The Mr. Sub case and double liability – still unresolved

David Young is a lawyer with the firm of Lang Michener in Toronto, practising in the advertising law field and is co-author of Canadian Advertising and Marketing Law.Last November, the Ontario Court of Justice rendered its decision in what some have...

David Young is a lawyer with the firm of Lang Michener in Toronto, practising in the advertising law field and is co-author of Canadian Advertising and Marketing Law.

Last November, the Ontario Court of Justice rendered its decision in what some have called a ‘precedent-setting’ case on the issue of advertiser/agency liability for media.

‘Double liability’ is a controversial and, notwithstanding the decision in cfto-tv vs. Mr. Submarine, still unresolved issue.

Despite some commentators’ fears, the case does not establish a clear legal precedent and should not be interpreted as such.

However, it does serve as yet another warning light for advertisers and advertising agencies to get their act together and, once and for all, acknowledge that comprehensive and unambiguous agency agreements are required.

Furthermore, failing a tri-partite resolution of the issue, mechanisms must be put in place to eliminate the risk of advertisers paying twice for media.

The Mr. Submarine case involved circumstances that have become all too familiar in recent years.

Mr. Submarine’s agency, Deane Advertising, bought commercial time on Toronto station cfto-tv and was billed by the station for the buy.

Before it paid cfto, Deane billed and was paid by Mr. Submarine. It then went bankrupt. cfto looked to Mr. Submarine for payment, relying on the terms of its broadcast sales contract, which contained a dual liability clause.

The court, with some difficulty, resolved the issue of liability by holding Mr. Submarine partly responsible for the unpaid media invoices.

Industry practice

What is striking about the case is that Madam Justice Feldman, clearly not being an expert in the advertising field, looked for guidance from industry practice in trying to understand the contractual relationships involved.

No such evidence was presented; if it had been, the decision might have been different.

After struggling with the issue, the judge concluded that Deane was the agent of Mr. Submarine and that Mr. Submarine was, therefore, bound by the media contract even though it had not signed it.

However, the judge’s decision to split responsibility for the loss between the advertiser and the station reflects some uneasiness with her conclusion and shows evidence of an attempt to find an ‘equitable’ balance in the circumstances.

In coming to its conclusion that Deane acted as the agent of Mr. Submarine, the court referred to cases in Canada, the u.k. and the u.s.

Strangely, however, those cases in which industry practice was relied on, it chose not to follow, opting instead to be guided by two u.s. cases which involved specific facts suggestive of direct advertiser liability.

Not helpful

The only Canadian case examined by the court was not helpful since it involved an advertiser’s ‘captive’ advertising agency.

In that clearly atypical situation, a New Brunswick court had no difficulty in concluding the agency was the agent of its client.

More authoritative guidance was obtained from u.k. and u.s. cases.

The u.k. cases were clear: the agency is an independent contractor and is not the agent of an advertiser. The court specifically drew attention to evidence of industry practice considered by the u.k. courts:

‘In England, it seems firmly established as a matter of trade custom that an advertising agency is a principal in its relations with advertisers and publishers and it alone is liable to the publisher.’

In turning to the u.s., the court was faced with judicial decisions that appeared to be contradictory.

An important u.s. case, involving the cbs tv network and Stokely Van Camp, again upheld the independent contractor relationship and found the agency, not the advertiser, liable for the media buy – even though cbs’ contract had a double liability clause.

The u.s. court relied on industry practice in trying to understand the nature of the advertiser-agency relationship.

Madam Justice Feldman did not apply the evidence of industry practice cited in the u.k. cases and in the Stokely Van Camp case; instead, she relied on two u.s. cases which, I would argue, involved facts distinguishing them from the case before her.

In one case, the advertiser had, before the agency’s retainer, contracted directly with the media, including agreeing specifically to a double liability clause; the original contract remained in place, with an amendment noting the agency’s intervention.

In the second case, the court found as a fact that the agency had agreed to enter into media contracts on behalf of the advertiser.

The facts involved in the Mr. Submarine case were not exceptional and probably represented typical circumstances of advertiser/agency/media dealings for the placement of advertising.

However, the court focussed on two aspects of the relationship that led it to conclude the agency was the ‘agent’ of the advertiser.

Firstly, the letter of engagement between advertiser and agency stated simply that Deane was ‘to act as advertising agent for Mr. Submarine.’

Stated like this, the contract might be interpreted to authorize Deane to act as agent for Mr. Submarine in all matters relating to creation and placement of advertising.

While the agreement apparently did not provide further detail to support such an interpretation, neither did it contain a clause – standard in more comprehensive agreements – specifically negating any ‘agency’ relationship and expressly characterizing it as one of independent contract.

Secondly, the court focussed on the control exercised by Mr. Submarine in approving media plans and found this to be a strong indicia of agency.

Based on these two aspects, and applying the two u.s. cases that upheld advertiser liability, the court found Mr. Submarine had placed Deane in a position of ‘apparent’ agency so that when Deane signed the tv commercial contract with cfto, Mr. Submarine was also bound by the contract, even though it had not signed it.

The case has been appealed by Mr. Submarine and we can await with interest the arguments that will be made in the higher court. However, two points stand out.

Firstly, the sparse language of the agency agreement clearly required explanation or interpretation. The industry’s practice in using such terminology is not, I suggest, to constitute an agency as the advertiser’s agent in all matters.

The phrases ‘advertising agency’ and ‘advertising agency services’ have, historically, implied services provided by an independent organization that contracts with advertisers to develop and manage their advertising.

Despite use of the term ‘agency,’ the relationship is not necessarily one of principal and agent (in fact, agencies were originally employed by the media to sell their advertising, for which they received a fee or commission.)

Furthermore, even if the course of actual dealings in media buying suggested the agency had authority to place advertising on behalf of the advertiser, it did not necessarily imply authority to pledge its credit.

How could the advertiser be bound by a double liability clause in a contract it had never seen, much less signed?

The Mr. Submarine case does not, in my view, establish a precedent. Rather, it only further muddles the waters in what continues to be a murky issue.

The fact that no clear evidence of industry practice was presented to the court probably tilted the scales in favor of the tv station.

It may be that counsel for Mr. Submarine felt such evidence did not exist. Clearly, if advertisers were asked today whether they intend to authorize advertising agencies to act ‘as their agents’ and legally bind them to media contracts, they would answer in the negative.

However, many advertisers still have agency agreements that do not clearly spell out the intended nature of the relationship and the limits on the agency’s authority.

Furthermore, unless advertisers take specific action to negate the double liability clauses in media contracts, they may be held to have implicitly agreed to them.

Typically, it is agencies which determine the form of their agreements with advertisers. It is in their interest to ensure these agreements contain appropriate language to clearly set out the nature of the relationship.

It is also important for them to develop a universally accepted creditworthiness rating.

If agencies do not give advertisers the comfort of immunity from double liability, advertisers will seek protection through arrangements such as trust funds and direct media payment, which are not necessarily satisfactory solutions.

It should be recognized the Mr. Submarine case arose at a time before the current controversy and publicity surrounding the issue of double liability.

A court might well have an easier time finding an advertiser liable in similar factual circumstances today, when the existence of double liability clauses, and the media’s intention to enforce them, are well-known.