A sponsorship agreement is a contract between a sponsor who is paying a fee or giving goods and services in exchange for a benefit from the sponsored party. These contracts often involve significant investment and complicated legal terms. Important clauses relate to licensing and brand rights, payment terms, key performance indicators and sponsorship outcomes, as well as termination rights.
Here are 5 key considerations for brand owners, marketing or merchandise managers, or business owners who want to get their sponsorship agreement terms right.
In this article, we will give legal advice on sponsorship and branding, focusing on the legal parts of a sponsorship agreement.
Tip #1 – Assess what the sponsorship fee pays for
A sponsorship agreement will involve the sponsor paying money or agreeing to give goods or services or some other benefit to the sponsored party. The sponsorship fee may involve a substantial investment, depending on who or what is sponsoring. Because of this, both parties must be clear on what the fee is and what they are giving in exchange.
Here’s a sponsorship agreement sample situation that you must take into consideration:
- If a sponsorship agreement describes an annual sponsorship fee, what benefits will be provided each year?
- If those benefits change, will the sponsorship fee be adjusted and if so, how?
Tip #2 – Consider the type and likelihood of force majeure events
Force majeure clauses became the golden child during the COVID-19 pandemic. However, a force majeure clause has always been an important part of sponsorship agreements.
The key thing about force majeure events is that they allow either or both parties to terminate the contract or suspend performance if the relevant event happens. Anything that is within one party’s control should not be considered a force majeure event.
Lots of things can happen that are outside both parties’ control. For example, if you sponsor an event, person, or product:
- the person could become ill or unable to travel
- the event could be cancelled due to bad weather or government restrictions
- the product could be held up at customs
- the event date could be moved or changed to meet government requirements
You will need to consider what you want the sponsorship agreement to allow you or the other party to do if these things happen. And if you are the sponsor, are you still happy to pay the sponsorship fee if you don’t receive a benefit because of a force majeure event?
Tip #3 – Think about whether exclusivity is appropriate
Consider your competitors when negotiating a sponsorship agreement
If you are the sponsor, you will likely want your brand to be front and centre. You are unlikely to be happy with the contract if it allows one of your competitor’s brands to step in and overshadow your brand. The sponsored party will then get the benefit of multiple sponsors while potentially having a conflict of interest. They then have to consider whose brand they will give greater prominence to.
An exclusivity arrangement can avoid this issue. The sponsorship agreement could include an exclusive right for the sponsor to showcase their brand during the term of the agreement.
The exclusivity can apply to a product type, service type, industry, or a limited list of competitors.
Consider whether the other party is the best partner for the sponsorship agreement
Do you truly want to lock in your relationship with the other party? For the sponsored party, associating yourself with a sponsor for a long period might be risky.
This consideration should be addressed long before you negotiate the sponsorship agreement. Sponsorship shows cooperation and support between parties to the public and potential customers.
Tip #4 – Make sure you have fair rights to terminate the sponsorship agreement
You may want to terminate the sponsorship contract if:
- you don’t receive the sponsorship fee
- you don’t receive the benefit of the sponsorship arrangement
- the other party infringes your intellectual property rights or misuses your brand
- the other party breaches an obligation of confidentiality
The termination clause needs to address when someone can terminate the contract, how they can terminate and the consequences of terminating the contract.
Here’s a sponsorship agreement sample of a Termination clause:
“Termination for Convenience: Either party may terminate this Agreement at any time by providing the other party with 30 days’ written notice.
Termination for Cause: Either party may terminate this Agreement immediately upon written notice if the other party Breaches any material term or condition of this Agreement and fails to cure such breach within 30 days after receipt of written notice of the same.
Consequences of Termination: Upon termination, the Sponsored must stop using granted rights, return the Sponsor’s confidential information, and pay any outstanding fees for services rendered before termination.”
Please be aware that the kind and other facts of the thing being sponsored will determine how the termination clauses shall be drafted.
Tip #5 – Consider reputational risks, cancel culture and marketing in the sponsorship agreement
Clauses that address reputational risk
The reputation of a brand can change quickly. A sponsorship agreement should consider what happens when that change brings a wave of controversy or negative publicity. This could be addressed in a termination clause as well as an indemnity clause.
An indemnity clause requires one party to compensate another if certain events happen or fail to happen. An indemnity clause might be necessary if the other party’s actions harm their reputation and the reputation of the other party. This clause provides protection and compensation for any damages caused. It ensures that both parties hold themselves accountable for their actions and any negative consequences that arise.
How to deal with cancel culture
Cancel culture occurs when people shun or avoid others for doing or saying something considered unacceptable. Be careful if your sponsor is connected to controversial things, especially if it could impact your customers.
Marketing rights
Consider if marketing rules apply to how the other party displays your trademark or branding. For instance, you may wish to align yourselves on pre-agreed marketing text. Or, the parties may need to seek each other’s written consent before using their intellectual property.
