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Consider the following scenario: An association's magazine accepts an order for advertising from a large national hotel chain through the chain's advertising agency. The agency send its Insertion Order for insertion of the ad in an upcoming issue. The agency's standard Insertion Order provides - in fine print at the bottom of the page - that the association agrees to hold the agency solely liable for payment for all advertising. In other words, should the agency fail to pay the association in full, the association is contractually prohibited from seeking payment from the hotel chain. (This generally is because the chain has made or will make payment in full directly to the agency.) The ad is run in the magazine. The association invoices the agency. The agency fails to pay the association, declares Chapter 7 corporate bankruptcy, and asserts that it has no assets from which to pay the association or any other creditors. Does the association have any recourse?

Under these circumstances, assuming a lack of fraud or other intentional misconduct on the part of the agency, the association likely does not have much, if any, legal recourse. The association has contractually waived its right to recover payment from the advertiser (the hotel chain) and the association's recovery from the agency will be limited and determined by the bankruptcy proceeding.

However, this does not mean that there is nothing the association could have done initially to minimize its risk. In addition, where the liability allocation is reversed - where the Insertion Order provides that the association agrees to hold the advertiser (not the agency) solely liable for payment for all advertising - there are steps an association publisher can take at the outset to help minimize its risk of nonpayment.

First and foremost, written contractual language (preferably prepared by the association) is essential to protect the association. From the association's perspective, the ideal Insertion Order or other written agreement for the insertion of advertising would provide that the advertiser and the agency are "jointly and severally" liable for payment. This means that recovery of the entire amount due can be made in full from either party. Alternatively, the advertiser (or agency) could be required to "guarantee" payment to the association if the agency (or advertiser) does not fulfill its obligations. However, if the advertiser has already paid the agency and the agency then fails to pay the association, the advertiser is not going to be receptive to making the same payment twice. Thus, in many cases, such language may be difficult for the association to secure. Regardless, using an association-prepared Insertion Order or other written agreement will permit the association to incorporate other helpful protections into the document.

Second, while it is not the industry standard, one simple and effective way to solve this problem is to require part or all of the advertising payment up front - before the ads are run. Partial up-front payment would function as a deposit. At a minimum, the association could require such partial or full up-front payment from "new" advertisers to the magazine, such as those who have advertised in six or less issues.

Third, the association might consider running a credit check or general business information report (e.g., by Dun & Bradstreet) on all new advertisers, to ensure that the companies or organizations possess a minimum financial stability (e.g., no past problems with creditors, successful business operations for a certain number of years). In the event that a potential advertiser fails to meet certain pre-defined minimum standards, then partial or full up-front payment could be required. However, associations should be careful to establish written guidelines as to when such credit checks or business information reports will be required, and when the results of such reports will result in the requirement of partial or full advance payment. Moreover, associations should be careful to be objective and consistent in the application of such guidelines and to avoid any discriminatory treatment of prospective advertisers.

Finally, the association could prohibit advertisers who have an outstanding advertising payment balance that is, for instance, four months old, from exhibiting in the association's trade show, attending seminars, meetings or conventions, or otherwise participating in association programs or activities until such balance is paid in full. Again, it is advisable to codify such requirements and prohibitions in a written policy that is made available to all advertisers, and to have such a policy reviewed in advance by legal counsel.

While there may be no simple and easy solutions to this problem, there are steps an association can take to significantly minimize its risk and ensure timely payment of its advertising commitments.