Sponsorship Agreements – how to avoid selling more than you bargained for

Posted by Dasha Kovalenko-Gormack on November 11 2019 in News

Many sporting organisations struggle financially and are reliant on sponsorships with commercial partners to assist with cash flow.  This is greatly appreciated by the organisations and a key way to commercialise the organisation where it might otherwise only be reliant on or predominantly reliant on member fees for incomings. 

Unfortunately, in the rush of finalising negotiations and “getting the deal over the line”, it is easy to enter into a sponsorship agreement that may have underlying unplanned consequences which may be significant for the organisation.

In signing sponsorship agreements, there are several issues that you as a sporting organisation must consider. Having reviewed a large number of sponsorship agreements, our team at Shieff Angland has put together a small checklist which relates to reoccurring issues we have come across: 

Commercial Terms – Check that the commercial terms such as price and other benefits correctly reflect the negotiations.  We are always able to give you a view on what we are accustomed to seeing in the market, however, it is up to you to assess the viability of the commercial terms on their merits alone. There are key issues to look for e.g. exclusivity with other sponsors, ability to commercialise, sponsorship amount upward reviews, varying values for special events or games, etc. 

Termination – The sponsorship agreement could include mechanisms relating to termination, prior to term end. For example, are you able to terminate without any reason (i.e. no-fault), and on what sort of notice if so, or can you only terminate for breach, or other reasons such change of control in the sponsor entity?  Watch out for automatic renewals, especially if renewal is exercised unilaterally by the sponsor or automatically in the absence of notice - which may result in you being locked into an agreement for longer than you may have contemplated.

Warranties – A warranty is a promise.  You might be asked to give warranties that you cannot fulfill e.g. parent body unexpectedly controlling what can be displayed on jerseys for certain competitions.  Take care - these may be grounds to pull the sponsorship or legal action.  

Indemnities – An indemnity is used to put a party back into the position it was in before a breach. Most sponsorship agreements will have some form of an indemnity provision.  Make sure you understand the level of indemnity that you may be required to provide in the event of breach and seek to limit it e.g. to the amount of sponsorship in a set period.  

Risk / Insurance – Carry out a careful analysis of risk in respect of the agreement. For example, what can be the worst possible outcome for the organisation under the agreement?  While you are at it, check your insurance.  More often than not, an agreement may require that a party or each party maintain insurance to a certain level.  Ideally, your potential exposure should be covered by insurance. 

Jurisdiction – To the extent you are able, make sure that the jurisdiction applicable to the agreement is New Zealand.  Beware - if the jurisdiction is outside of New Zealand this means that any legal action needs to be taken overseas which may prove to be costly and difficult.  

Dispute Resolution – Most contracts contain dispute resolution provisions.  What this means is that parties must take certain steps before issuing legal proceedings.  Some options are direct resolution as between CEOs, determination by an expert, mediation and arbitration.  We suggest the relevant clause is kept simple and careful thought is given to potential costs involved, for example, mediation may be less costly than arbitration.

Intellectual Property – Intellectual property is valuable and a critical issue for an organisation to protect.  You should have taken steps to create your logo and protect your logo (and other intellectual property) including by registration at IPONZ.  To add a further layer of protection, it is usual to include a provision that relates to the limits of use of intellectual property by the sponsor, such as for certain events and only in particular and provided forms, which will be destroyed or returned at term end. 

The above are some of the points that you need to take into account when entering into a sponsorship agreement. But each sponsorship agreement is different and there may be other fishhooks to look out for.  If a sponsorship agreement is well drafted the organisation will reap not only financial benefits but also have the benefit of certainty.

If you have any questions or need assistance in locating those fishhooks, please do not hesitate to reach out to the team at Shieff Angland who will assist you in mitigating any risks.

Author: Dasha Kovalenko-Gormack