your area of authority.
Peter:
I’ve gone… I’ve exceeded my authority, that’s exactly right.
Who is paying for the costs?
Darren:
Because it’s interesting what the third parties think of the relationship to your point about the production companies that are contracting with agencies, naturally believe that the client will underwrite their cost or will pay the costs because the agency is acting as an agent.
The media owners will be entering into these relationships believing that the advertiser will pay the bill, when in actual fact as independent contractors they don’t necessarily have that authority unless it’s defined in the contract.
Peter:
Well, there’s two ways of that occurring. They may well actually have that authority in which case, there’s no harm done. If they don’t have that authority, and they’ve held themselves out as having that authority, then they’re guilty of misrepresentation. But that’s between them and the advertiser and at the end of the day, the third party may well have that claim against the advertiser because of the misrepresentation by the agent. If it was in circumstances that would allow a reasonable third party, so to speak, in that position to go, “Well, yes, I thought that was appropriate, you had the appropriate authority”.
Darren:
It becomes very murky.
So many transactions with so many third party suppliers and entities it seems from my perspective, the industry has defaulted to just believing it’s still an agent arrangement.
Peter:
Well, that will be a naive proposition to take, or position to take I should say, because at the end of the day, as I said at the beginning, just because you say it is, doesn’t mean it’s so. It’s all substance over form at the end of the day, so that how people are conducting themselves, how they’re acting with one another, is going to be taken into consideration.
Look, it may be at the end of the day, all things being equal, the determining factor might be a clause in a contract saying, “You are not an agent” or, “You are an agent”. But that doesn’t mean it’s always going to be a determining factor.
Darren:
No, that’s true.
Peter:
There’s always going to be a whole swag of other evidentiary things that can be taken into consideration and will be taken into consideration.
Darren:
So if you as an agency, even though the contract may say that you’re an independent contractor…
Peter:
You could be an agent.
Darren:
You could be acting as an agent and that would be taken into consideration by the courts because it’s the way you’re behaving.
Peter:
Yes, it’s true. And, and indeed, going back to your query earlier, or your example, I should say, earlier of creatives and media, in cases where media agencies, or I call them consultancies, because most of the time they’re contractors, but they could be acting as an agent, in the sense that when they’re booking media space, there could well be an argument to say that they’re acting as an agent on behalf of their advertiser clients.
And correct me if I’m wrong, I don’t know if the media still does this, I haven’t looked at these ones for a while, but the media often still gets some form of acknowledgement or recognition signed by the actual advertiser themselves. They used to do that, I don’t know if they still do.
Darren:
They still do in most cases, they won’t go to buy media unless they have written authority to buy the media from the advertiser.
Peter:
Yeah. When you say that, you mean the agency.
Darren:
The agency will not actually start the process of buying the media. They may have negotiated on behalf of the client, but they would usually wait for it to be signed off before they go and commit.
Peter:
Well, that’s the agreement between them and their advertiser client.
Darren:
That’s right, which is the authority for them to actually go and buy. If they went and bought it without that written authority, they could risk being outside their authority by committing the client to purchasing that media if the contract didn’t clearly say they had the authority to do that.
Peter:
But in any respects, I mean, the big problem with this, it’s never an issue if everybody’s got money. It’s only if people don’t have money and I’ve seen situations where the advertiser has gone belly-up, they’ve been hooked up for half a million dollars on an ad spend, on a media spend, and the media consultant concerned has basically gone, “Oh my God”, and has had to make a very difficult call to the media to say, “I’m in the hole”.
Darren:
In some ways, to your point about the way the agencies currently act, because they do go into negotiations with the media owners to get a volume discount, based on the projected spend on all of their clients, before the clients even authorise that spend.
Peter:
Yep.
Darren:
So they will on an annual basis, sit down with media owners going, “Well, we’ll have approximately twenty million dollars that we could invest with you, what’s our effective discount or what’s going to be our buying position as a starting point?” So in some ways they’re defining themselves as the agent, because they’re already entering into negotiations as if they’re agents of those collections of clients.
The independent contractor relationship for an advertiser
But Peter, it’s interesting so we have agent agreements and we have independent contractor agreements and as you’ve said as far as the law is concerned, it also depends how you act. Why is it that from you know, as I said, I have not seen a single agreement between an advertiser and their agency that has not been an independent contractor. What is the desirability of the independent contractor relationship for an advertiser that makes them so popular?
Peter:
Ah, that’s very clear. Liability. Straight out liability. I mean at the end of the day, if you can be one step removed from the liability, legal liabilities that flow from the contracting decisions, that’s a better position to be in than in the front line. So, in other words, the agency is taking the risk in that sense.
Darren:
So it’s all care and no responsibility?
Peter:
Correct. It’s all care, no responsibility. Now they’ll have their own contract with the agency no doubt and most agency contracts, in fact every agency contract I’ve looked at will have the appropriate warranties and indemnities there from the advertiser, as the advertiser will have from the agency as well.
But at the end of the day, the front line position will be that the, either the person, the sub-contractor or even the media that the agency is dealing with, they’re going to be first in line when something goes wrong and there’s not enough money and there’s a debt recovery action.
They’re going to be knocking on their door to start off with and that means they’ve then got to go back to the advertiser now because of the dispute between the advertising agency about the amount. Then that’s going to be an issue between them and if it’s an independent contractor agreement that means that that independent contractor, that agency is going to be 100% liable to the third party.
Darren:
So it’s a way of risk mitigation?
Peter:
It’s very much risk mitigation.
Darren:
For the advertiser to put that onto the agency. That’s interesting because under an agent agreement, it’s often that the principal will agree and define the level of compensation or remuneration for the agent as part of this.
You know, you can see that with Real Estate agents getting their sales commission and it used to be with the media agencies would get their 10% commission, so that the principal had a legal right to actually define the level of compensation as part of their acting as an agent, okay. And in return, the agent didn’t carry all the risk for the transaction.
Peter:
In the sense that they could maintain that their own acting as the agent of the principal so that the legal liability lay with the principal, not the agent in terms of the third party.
Darren:
So now, under an independent contractor arrangement, the risk sits with the agency but we also have the advertiser trying to dictate how much the agency makes in their compensation in delivering these services. Is that a bit like having your cake and eating it too?
The man with the gold makes the rule
Peter:
I suppose you could look at it like that. It’s, I suppose, well yeah, I suppose it’s really, I don’t want to say the problem of being a service provider, but at the end of the day, it’s one of the vicissitudes of life of being a service provider. I think in this day and age, the person that really calls the shots would be the entity that’s wanting the services provided to them, as opposed to the provider of the services.
Darren:
So I call it the golden rule. The man with the gold makes the rule. So that’s pretty much how it works whether they’re an agent or an independent contractor. It’s the advertiser that gets to define the rules and that’s it.
Peter:
I agree with that.
Darren:
So the media agencies have become a particularly hot topic at the moment is around the transparency of the transactions that the media agency, where they generate additional income or revenue because, as an agent, they were entering into these negotiations and transactions on behalf of the client and the authority of the client. As an independent contractor, they’re entering into the same negotiations, but with more responsibilities.
Peter:
Well, potentially more responsibility, I mean, as I said earlier, I think in those sort of situations it may well be that the agent is actually truly an agent at all, as opposed to independent contractor despite the wording of the agreement between them and the advertisers.
I mean a classic situation is when you place media on behalf of another party, or your client, your advertiser client, your principal, the question will be whether or not you have the right to enter into an agreement with the media on their behalf. And it’s often interesting to see whether the bills that are issued by the media are in the name of the advertiser or in the name of, it might send them care of the agency, but they might be in the name of the advertiser.
Darren:
In most cases it’s to the agency, but it’s billed for provision of media to the particular client.
Peter:
Right, well then, it just more to the point indicates that from the media’s perspective, the person that’s going to pay them is the agent, not the media consultant, not the advertiser.
Secret commissions
Darren:
There are reports of the agencies, the media agencies are getting additional funding from rebates or commissions from media owners. They’re getting additional inventory rather than cash, they’re funnelling this through holding companies so that, an audit, a traditional financial audit wouldn’t detect it, and certainly this is a dirty secret that the industry is dealing with. But what are the legal ramifications or what would be the legal perspective on some of these behaviours where an independent contractor is actually receiving additional incentives or payments from the third party?
Peter:
You’re getting in the realm of what’s called, “secret commissions”, and…
Darren:
Ah, the Secret Commissions Act.
Peter:
Yes, well, it’s a provision under the Crimes Act and at least under New South Wales law. There is federal legislation but that’s more specific for public service servants, as opposed to people at large so to speak.
The New South Wales legislation is for anyone and it’s punishable by up to 7 years imprisonment. So you don’t want to go to jail for obtaining a secret commission, in any situation where you’re doing work on behalf of another person, and you’re getting an additional benefit that you don’t necessarily, or you don’t disclose to the person you’re working on behalf of, and it doesn’t have to be an agency situation, then that can amount to a secret commission.
Darren:
Of course, because financial advisors were cracked down on a few years ago, they have to very clearly state and have you sign off what are all of their sources of revenue?
Peter:
Correct.
Darren:
Commissions and rebates and things. So the same applies in all of these circumstances?
Peter:
Yes. Every circumstance. I mean when we had years ago, all the various building commissions, royal commissions that we’ve had over the years, that was to do with secret commissions, as well where various builders were getting kickbacks from property developers, and things of that nature.
Again, it doesn’t matter which walk of life you’re in, which industry you’re in, if you aren’t transparent about it and you’re getting an extra benefit, and the person which you’re doing work on behalf of isn’t aware of, it could amount to a secret commission.
Lack of transactional transparency
Darren:
Interesting. So now, there is this concern about lack of transactional transparency. What would be the best approach for any advertiser in entering into an arrangement with, you call them media consultants, or media agencies. Are they best having an agent agreement, principal/agent agreement, or are they best having an independent contractor?
Peter:
Whichever one.
Darren:
What are the types of things that you could reasonably do to get the transparency that you desire?
Peter:
Well, I mean, the relationship between an advertiser and a media consultant, or a media agency, is always going to be governed principally by the terms of the contract. You can put in as many provisions there as you like in terms of increasing the transparency between what is going on between the media consultancy and the media, so that the advertiser is aware of that.
It’s not uncommon now to see clauses in these sorts of contracts where the media consultancy has to fess up to the advertiser during the entire time of the duration of the contract of any additional rebates, and things that they might get back from the media as a result of doing work for the advertiser.
You can have those inbuilt into the contract and they are inbuilt into the contract. In terms of whether or not it should be an independent contractor agreement or an agency style or, in a sense of agency at law type style agreement, I suspect we’re not going to move away from the independent contractor model, that’s going to stay.
Risk mitigation
Darren:
Because of?
Peter:
Because of risk mitigation, that’s exactly right. And you’ve got to remember as I was saying the two are not mutually exclusive. So an agency at law and an independent contractor type agreement are not mutually exclusive, one doesn’t necessarily cancel out the other.
You can have both in the same and as I said, you might have an independent contractor type arrangement, yet there might be certain aspects of that where you’re truly an agent at law, such as potentially media placement. So, as I say, I think we’re not going to see the end of media consultancy whether it’s being independent contractor arrangements, I think that’s going to stay.
And, the question will be whether or not I suppose further down the track, and I think media consultancies would be wise to try and resist this, would be to have some specific clause in there saying that they are specifically, principally liable for the ad spend that they book. I don’t, well, not that I’ve seen that, I haven’t seen that but I’m just saying that’s something you might want to avoid if you are a media consultant because at the end of the day, the more express terms there are about something, the harder it is to say that it isn’t.
Darren:
Yes.
Peter:
I mean, even though, as I said before, just because you say it, it doesn’t necessarily mean it’s so. Once it’s there, you’re trying to show something else gets harder.
Darren:
So, the important you know, as you said earlier, everyone has contracts or most people have contracts now between advertisers and agencies. It’s more important now to actually understand what those contracts mean, isn’t it?
Peter:
Well, yeah, from a legal perspective, absolutely.
Darren:
Most times, we ask our clients about what contracts they have in place and they can’t find them.
Peter:
Yes, yes, I’ve had that one.
Darren:
It’s like something that got signed three years ago when we appointed them. In fact, I remember not long ago a client asked us to help them terminate an existing agency, and we asked for the contract and they said there wasn’t one in place. And when we went to the agency, the agency actually pulled it out, it was a letter of agreement that they’d signed ten years earlier and there were no exit provisions, no termination provisions.
Make sure that whatever is agreed, is agreed, reduced to writing and executed
Peter:
Well, there are provisions there at law for that to take effect, the common law, where there’s the absence of certain clauses you’re looking for, like the termination provisions. I’ve had situations where a party has, whichever one I’m acting for, has pulled out of an agreement that’s never been signed, but they’ve conducted themselves not necessarily to the letter, but by in large in accordance with its terms which makes it easier.
But then you’re talking about an implied contract and once you’re talking about an implied contract, all sorts of things can find its way into it. So it’s always best to make sure that whatever is agreed, is agreed, reduced to writing and executed so that’s signed by the parties, so at the end of the day you’ve got a legally binding agreement. The question is does everybody know what it means?
Darren:
And often they don’t.
Peter:
No. Well, that’s the best way to be giving legal advice obviously at the beginning of these things so that you know what you’re entering into and what the ramifications could be for you down the track.
Darren:
I wonder if the media agencies are feeling, to go back to the media agencies, it just crossed my mind, if they feel like if they’re taking the risk, they should also be able to set their own margins on that.
Peter:
Oh look, I can understand that point of view, especially if they’re taking the risks. But again, it goes back to that. What was your rule, the golden rule?
Darren:
The golden rule. The gold makes the rules.
Peter:
That’s it! And you’re stuck with that. I mean, as you quite rightly pointed out, I mean, back in the old Media Council of Australia days, it was a 10% rebate, back to the agency who were, they were actually, as they were accredited agencies, were not allowed to rebate that back to their client. So they get that plus a 7.5% service fee, they were killing it. That’s a term of art. Now, they might be down to 2, 2%, 3%?
Darren:
3% is the global average according to the World Federation of Advertisers; for global advertisers it’s 3% for traditional media and 6% for digital media was the latest.
Peter:
Okay, alright. So okay, global average of 3% is a big difference and you would have to rebate the other 7% back to the client.
The man with the gold doesn’t like being ripped off
Darren:
Except that we’re hearing stories about the digital transactions and especially with programmatic buying and trading desks, some of the agencies are making 30/40% on those transactions and this is the concern the advertisers have around the amount of transparency, because a lot of these things appear like a black box. You know, you pull out the budgeting at one end and advertising and digital advertising gets served at the other end, and there’s very little change out of your millions and millions of dollars.
Peter:
Well, I suppose what we’ve often seen with a lot of these sort of agreements, well at least what I’ve seen, is there’s obviously very very detailed and fulsome order provisions which allow the advertisers to go back and review the ad spend and things of that nature so that they can ensure that from their perspective, they’re not being again, I’m going to use a term of art, ripped off.
Darren:
Ripped off. And that’s the fear of being ripped off.
Peter:
That’s right. So the golden rule, the man with the gold doesn’t like being ripped off.
Darren:
Exactly, because after all, they made the rules.
Peter:
They made the gold too!
Darren:
So some interesting things in these independent contractor arrangements, which have very long clauses around related bodies corporate under the Corporations Act, because often the money will be, the contract will be with a particular entity being the agency or media consultancy.
But the actual rebates are coming back through, say a holding company, or another corporation related to the agency, and that makes it particularly difficult to do an audit because you only have the rights to audit your accounts. And that’s not all of the accounts…
Peter:
No and I would’ve thought any, and you’re talking about all of the accounts of the media consultancy.
Darren:
Yeah.
Peter:
Of the related bodies of the media consultancy, yeah. And quite frankly, I mean, I think any media consultancy would be quite right to resist that sort of expansion of that definition or rather, the expansion of the audit provisions to cover their related body corporates because as you say, it’s them that’s doing it.
However, if that’s becoming a common practice, I can see there’ll be more push for that by the advertisers because they’ll be saying, “Well, it’s all part of the same group”. But, under the doctrine of privity, privity of contract, it’s unlike; there are provisions in other jurisdictions around the world like in the UK you can have rights against third parties that are in the same group. That’s under statute over there. We don’t have that law here.
There are certain provisions in certain state jurisdictions in Australia, that give you specific rights, usually related to insurance type claims to related bodies, but for the purpose of New South Wales, there is no additional legislation that in any way sort of, restricts or reduces that legal doctrine of or principal of privity of contract, that is a contract that is between two contracting parties. And that’s it. No others.
Unless of course, you give somebody a specific right within that contract to go and act on or look at the, the, the records or financial records of another related body corporate. But that obligation will be on the agency, not on, it’s not something you would be able to enforce on the related body corporate. You could only have it enforced against the agency. Whereas the example I was giving in the UK, you could actually enforce it against the related body corporate even though they’re not originally a party to the contract.
Darren:
Okay.
Peter:
Yeah, so that’s a big difference. But we don’t have that here.
Darren:
And so that’s one of the issues and concerns around transparency, is that the money trail could flow around through any number of entities and be impossible to actually enforce, even an order of provision because they’re outside of the primary scope of that contract.
Agencies are independent contractors
Peter:
Yep, yep.
Darren:
So the big thing I got out of this conversation Peter is that we’ve got to stop calling them agencies.
Peter:
Yeah, I think that probably, look, in any respects I don’t think that’s going to go away, it’s one of those things as you mentioned at the beginning of this conversation, there’s a lot of different agencies around that may not, strictly speaking, be agencies. I think that the popular term is going to stay. But I mean from a legal perspective, it might be more appropriate not to call them agencies.
Darren:
Well, especially because it does confer a certain relationship or set of trust that may not actually be there.
Peter:
Well, that’s true but as I say, it’s more the popular view that people might think of agencies as, opposed to the legal view. And maybe people need to start thinking more about the legal view of an agency and the more narrow confines that that entails, as opposed to the broader cover or picture that they get from the concept of agency.
Darren:
Okay, thank you for your time, thank you for bringing some clarity too.
Peter:
I hope I brought you some clarity and I haven’t confused everybody.
Darren:
And of course you know the advice that you always get is, if you’ve got any concerns about your contract, see a lawyer.
Peter:
Absolutely.
Darren:
Thanks very much.
Peter:
Pleasure.
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