Key Points for Checking Basic Contract of Advertising

With the advent of the internet, advertising methods have diversified, and the content of contracts related to advertising transactions must now be tailored to the nature of each media, such as ‘magazine advertising’, ‘online advertising’, and ‘TV advertising’.

However, the nature of advistering contract where the person commissioned to perform the task carries out the advertising work and the client pays a fee for it remains the same.

When commissioning work on a continuous basis, it is common to use a two-step contract, consisting of a basic contract that sets out the basic transaction conditions and an individual contract that specifies the content of each transaction. However, if there are omissions or imperfections in the basic contract, it can cause problems.

Therefore, in this article, we will explain in detail the key points to avoid unnecessary trouble regarding the ‘Basic Contract of Advertising’, which is most important when conducting continuous advertising transactions.

The Role of Basic Contracts

A basic contract is an agreement that is negotiated and concluded in advance for basic matters such as ‘scope of the contract’, ‘payment terms’, and ‘damages’ that are common to all transactions, in cases where similar transactions are repeated with a specific partner in the future.

For each individual transaction, a simple individual contract is concluded that stipulates matters related to each transaction that are not stipulated in the basic contract, such as ‘content of work’, ‘additional compensation’, and ‘delivery date’.

Stipulating the basic terms in the basic contract allows communication to be focused on how to proceed with tasks while conducting individual transactions, so there is a benefit that individual transactions can be smoothly advanced if there is a basic contract.

Next, using general clauses, we will explain the important check points of the basic contract for advertising transactions.

Clause on Requested Services

Article ◯ (Definition)
In this contract, an advertising transaction refers to the situation where Party A requests Party B to perform any of the tasks defined below (hereinafter referred to as “the Services”) related to the advertising of Party A’s products and services, and pays Party B for these services.

1. Planning and proposing advertising methods
2. Selecting advertising media (Internet advertising, and other electronic media, etc.)
3. Managing advertising placements
4. All tasks related to the above that Party A orders from Party B

Here, we define the content of the “advertising transaction” that forms the basis of the basic contract.

However, if “design” or “production” is included in the ancillary services defined in 4, it is necessary to separately list “design and production of advertisements” in the Services.

The reason for this is that various rights often arise in the created works, and clauses regarding the ownership of “intellectual property rights” such as patents, designs, and copyrights, along with the handling of the “deliverables” created in the process of production, are necessary.

At the same time, a separate clause regarding the “acceptance” of the created works is also necessary.

Provisions on the Relationship between Basic Contracts and Individual Contracts

Article ◯ (This Contract and Individual Contracts)
1. The provisions of this contract shall apply to all individual contracts (hereinafter referred to as “individual contracts”) that are concluded between the parties for each order related to advertising and promotional transactions.
2. Notwithstanding the provisions of the preceding paragraph, if the parties conclude an individual contract with provisions different from this contract, the said individual contract shall be given priority.

This clause clearly defines the relationship between the ‘basic contract’ and the ‘individual contract’, and stipulates the order of priority in case there are contradictory or conflicting provisions between the two contracts.

While this clause gives priority to individual contracts, which are often concluded at the staff level, there is also a view that it is safer to prioritize the basic contract, which has been carefully examined and created after receiving a lawyer’s check, rather than changing the provisions of the basic contract with an individual contract.

If there is no priority clause, there is a view that the individual contract concluded later takes precedence, but without a clear provision regarding priority, it cannot be said which one takes precedence.

Therefore, forgetting to include this clause could potentially lead to disputes between the parties.

Provisions Regarding Individual Contracts

Article ◯ (Establishment of Individual Contracts)
⒈ An individual contract is established when Party A sends an order form to Party B, detailing necessary items such as the order date, name of the task, content of the task, quantity, price, and performance period, and Party B sends back an order acceptance form to Party A, which is then received by Party A.
⒉ The order form and order acceptance form mentioned in the previous paragraph can be substituted by email or fax transmission.

In individual contracts, it is necessary to clarify the content of the task request and when the individual contract is established. To do this, it is advisable to decide on a format for order forms and order acceptance forms in advance between Party A and Party B, ensuring that no items necessary for task commissioning or acceptance are omitted.

There is one problem with the above example. That is, there is no set deadline for responding to the order form. If this is not specified, the responsibility for not meeting the performance period required by the ordering party, Party A, becomes ambiguous.

Therefore, it is also possible to add the following clause at the end of the first paragraph to clearly define the response deadline.

“However, if Party B does not respond to Party A within ○○ business days after the order form is sent, the individual contract related to the said order form is considered to have been established.”

Provisions Regarding Subcontracting of Services

Article ◯ (Subcontracting)
⒈ The Party B may subcontract all or part of the services under this contract or individual contracts to a third party without the prior consent of the Party A.
⒉ When the Party B subcontracts as per the previous clause, the Party B shall ensure that the subcontractor complies with obligations equivalent to those of this contract and individual contracts. However, even if the Party B subcontracts, it cannot be exempted from the responsibilities it bears under this contract and individual contracts.

The key point in the case of subcontracting is whether or not the prior consent of the Party A is required. In the above example, prior consent is not required, but depending on the nature of the work, it may be considered to require prior consent.

Another point is that while it is stipulated that the third party must comply with the obligations equivalent to those of the Party B as defined in this contract and individual contracts, since this is a contract between the Party A and Party B, the Party A cannot claim damages for breach of contract against the third party, who is not a party to this contract.

However, one way to avoid such risks is to add the following clause at the end of the first paragraph:

“Party B shall bear all responsibilities for the actions of the subcontractor”

Confidentiality Clause

Article ◯ (Confidentiality)
⒈ Party A and Party B shall not use the information disclosed by the other party under this Agreement and the individual contract, which has been explicitly stated as confidential (hereinafter referred to as “Confidential Information”), for purposes other than those of this Agreement and the individual contract, and shall not disclose or leak it to third parties without the prior written consent of the other party.

The most important aspect of a confidentiality clause is to specify “what constitutes a secret”. In the above, it is defined as “information explicitly stated as confidential”. However, information disclosed verbally or on a monitor screen does not leave evidence, making it difficult to argue that there has been a breach of confidentiality if such confidential information is leaked.

Therefore, to specify confidential information that does not leave a record, such as verbal information, it is advisable to add the following wording as a supplement to the confidential information.

“Information disclosed verbally or on a monitor screen, which was announced as confidential at the time of disclosure, and the fact that it is confidential information and its content were notified to the other party in writing within ○ days.”

For more details on the confidentiality clause, please refer to the following article.

Clause on Validity Period and Renewal

Article ◯ (Validity Period)
⒈ The validity period of this contract shall be from ○○ year ○○ month ○○ day to ○○ year ○○ month ○○ day. However, if neither party expresses an intention not to renew this contract by three months prior to the expiration of the term, the contract shall be extended for another year, and the same shall apply thereafter.
⒉ Even if this contract has ended, if individual contracts concluded during the validity period of this contract continue to exist, the provisions of this contract shall continue to apply to such individual contracts.

The key points of the clause on the validity period are whether the contract is automatically renewed or not, and if it is automatically renewed, whether the method of termination is clearly stipulated.

In the above case, a potential issue is that the method of expressing an intention not to renew is not clearly stated.

Therefore, since there will be no evidence if the expression of intention is made verbally, it may cause trouble as to whether the expression of intention was made by three months prior to the expiration of the term. It would be advisable to specify the method of expression, such as “in writing or by email”.

Also, it may be better to keep provisions regarding confidentiality obligations and damages even after the contract period has ended.

In that case, you can stipulate it in individual clauses as in the example, but you can also consider setting up a provision on “survival clauses” separately from the validity period and listing the applicable clauses together.

Clause on Damages

Article ◯ (Damages)
The Party B shall compensate the Party A for the ordinary and direct damages actually incurred when the Party A suffers damages due to non-performance or performance of the services stipulated in this Agreement and the individual contracts. However, the amount of compensation shall be limited to the amount paid by the Party A to the Party B for the said services.

It is essential to include a clause on damages, but if there is a possibility that both parties may incur damages depending on the content of the contract, it is necessary to stipulate the obligation of damages for both parties.

In the above example, only the obligation of Party B to compensate Party A is stipulated, but as mentioned earlier, in clauses where both parties have obligations, such as the “obligation of confidentiality”, there is also a possibility that Party B may incur damages due to a breach of this Agreement.

As a countermeasure, it would be good to stipulate in the first paragraph the obligation of damages in case Party A or Party B violates this Agreement and the individual contracts, and in the second paragraph, stipulate the obligation of Party B to compensate Party A as in the example. However, if the clause remains as it is, the scope of the liability for damages that Party B bears may be too broad, so it may be considered to add a supplementary clause for exclusion of application as follows.

“However, this shall not apply in case of intentional or gross negligence on the part of Party B.”

Tax Treatment of Basic and Individual Contracts

It is important to note that the tax treatment under the Japanese Stamp Duty Law differs between basic contracts and individual contracts.

For a basic contract, which is a contract to conduct continuous transactions with a specific party over a period of more than three months, it falls under Document No. 7 of the Japanese Stamp Duty Law. Therefore, a revenue stamp of 4,000 yen per document is required.

On the other hand, individual contracts are considered contract documents related to subcontracting, and thus fall under Document No. 2. Therefore, payment of stamp duty, determined according to the subcontracting amount, is required.

If a revenue stamp is not affixed to the contract document, a delinquency tax twice the amount will be imposed. The same amount of delinquency tax will also be imposed if the stamp is not postmarked. Therefore, it may be worth considering stipulating the burden of stamp duty in the basic contract.

Summary

We have explained the basic knowledge such as the role of the ‘Japanese Advertising Transaction Basic Contract’ and its relationship with individual contracts, as well as important checkpoints to avoid trouble with the other party.

While there is great potential in using new media such as the internet as advertising media, depending on the content of the contract, there may also be significant risks.

To succeed in advertising transactions, which come in various forms, we recommend consulting with a law firm that has specialized legal knowledge and extensive experience.

For more information on the contract of an ‘Japanese Internet Advertising Agency’, please refer to the article below.

Contract Creation and Review Services by Our Firm

Monolith Law Office, with its strengths in IT, Internet, and business law, offers a wide range of services including the creation and review of various contracts, not limited to basic advertising transaction contracts, to our advisory and client companies. Details are provided on the following page.