Sponsorship Contracts 101: Essential Elements for Success

What is a Sponsorship Contract?

Sponsorship contracts are legally binding agreements that outline the terms and conditions agreed upon between a sponsor and a property owner (the event or organization being sponsored). The essential purpose of a contract is to provide for uniformity in applicable laws, obligations , procedures and documentation for both the sponsor and the property owner. The contract is a requirement of the sponsorship relationship. It provides a formalized and accurate way to document the precise actions that will take place between the parties as part and parcel of the sponsorship agreement.
A well-drafted contract takes into consideration what each party wants out of the relationship and turns that into a mutually agreeable structure. Making this an essential element of the transaction avoids future litigation or breach. Using a clear and concise written contract is the best way to avoid default and potential litigation. In the event of a breach, the contract dictates the options available for enforcement, which can include: (1) private enforcement, (2) specific performance and (3) pecuniary damages.

Essential Elements of a Sponsorship Contract

Typically a sponsorship contract will include the following:

1. Scope – these are the details of the sponsorship arrangement – what services, benefits, rights and conditions are included:

A. The events or activities to which the benefits apply
B. The period of time for which the benefits are available
C. The scope of the sponsorship rights, benefits and deliverables
D. Any conditions attaching to the rights, benefits and deliverables
E. Any limitations in respect of the delivery of the rights, benefits and deliverables (for example, limited to a specific number of hours, dates and times).

2. Deliverables:

A. Confirmation of the delivery of the rights and benefits – if there is a number of deliverables (i.e. more than one activity, right or benefit), it’s best to list them sequentially making it clear whether they are all inclusive or cumulative. For example, you have a series of events and your sponsorship contract may include:
B. Exclusions – it’s prudent to make it clear that no benefits or entitlements are available other than those specifically set out in the sponsorship contract.

3. Obligations of each party:

A. The sponsor will be responsible for their own costs connected with the sponsorship
B. The event owner will acknowledge all sponsorship material.
C. The event owner will satisfy any conditions necessary to put the benefits into effect.
D. The sponsor will have the right to approve any creative or production work associated with its sponsorship.
E. The event owner will provide a written report on the event to the sponsor after the event.
F. Don’t forget general obligations such as the event owner’s obligation to obtain all necessary approvals- licences and permits (for example: liquor permits), provider of the venue to obtain necessary permits (and payment of any increased cost) and to provide insurance coverage for the event as required by law.

Negotiating the Terms of a Sponsorship Contract

Negotiation may be the most important step in the entire process of the parties successfully coming to a contract, and it will definitely affect the parties’ rights and obligations under the contract. In the sponsorship context, success during negotiation sets up a sponsorship that protects the sponsor’s investment and provides entertainment value for the sponsored event. It also helps to avoid problems between the parties after the transaction is complete.
Unlike a sales transaction where a consumer rather than a business negotiates with the supplier, in a sponsorship transaction, both parties to the transaction are business people negotiating who knows what benefit is at stake should the parties be unable to come to an agreement. The parties often have the luxury of more time for negotiating because of the parties’ interests in the secured rights and benefits.
When there is a lack of information or research on the availability of certain sponsorship rights or price of the sponsorship, the negotiation process may be complicated because the sponsor or sponsored may have to bring the other side up to speed on "the going rates" for such sponsorship. As a result, the entitled benefit of the other party ends up being negotiated in the terms so that the other party’s inability to understand "the going rates" for sponsorship does not negatively affect that party’s rights and obligations in the contract.
The range of possibilities in sponsorship negotiations is vast, ranging from a super bowl halftime show to an "I sponsor my child’s little league team" scenario and anything in between. Careful evaluation and negotiation of the mix of benefits and obligations of the parties through sponsorship, including those that extend beyond the actual event or dates of the sponsorship period, are critical to successful sponsorship arrangements.

Common Terms in Sponsorship Contracts

Common clauses in sponsorship agreements include terms relating to payment, termination, confidentiality, exclusivity and liability. Payment clauses set out how much the sponsor is required to pay and when. Depending on the nature of the sponsorship, a single lump-sum payment or instalments might be appropriate. The amount of the sponsorship fee is largely driven by the value of the sponsorship rights being granted to the sponsor. In the case of sports sponsorships, sponsorship fees are commonly calculated on an annual basis with the option for, and increasing amount of, sponsorship fees payable over the term of a multi-year sponsorship. Parties must also consider the standard of care to which the sponsor is held for payment. Unless otherwise stated, the standard of care to which the sponsor is held is a reasonable standard of care.
Termination clauses are important for both the event owner and the sponsor. The terms of termination may vary depending on the type and duration of sponsorship. For example, in the case of a sponsorship of an event, clauses setting out a number of events or duration for the sponsorship may be more appropriate than an annual term to suit the timing of the event. Termination rights should align with the nature of the sponsorship and the duration of the sponsorship. For example, a one-year sponsorship of an event may be in the form of a termination upon notice of 30 days with an additional clause relating to breach if the breach is considered serious enough to warrant termination. For a term sponsorship with vesting payment terms, termination clauses should provide clarity on the circumstances under which all or part of the vesting sponsorship fee can be terminated with or without penalty for the event owner or the sponsor.
Confidentiality clauses should set out all confidential information which cannot be disclosed. It is important to set out as clearly and as specifically as possible the scope of confidential information and the period that the recipient must keep that information confidential for.
Exclusivity clauses provide the sponsor with exclusivity in its industry, which can enhance the perceived value of the sponsorship. Exclusivity should be relevant to the category of sponsorship. For example, a retail sponsorship might extend to department stores, clothing, and/or grocery stores. An exclusivity clause should refer to how long the exclusivity is enforceable and the consequences of breaching exclusivity. For a long-term sponsorship, the parties may consider including step-down clauses, whereby the exclusivity becomes more limited as the term of the sponsorship progresses. For example, during the first half of the term the exclusivity may be absolute, during the second half of the term it may become more limited so that a competitor of the sponsor can be a provider of goods or services for the event or property for a period of time without breaching exclusivity. In that situation, the total sponsorship fee likely would be reduced to reflect the more limited benefit of exclusivity. Sponsorship agreements should contain a clause permitting the sponsor to assign or transfer the sponsorship agreement. Sponsorships can have a wide range of values depending on the rights that can be attained by the sponsor. Common sponsorship assignment requirements include:

Legal Aspects and Compliance for Sponsorship Contracts

Ensuring legal compliance is paramount when entering into a sponsorship contract. It not only protects the parties from post-signature litigation, but also contributes to the overall integrity of the brand. The following considerations should be considered when drafting and signing a sponsorship agreement with your company.
Confidentiality
Advertisements and publicity concerning the sponsor and the sponsorship must remain confidential unless the sponsor provides written consent. If not properly addressed, the sponsor could be forced to comply with a confidentiality obligation, but the beneficiary wouldn’t be. This would result in an inequitable situation for the sponsor.
Governing law
Wherever possible, the agreement should not be governed by any specific state or jurisdictional law in order to create the most flexibility for compliance. Having a carefully drafted "arbitration clause," for instance, serves to keep the contracting parties out of court , should any questions arise concerning the interpretation and execution of their contract.
Obligations of the parties to the agreement
Parties can include specific information about how any marketing or sales materials will be produced—for example, whether they will be printed, published, or promoted electronically. There should also be an agreement on how long the promotional materials will be effective.
Representations and warranties
In order to protect the parties involved, it becomes the responsibility of the sponsor to "hold a harmless" agreement concerning a variety of issues, including (but not limited to) risk against future claims, liabilities, actions, causes of action, costs, losses, or damages. Generally speaking, such an indemnification provision is a vital element to any sponsorship contract.
Limitation of liability
Public sponsors usually have rather extensive "hold harmless" provisions; however, these limits on liability are not standard across the board. The sponsor may find that the hold harmless provision is more favorable to the sponsor than it is to the beneficiary, and the parties may choose a more narrow, mutual limitation of liability.

Examples of Successful Sponsorship Contracts

Mastering Sponsorship Contracts: Key Elements for Success
Case studies are an invaluable tool for learning successful sponsorship contract strategies. In the cases below, the key points of the contract are highlighted, demonstrating the importance of careful drafting.
Case Study #4: Cintas v. G&K Services, Inc., 2008 U.S. Dist. LEXIS 67617 (S.D. Ohio Sep. 4, 2008). In an unreported opinion out of the Southern District of Ohio, Cintas Corporation ("Cintas") successfully recovered for breach of a sponsorship contract. Cintas maintains vending snack machines in over 150,000 locations across the United States. As part of Cintas’ marketing strategy, it entered into sponsorship agreements whereby Cintas’ logo would be displayed on vending machines owned by other companies.
Cintas entered into two sponsorship agreements with Defendant G&K Services, Inc. ("G&K"): one in May 2007 and one in February 2008. The May agreement was for one year. The February agreement was for three years. These agreements, essentially tag-along licensing agreements permitting G&K to use the Cintas logo in connection with its vending machines, required Cintas to maintain a minimum number of machines during the term and required G&K to make up the fees if that minimum was not met.
In July 2007, G&K sent Cintas a letter asserting that G&K planned to reduce the number of machines displaying the Cintas logo. G&K reduced the number from 5,560 to 3,239, but Cintas alleges that G&K continues to use the Cintas logo.
In addition, Cintas alleges that it declined several offers from third parties to purchase partial or full ownership of the vending machines displayed the Cintas logo and that, as a result, those third parties opted to use a rival company’s logo instead. Cintas asserts claims for breach of contract and breach of the implied duty of good faith and fair dealing.
Case Study #5: American Vending Sales, Inc. v. Leahy, 2007 U.S. Dist. LEXIS 26671 (D. Conn. Apr. 9, 2007). In American Vending Sales, Plaintiff American Vending Sales, Inc. ("American Vending") sought damages for breach of contract. Plaintiff contracted with Defendant Leahy and her husband to create a joint venture to operate vending machines in various locations. According to the complaint, Defendant Leahy agreed to the following terms:
Pursuant to this contract, Defendants purchased vending machines and locations. They, however, were allegedly unable to find enough vending machine locations to keep the machines fully stocked. They further allegedly purchased vending machines designed for locations requiring only snack food. The complaint alleges that this caused American Vending to sell candy at a loss.
American Vending sued Leahy, individually and as Trustee of the Leahy Trust, alleging that Defendant Leahy failed to include Defendants’ husband in conversations about a loan American Vending made to the Defendants for $40,000. The complaint also alleges that Defendant Leahy transferred ownership of a local pizzeria to the Leahy Trust without informing Plaintiff.
Ultimately, the court granted the Motion to Dismiss as to the claim against Mrs. Leahy in her individual capacity. With respect to the claim against the Leahy Trust, the court denied the Motion to Dismiss and allowed the Plaintiffs to conduct discovery on the issue of whether the individual Defendant acted within the scope of her agency.
Case Study #6: Dempsey v. Aim Vending Company, Inc., 2006-Ohio-5365 (Ohio App. 2 Dist. Oct. 2, 2006). In Dempsey, the state intermediate appellate court decided that an appellant seeking to pursue a claim for breach of contract arising from a vending machine agreement must prove both the existence of an agreement and damages. Dempsey alleged that he and other individuals signed vending machine agreements with Appellee Aim Vending Company, Inc. However, Dempsey asserted that these agreements were invalid as to him because Dempsey’s spouse signed the agreements on his behalf without his authority.
The trial court found in favor of Appellee on all claims. The state appellate court reversed the trial court’s decision regarding the contract claim, remanding to the trial court for additional proceedings.

Essential Tips in Drafting a Strong Sponsorship Contract

The primary objective of a sponsorship agreement is to protect a sponsor and a property. The sponsor holds the property responsible for performance of contractual obligations, and the property holds the sponsor responsible for paying the agreed-upon consideration. In its most basic form, this means that each party performs and then pays — but there are many provisions that make up a comprehensive sponsorship agreement.
Here are a few business tips for strong sponsorship contracts, in addition to both parties performing and paying:
Define Live and Digital Asset Availability
It’s critical to define exactly what assets are included in the sponsorship. Whether it’s live or digital, this should be clear from the outset and enumerated in the agreement to avoid any disputes between the parties post-signature that could lead to protracted and expensive litigation.
Consider Exclusivity
Exclusivity is another important consideration. Depending on the nature of the property , a sponsor may want to be the only company operating in its category or to have the right to compete with other sponsors if those sponsors are in the same category. An exclusivity provision would define exclusivity, including the duration of exclusivity, help protect the rights of a sponsor and prevent a sponsor from competing in the same space as other sponsors.
Appropriate Compensation Values
Finally, compensation should be commensurate with industry best practices so that neither party feels taken advantage of. Similar activations for similar audiences should incur similar costs. Should a dispute result in litigation, having a detailed and comprehensive agreement should help ensure that neither party feels their interests were not taken into account or that they did not receive what they contemplated when signing. Top-tier properties will need to add protections that are germane to their property type, as well as their audience, that help ensure that the target audience receives value from an activation.