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Formalizing Agreements 

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This position paper addresses three primary business points:

  • The importance of working under a written agreement and that a binding letter of agreement is a good first step to developing a full contract;
  • Both advertiser and agency gain from a formalized detailing of their basic business understanding; and
  • Termination provisions are an important element of any contract and are most comfortably agreed to at the beginning of the relationship.

I. Preliminary Letters of Agreement

Working without a binding written agreement is always ill advised.

With the exception of those rare instances when a full contract precedes the beginning of the work, we suggest that advertisers and their agencies enter into a preliminary letter of agreement at the inception of their relationship. The purpose of this preliminary letter of agreement is to govern the terms of the relationship until a full contract is developed and executed.

A preliminary letter of agreement is a framing of the agreed upon and most critical business terms of the relationship; it is not an alternative to an executed contract.

The letter of agreement should specify payment amounts and terms, and establish an understanding of how both parties will work with each other. The letter should also include termination provisions.

II. The Need for a Fully Executed Contract

Most non-project advertiser-advertising agency relationships are bound by contractual protections covering a range of provisions, typically including the scope of the assignment, payment amounts and terms, ownership of the work, confidentiality, indemnification, needed insurance, prevailing legal jurisdiction and termination periods.

The AAAA recognizes the importance and need for carefully negotiated and agreed upon contracts, and supports agency use of standardized contract provisions and wording. Such wording can be found in the AAAA publications, Various Provisions in Agency-Client Agreements and A Client’s Guide to Agency-Client Contracts.

III. Both Advertiser and Agency Can Gain From a Preliminary Written Agreement

The beginning of the advertiser/agency relationship typically involves excessive start-up costs. Assigning and familiarizing staff with the advertiser’s operations and concurrently delivering on objectives
are costly and time consuming. Costs incurred at the beginning of the relationship often exceed both the anticipated ongoing rate and agreed upon fees.

The disruption to the normal flow of the advertiser’s marketing effort can also be significant.

The focus at the beginning of the assignment is generally on developing and launching the work product, and not on the details. Too often, both the client and the agency are operating without a written understanding.

The need to formalize the assignment’s scope, fee levels and payment terms is obvious. Staffing requirements and termination provisions are equally important since neither party should suffer added disruption from under-delivery on expectations or an unanticipated termination or resignation.

A preliminary letter of agreement may relieve some of the pressure from contract negotiations and can be a directional guide for the tone management would expect within the contract’s final terms and conditions.

If the initial assignment is to work with the advertiser in the development of a marketing communications plan, the preliminary agreement can establish a fee for that assignment, with a provision that states that:

  • An ongoing compensation arrangement will be developed based on the work to be performed by the agency under that marketing communications plan (which is in development.)
  • Work to be performed in the interim period will be estimated and billed on a project basis, at the agency’s standard billing rates.

IV. Anticipating the End of the Relationship

Most relationships follow a natural life cycle and, although their demise may be attributable to a variety of reasons, that ending should be due to business reasons and dealt with professionally and precisely.

Included in joint thinking at the beginning of the relationship should be procedures covering the transitioning of contracts, transfer of work, payment for outstanding obligations, including third party noncancelable commitments, and cut-off periods for services and fees.

Attempting to establish mutual expectations and rights concurrent with the termination or resignation of a relationship is difficult and may result in unneeded acrimony. Developing sensible, mutually agreed to termination provisions both in the letter of agreement and within the subsequent client/agency contract is mutually beneficial.

Fair contract terms for both the advertiser and advertising agency could be an initial one-year term followed by a continuing 90-day termination/resignation cycle. If so, during the wind-up period, the advertising agency could be paid either its normal commissions or 90 day’s fees at an average monthly rate experienced during the prior twelve months.

Such standard termination provisions are based on good business practice:

  • A minimum one-year initial assignment provides an opportunity to recover some of the initial costs of developing and launching a marketing assignment. A continuing 90-day wrap-up period mitigates some of the costs that occur at the end of most relationships, including either re-purposing or terminating employees, and laying off overhead.
  • For the marketer, the search cycle varies, but the time line from when the decision is made to search for a new agency to selection of an agency generally ranges from two to four months.
  • Placing an artificially short calendar date into the search process works against the probability that the right selection and the right relationship will result. In fairness to the newly selected agency, as well as to the advertiser, a 90-day termination provision lays advance groundwork for sustaining the current marketing efforts until new work is developed.
  • Mutual advance agreement to fee payments such as one quarter of the prior year’s fees (or for commission accounts, three months continuing commissions) eliminates doubt and unneeded negotiations at what can be an inopportune time for either or both parties. In instances where there is no existing written agreement, adoption of provisions such as the above during the termination period could be considered
    fair and protective for both the advertiser and the advertising agency.

The advantages of arrangements such as this are several: the advertiser and agency understand, in advance, the cost of ending the relationship, eliminating the need for additional negotiations; doubts and discussions concerning fees, which often occur after termination, are minimized; an arrangement such as the one detailed above facilitates the orderly and on-budget transition of the assignment.

V. In Summary

It is important to both the advertiser and its agency to operate under a preliminary written agreement, which should be drafted at the earliest stages of their relationship. A letter of understanding or agreement is an important transition document until a contract is finalized and that letter should incorporate all the essential terms of the business arrangement, including termination provisions.

Adopted by AAAA Board of Directors, August 21, 2000.

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