Sponsorship contracts: What could possibly go wrong?
During the hurried excitement and positivity of a new partnership coming together, when negotiating the finer details of rights packages, activation budgets and launch plans, it is often difficult to consider or even imagine what might go wrong and this is where pessimistic lawyers and a sponsorship contract come in handy. Thankfully, at The Sponsor, we spoke with one such handy lawyer in Rob Powell, Senior Associate at Bristows, to get his advice on sponsorship contracts.
When entering a deal of significant value and duration, it is crucial, alongside all the hard work assessing and finding the right partner, conducting due diligence on them and aligning values, to also consider what might go wrong and how this might be managed in your sponsorship contract.
Lawyers are famously pessimistic, always predicting what might go wrong – and then working out how that could be dealt with and managed in the wording of a sponsorship contract to avoid the possibility of dispute later down the line and – crucially – give the partnership the best chance of success by keeping it on track and delivering its purpose. It is worth having those difficult conversations up front to ensure you have a robust legal agreement (befitting of the value of the deal) that protects you as you embark on the partnership ahead.
Below, Rob highlights some of the key elements of a partnership that may go wrong – which should absolutely be considered at the outset of a deal – and which can, if faced up to, be managed effectively in your sponsorship contract to minimise the risk for your business.
Missed or undelivered rights
"This is something that will, rather than may, happen. Rights packages will be extensive, detailed and depend on many stipulations. Rights will be unable to be delivered for a multitude of reasons beyond all parties’ control, particularly so in a sporting context – think abandoned matches/events, non-qualification for a particular competition, or non-selection of a particular player. More broadly though, there are countless reasons which would render it difficult, impossible, or in some cases illegal, for rights to be delivered – the next pandemic; technical/equipment faults; dangerous weather leading to the cancellation of an event; or – more fundamentally – a change in law which, for example, prevents the advertising of a brand in certain contexts.
With this in mind, your sponsorship contract must have in place a mechanism to deal with what happens when rights are not delivered. Typically, any partnership agreement of merit will include provisions in some form covering alternative or replacement rights, but in what detail? Considerations should include: How will those rights be replaced? By what? Who will decide what rights are of equivalent value? (Are the rights within the package given individual value? How will value be determined?) How will the detail of those replacement rights be decided? – by the rightsholder alone, or by collaboration? What if the brand does not agree on the new rights? Or if the non-delivered rights are fundamental to the deal, and cannot realistically be replaced in value? If agreed, when and how will the replacement rights be delivered? And crucially, will there be the possibility of a refund of partnership fees on the table if replacement rights cannot be delivered – or do not meet the brand’s requirements? Addressing these questions at the outset and putting in place some form of framework may well significantly reduce friction and scope for dispute as and when rights cannot – for whatever reason – be delivered in accordance with the agreement."
Reputational issues
"Partnerships are, at their core, about the association of reputations. Extensive work goes in to selecting the right partner – in the knowledge that a partnership will tie reputations and associations, for the duration of the deal term and beyond, in the mind of the all-important consumer. With that in mind, if – for any reason – it is no longer beneficial, or actively damaging, to a party’s reputation to continue to be associated, there must be an option to bring the partnership to an end.
We are all very familiar with the raft of examples of partnerships being terminated where an individual (e.g. an athlete) or a rightsholder (e.g. a club) does or says something that could potentially harm the reputation of a brand sponsor. Including a “reputation” clause of some description is essential to any partnership agreement, but there are many forms it can take.
It is impossible to draft the wording of a sponsorship contract to capture every possible misdemeanour, act or conduct that would trigger a right to terminate, so these clauses tend to be necessarily broad – going to the impact on the reputation of the brand in the public eye, rather than focussing on the act itself. The reputation clause is typically a hot point of negotiation, but needs to be dealt with at the outset, given the association between brand and rightsholder is so fundamental to the partnership deal as a whole.
It is important too to think about what the reputation clause actually triggers if breached – is it an automatic right to terminate? Or will a rightsholder push first for a meeting of senior executives to discuss and try to resolve the issue in the first instance? What would happen in practice if this were triggered – especially in the context of a long-term deal? How would it be dealt with at your organisation and what options would you want to have on the table? Even if a brand would not necessarily terminate in practice depending on the nature of the act calling reputation into question, having it in the sponsorship contract as an option, may act as useful leverage in resolution meetings."
Change of control
"As mentioned previously, a significant amount of time and effort goes in to selecting the right partner – one who holds shared values, purpose and who is committed to a long-term partnership. So what happens if that partner gets taken over or bought out by a third party? A common occurrence in the sporting sphere.
Given the fundamental change in “who you’re dealing with”, brands – in particular – may want to push for this to trigger a right of termination. From a rightsholder perspective of course this is likely to be resisted, as a potential risk to partner revenue streams in the event of a sale, but should not be dismissed out of hand and should at least be considered as a point of re-evaluation. Though a “change of control” of a rightsholder may not be envisaged or expected at the outset of a partnership, it is an important consideration to plan for – particularly on longer term deals and in view of the context of the wider geo-political climate, private equity investment and state investment fund-backed takeovers. Fundamentally, the entity you are partnered with may look and feel very different in two or three years’ time, so at that point it is not unreasonable that everything should be back on the table. Ultimately, if making the decision afresh post-takeover, would that entity still be one which you would opt to partner with?
As with the reputation clause, it is impossible to include a closed list of individuals, states or other new owners that brands may not want to associate with, but – much like the reputation clause – it is necessary to keep any such clause broad and to look to the impact on your company and its values of any new owners/investors, rather than being prescriptive about who they may be."
Failure of delivery/lack of commitment
"A pet hate of brands. You have the big bang of the deal announcement, logos appearing everywhere, press photos of handshakes…but then little to no support or plan for activations and shared purpose throughout the life of the deal. Maybe rightsholders are becoming difficult to work with – not permitting enough time or access to their content or talent? Perhaps they are not committing sufficient time to support or plan for activations? It is important to anticipate and plan for what happens if the partnership goes stale and is no longer working for one or more parties. Again a very difficult conversation to have at the outset of a deal, but one that can pay dividends long term if this situation ever transpires.
Having clauses in the sponsorship contract that go to commitment and a general baseline standard of performance can be very useful. As can including ongoing obligations (throughout the duration of the deal) to share metrics on the performance of the partnership – including reach and impact of various campaigns, as well as other targeted (and crucially mutually agreed) data points that can assist brands in justifying value and success internally.
In addition, consider putting a mechanism in place for executive escalation and/or a performance “reset” discussion where things are just not working out in this regard. Whether this ultimately leads to a termination right will be a matter for negotiation, but having some commitments and checkpoints around performance over the life of a partnership within your sponsorship contract can help to keep both sides honest – and to at least be used as a reference point in crisis discussions. It is important to view the partnership across the life of the deal, not just the initial announcement – again parties’ commitment to the relationship may be significantly different in two or three years’ time."
Change of talent
"Even more likely than a change of control occurring during the term of a partnership, is a change of talent. Particularly from a sporting perspective, the market for talent is notoriously fluid, with players and managers moving on frequently. The major stars present at the time a brand signs up, may well be gone within months of the partnership being announced.
The importance of the talent to the deal value may differ significantly from, say, a Formula 1 team, consisting of two star drivers (which would be heavily impacted if one moved on), to a Premier League football club packed with marketable players (where the effect of one name leaving may be less harshly felt). The rightsholders will of course see value in the club or team as a brand in themselves, independent of talent, but there is no denying the impact on the valuation of a partnership package that certain star talent can bring.
With this in mind, what happens if managers or players exit mid-season or mid-campaign while still under contract – as frequently happens? Brands will – not unreasonably – be basing their content and campaigns on the expectation that talent will remain for the duration of their contract, but this is frequently not the case. There may have been significant investment made into a season-long campaign, only for it to be undermined by key featured talent no longer being with the rightsholder. In this situation, who should bear the costs of expensive reshoots, edits or re-running of paid promotions? Use of materials featuring the talent may well be actively prevented by the club, or the talent’s contracts with their new team/club. Even if not, a brand may risk looking out of touch or out of date by continuing to use any such material. Going even further, more fundamentally may the departure of certain major talent trigger a right to terminate the partnership? Or a reduction in the partnership fees payable?
Given the frequency with which changes of talent occur, particularly in the sporting world, contracting for and managing this risk at the outset is relatively rare. Again, even if the process you have in place for dealing with it isn’t followed to the contractual letter, it’s mere presence is likely to assist in smoothing the way to resolution of any fallout discussions over cost responsibility or partnership fee adjustments."
Conclusion
The above issues represent just a handful of the many (necessarily pessimistic) considerations that should be taken into account at the outset of a partnership (you can find some additional points to consider here) Though these conversations may be awkward to raise during the early days of a collaboration being formed, good lawyers should be well placed to facilitate this – shielding the commercial and marketing teams and crucially protecting the ongoing working relationship that is going to be so critical to any partnership’s success. Ultimately, it is best to get out ahead of these potential concerns early on, to give both parties greater certainty and structure – hopefully avoiding or heading off more significant issues later down the line, with minimised cost and impact on the purpose.
