Sequential Liability

If you’ve worked in the advertising industry, you’ve probably heard of sequential liability. Sequential liability is core language in many agreements between agencies, their clients (the principal advertisers) and third-party vendors.

That said, not all third-party vendors will agree to sequential liability terms due to the potential implications; however, if applied and accepted in good faith, sequential liability may afford protection to all parties to the agreement. That’s not to say it guarantees payment to any of the parties owed monies but even with direct agreements with principal advertisers, payment is not guaranteed.

So, what is sequential liability?

In many agency-client agreements, the agency will act as an authorized agent to purchase necessary advertising and advertising-related products and services and/or enter into advertising agreements on behalf of the client. This may include advertising media space (print, digital, broadcast, out-of-home), production costs, costs related to conducting focus groups, research studies and so forth. In other words, pass through costs (COS, COGS).

Typically, an agency will receive written approval from the client then, acting on the client’s behalf as their authorized agent, procure the necessary advertising and advertising related products and services and/or enter into the necessary advertising agreements with the corresponding vendors. Vendors will invoice the agency and the agency in turn will invoice the client (the agency may also prebill or bill on estimate). The client will pay the agency and the agency will subsequently handle payments to vendors on behalf of the client.

Provided the agreements between the agency, clients and vendors include sequential liability terms, the agency will only be liable to vendors for payment to the extent for which the client (principal advertiser) has paid the agency. If the client has not paid the agency, the client remains liable for payment and the vendor should look to the client for payment not the agency in the event of delinquency. From the agency standpoint, this affords a certain level of protection to the agency from being left holding the bag and owing vendors substantial monies for purchases authorized by and made on behalf of the client.

Some vendors don’t accept sequential liability for this reason. Vendors want clear liability and responsibility for who needs to pay and will often want the party that is executing the agreement to assume full responsibility for payment, and/or they will seek joint and several liability meaning both agency and client (principal advertiser) are jointly and individually liable for payment until the vendor is paid in full. This leads into a much larger conversation so for the purposes of this post, let’s focus solely on the agency’s perspective.

So, how does an agency implement sequential liability terms?

In any agency-client agreement (ex: Agency of Record (AOR) agreement, Master Service Agreement (MSA), Letter Agreement or the like), the agreement should include clear and concise sequential liability language, so the client understands their responsibility for vendor costs managed by the agency on behalf of the client. It’s best to consult with professional legal counsel to develop and incorporate the proper language for your agency-client agreement.

In addition to agency-client agreements, any statements of work (SOWs), purchase orders and authorizations, estimates, media insertion orders, production & media plans, advertising & purchase agreements, production & media agreements and so forth should include similar sequential liability language.

Some vendors may also ask for a signed letter from the client stating that they will assume financial responsibility for payments to the vendor and/or additional documentation before they will agree to sequential liability terms. This ensures the client remains solely liable to the vendor in the event of the client’s failure to pay the agency and the agency’s subsequent failure to pay the vendor.

Let’s also make clear, provided the client does pay the agency and those monies clear from the client to agency, under sequential liability terms, the agency now assumes liability to the vendor for the monies owed and the vendor should look solely to the agency for payment and not the client.

There’s a lot more to sequential liability that can be covered here but know sequential liability does and will work provided all parties use good faith efforts to fulfill their obligations under the sequential liability terms.