A legal overview of sponsorship

A legal overview of sponsorship contracts

In an initial review of a proposed sponsorship contract, there are a number of key elements that Sponsors should review.  The checklist below is not an exhaustive list, and indeed for certain types of deal there will be key aspects that are not covered below.  However, it may be a useful aid in getting the ball rolling on the first contract run-through.

THE BASICS

Who?

Are the details of the ‘Sponsor’ and the ‘Rights Holder’ correct?

The parties must have capacity and authority to enter into the agreement, which means:

The Sponsor must ensure he is contracting with the right party, that is, the holder (or exclusive licensee) of the rights. 

This may involve requiring the Rights Holder to produce copies of contracts with third parties to ensure he has capacity to grant the necessary rights.

The Rights Holder must have capacity to enter into the contract.  In sports, for example, the event owner may be a sports governing body.  The Sponsor must ensure (A) if the body is an unincorporated association, that the rules of the association are checked to confirm authority to contract; (B) where the event owner is a representative body, it is important to check that the participating members have ceded to the representative body and the representative body can bind its members; and (C) if the Rights Holder is a limited company, that the memorandum and articles of association are checked.

A Sponsor should seek a contractual warranty that the Rights Holder has all relevant rights and the ability to enter into the proposed sponsorship agreement.

What and where?

Type of sponsorship  There are various ways in which to be associated with an event or property, and the sponsorship agreement should set out clearly the nature and extent of the sponsorship.  For instance, the sponsorship may be:

Stadium or venue sponsorship – e.g. Fosters Oval or Reebok Stadium in case of Bolton Wanderers FC.

Title or event sponsorship – i.e. when sponsor is the name in title sponsor, or sole or main sponsor of an event.  Often including the right to have Sponsor’s name in title (e.g. Worthington Cup, Barclaycard F.A. Premiership, the Carling Reading and Leeds Festivals, etc).

Secondary sponsorship – for example, sponsoring a particular part of an event, such as one of the matches or performances in the event or series.

Official supplier status – whereby the sponsor becomes the official supplier of a product or service to a sponsorship subject (eg. Tetley Bitter to the England Rugby Union Team).  

Broadcast sponsorship – sponsoring a television, internet or radio broadcast (e.g. Baileys’ sponsoring “Sex and the City” and Stella Artois’ sponsorship of Channel 4 Films).

Product placement – e.g. use of BMW car and motorcycle in James Bond film.

Territory  The Sponsor and Rights Holder will normally require “world-wide” coverage, although this will depend on the brand coverage and popularity and coverage of the event.  The Sponsor will not want the Rights Holder to carve out different sponsorships in different territories as this would dilute their association with the event.

RIGHTS

Sponsor’s rights

Sponsor’s title rights – the type of association with a sponsorship subject a Sponsor would generally most want to have (examples above). 

Designations – Sponsors typically want rights holders to grant them official status or direct association such as: “Official Sponsor of”, “Official Supplier of” or “in association with” (e.g. The Q Awards 2001 in association with Orange).  The designation will be defined and will most likely be limited to the Sponsor’s categories of products or services (e.g. Coca Cola may be limited to designations for “soft drinks” or possibly “drinks”).

Advertising – Sponsor will want the additional right to advertise at the venue/event.  The sponsorship contract will provide for the nature and amount of advertising.  E.g. if advertising around the perimeter of the sports playing surface, placement and number of hoardings will be defined. 

Branding – includes right to incorporate the Sponsor’s branding on as many elements as possible, for example, clothing of participants, messages on scoreboards and computer display screens, branding at press conferences or interviews with participants.  The agreement may also grant the right for the Sponsor to combine the Rights Holder’s mark with the Sponsor’s.

Corporate hospitality rights – including tickets to the event, use of VIP area and other facilities, etc.  The contract will stipulate the number of tickets the Sponsor will get, for what part of the event(s) (if not the whole) and at what cost (if any).  Rights of resale will also be covered.

Approval rights – the Sponsor will want the right of approval or control over certain other key matters that include:

A duty on Rights Holder to consult with the Sponsor regarding third party contracts;

A duty on the Rights Holder to incorporate the Sponsor’s requirements in such contracts.

A Sponsor may have the right to reimbursement of some of the sponsorship fees if the Sponsor’s requirements are not adhered to.

Other rights – include:

the right to present the trophy to the event or award winners;

filming rights – if the Sponsor wants to create its own footage for use in promotional and advertising material.
promotional rights or association on the Sponsor’s website.

What events/venues?

It is important to specify exactly what event or venue the sponsorship will be for.  The sponsorship might, for example, be for one or more music concerts at Wembley Arena or for a band’s concert tour.  This must be clear in the contract.  Another example is that Juventus has one kit-sponsor for Serie A matches and one kit-sponsor for Champions League matches.

RIGHTS HOLDER’S OBLIGATIONS

Organise and hold the event – the Rights Holder will undertake to own the venue for the term and procure that the event is held in accordance with the agreed terms and format.

Make rights available and help maximise benefits – the Rights Holder must do its best to assist the Sponsor in exploiting the rights granted and see that those rights are actually delivered.  The Rights Holder should be contractually bound to assist the Sponsor in getting as much out of the sponsorship as it can.

Exposure for the Sponsor – the Sponsor must receive the broadcast and general exposure he has paid to receive.  All official publications, materials, press releases, clothing refer to the Sponsorship, and the references must be in the agreed size and position.  This is especially important regarding exposure on television, radio, internet or other agreed broadcast medium.

Exclusivity and ‘clean venues’ – The success of a sponsorship depends largely on the exclusivity granted and whether the venues in question are ‘clean’ venues.  It is possible to grant sponsorship rights to a number of parties but usually limited to one per product/service category.  The Sponsor must ensure no existing agreements that conflict with the Sponsor (e.g. when Carling started sponsoring the F.A. Premiership, Liverpool FC were subject to an existing sponsorship with Carlsberg which limited Carling’s ability to advertise at Anfield).

Competitors – the Sponsor will not want a competitor to have any form of exposure at the event or venue.  The contract must restrict the Rights Holder and grant sensible exclusivity to the Sponsor and must state that the Rights Holder has not entered into any contracts that conflict with the Sponsor’s interests.  The level of exclusivity will depend on several factors including money and the relative bargaining power of the parties.  Some sponsors will have the clout to exclude all competitors.  If, however, a Rights Holder is to grant certain rights to a competitor of the Sponsor it is important to restrict these rights to products /services other than those of the Sponsor. 

Ambush Protections – protection from this is difficult.  The Rights Holder needs to control, supervise and check a large area in order to ensure no unwelcome brands are promoted in at or around the venue (e.g. the successful ambush marketing campaign by Nike at Euro 2000 where Adidas was the official sponsor.  Nike put a huge picture of Edgar Davids on the side of a building next to a venue and, as a result, viewers thought Nike was an official sponsor). 

International Olympic Committee managed to stop such marketing at the Sydney Olympics by convincing the government to pass a law to excluding all other marketing in and around the Olympic village, venues and cities hosting events in order to protect the sponsors.  Whether this kind of protection is possible depends on the bargaining power of the Sponsor or Rights Holder.

Additional obligations may require the Rights Holder to:

maintain all necessary insurances and other cover;

comply with all relevant rules and regulations of an association in the organisation, running and promotion of an event;
ensure nothing is done which might prejudice the sponsor’s own image or reputation (The Sponsor can, for example,  include a “Morality clause” giving, in the case of a sports team sponsorship, the Sponsor the option to take action or terminate the sponsorship if a team member or club official acts contrary to the club’s or sponsor’s standards.);

run the event in a business-like manner and ensure maximum media exposure for the Sponsor;

not alter materially the format and schedule of the event (e.g. if alteration means less attractive teams in an event are favoured then the value of the sponsorship will decrease).

ensure, in the case of a team, that a certain standard of player plays at the event (i.e. fielding a team of relative unknowns will decrease the value of the sponsorship);

ensure that no conflicting contracts have been or will be entered into by the Rights Holder relating to the event or sponsorship subject;

warrant that it owns or has the exclusive right to license the intellectual property rights and that the Sponsor can use them without fear of infringing third party rights (the Sponsor should also seek protection in the form of an indemnity to cover any costs or losses suffered by the Sponsor in the event of third party infringement);

make sure the marketing rights can be exploited and that the Sponsor is able to sell/give away merchandise and samples of products;

ensure that the leading players/participants in the event or sponsorship subject have contracted to participate;
provide space for a sponsor’s message in the programme.

SPONSOR’S OBLIGATIONS

Usually set out in various points in the sponsorship agreement.  The Sponsor’s obligations will typically include (a) paying the sponsorship fee (see below); and/or (b) providing products and services as part of the sponsorship.

There may also be various other obligations that may include some or all of the following:

to comply with all applicable national and international media and domestic rules and regulations;

to comply with rules and regulations of the sport, or industry, and Rights Holder;

to act in a manner that does not prejudice the image or running of the event/sport/etc, including the image of the Rights Holder;

to produce any samples of materials the Sponsor produces to exploit its rights under the agreement.

WARRANTIES, INDEMNITIES AND LIABILITY

The Sponsor will require certain warranties from the Rights Holder to give it the comfort it needs to enter into the Sponsorship, but some warranties may also be mutual.  Warranties may include:

that key third party contracts relevant to the event or venue sponsored have been concluded;

that the parties are free, entitled, and have the power and authority to enter into the contract;

that neither party has entered into conflicting agreements with third parties;

that the parties will keep the details of the agreement confidential from anyone but their professional advisers or as generally required by law;

that the intellectual property rights held and licensed under the agreement will not infringe third party rights;

There may also be a general indemnity from one party to the other in case of breach of any terms or obligations in the agreement. 

One or both of the parties may want to limit their liability under the agreement, by excluding liability for indirect/consequential loss, by imposing a “cap” on liability, or in some other way.

SPONSORSHIP FEE

Fee – Usually cash but may also be non-cash alternatives depending on the product/service the Sponsor supplies (i.e. an airline may provide overseas travel to participants).

When payable? – Payment dates are often contentious.  The Rights Holder will want money up-front to help meet its third party financial obligations, whereas the Sponsor would want results before handing over any money.  The threat of non-payment is the Sponsor’s main “stick” should the Rights Holder be in breach of any of his contractual obligations.  (One point for the Sponsor to consider, however, is whether the event will suffer as a result of a lack of funds at the initial stages.  The event might rely on funds coming in from sponsors in order to get off the ground.)

VAT – The Rights Holder as recipient of the fees generally makes a taxable supply for VAT purposes.  Fees must therefore clearly state whether they are inclusive or exclusive of VAT.  If this is not stated the fees are deemed to be inclusive, which would reduce the amount the Rights Holder gets if the amount was intended to be exclusive of VAT as the Rights Holder must account to the Inland Revenue for the VAT.  (The VAT position will be different if the Rights Holder or Sponsor is based outside the UK.  If the Rights Holder is UK based but the Sponsor is based and registered for VAT in another EU Member state the no UK VAT is chargeable.  The Sponsor will be subject to VAT in his own member state under the “reverse charge” procedure.)

INTELLECTUAL PROPERTY RIGHTS (IPR)

The contract will contain a number of provisions dealing with:  protection of the parties’ existing IPR; who will own the IPR that arises from the sponsorship; and the use of the other party’s IPR (usually name and/or logo) for the duration of the sponsorship.

The contract should cover some or all of the following:

notification by either party of suspected or actual infringement of the IPR of the other party that they become aware of (the terms may also require the relevant party to assist the other in protecting its rights);

limitations on the extent to which either party can authorise unconnected third parties to use the IPR (the owner will usually want to license/authorise its use);

the registration, protection and enforcement of registerable IPR, especially as regards newly designed logos and marks relating to the Sponsor’s sponsorship of the event;

ways in which the parties’ IPR may be used;

a warranty that the relevant party owns its IPR and that any relevant new trade marks have been registered at the Trade Marks Registry.

TERMINATION, DURATION AND RENEWAL

The contract should contain a right to terminate in the event of (a) either party going into liquidation/cease trading; or (b) certain breaches taking place that are viewed as fundamental to the sponsorship.  The Sponsor should insist on the right to terminate immediately for such breaches (along with repayment of fees).

The Sponsor may also insist on a right to terminate if:

the broadcast exposure is poor or below the agreed level;

certain individuals, groups or teams do not take part in the event;

the Rights Holder fails to deliver on some of its contractual promises, especially in relation to the rights agreed; or
an event is cancelled.

The contract should also deal with postponement of the event.  The termination provisions may vary depending on the type of sponsorship and additional provisions may be included where appropriate.

Duration and Term

It is common for a sponsorship to cover a fixed period, for example, a season, annual event or competition.  Fixed term sponsorships will terminate on an agreed date subject to rights of renewal of the sponsorship.  The duration will be subject to a number of commercial factors.  The provision dealing with the term is normally fairly straightforward.

If the Sponsor wishes to advertise before or after the event and to sell off merchandise and promotional material, the Sponsor should include “sell-off” provisions giving a set amount of time (e.g. 90 days) following the event to sell off the remaining stock.

Renewal

Option – The Sponsor may negotiate an option to renew or extend for a further period following expiry of the term.

Matching rights – The contract may give the Sponsor the right to match any third party bids following expiry of the term.  The Sponsor should ensure it only has to match the main financial terms, as there may be other aspects it cannot match.

The Rights Holder may be reluctant to agree the above renewal provisions given that it may restrict itself and may only want to grant a right of ‘first negotiation’. There will most likely be a set period of time during which the parties must agree new terms for the sponsorship.

IMPORTANT DISCLAIMER

This document is a non-exhaustive checklist and will only be suitable in certain situations.  It is not a substitute for proper professional advice and is intended as an aid for Sponsors in their discussions with their own legal advisers. 

To the greatest extent permitted by law Osborne Clarke excludes any liability for loss, damage or other liability arising in relation to this document or its use.
 
Nick Johnson