Recent News Suggests It’s a Good Time to Revisit Sponsorship Agreements
The last few months have delivered a litany of unfortunate reminders of the many things that can go wrong between rights holders and brand partners—with sales rights being taken away at the last minute in Qatar and the collapse of FTX, a company that had committed hundreds of millions of dollars to sports marketing, leading the pack.
Although it’s a safe bet that the drafting and reviewing of contracts is no one’s favorite part of the partnership process, those headlines are a stark reminder of the importance of having agreements that clarify rights, create and preserve value, allocate risks and provide remedies if circumstances dictate the need for them.
While the issues faced by AB InBev and FTX-sponsored properties have mostly to due with breach of contract provisions that are not unique to sponsorship agreements, below is a recommendation for handling one of the most frequently contentious areas unique to sponsorship rights holders and their partners: renewal.
Explicitly defining the terms for how a brand can renew its partnership at the end of the contract term can avoid one of the most common conflicts between properties and sponsors.
The dispute is often over the use of the term “right of first refusal.” The intention is to allow a current partner to have the ability to renew its deal without interference from another marketer. There is pretty much universal agreement that this is the fair approach to take.
Strictly speaking, first refusal offers the sponsor the right to match the financial terms of a competitive offer. But in my experience, many rights holders have interpreted this to mean something more akin to “right of first negotiation,” which gives the sponsor an exclusive negotiating period in which to reach a new deal before the property makes it available to others. Once that period ends, the existing sponsor’s right dissolves.
Although it is most important that both parties understand and agree on whichever term is incorporated into the agreement, choosing right of first negotiation in most cases will help to avoid disputes.
In practice, right of first refusal can mean that a rights holder, having failed to agree on renewal terms with its current partner, could spend months negotiating with another company to take over the sponsorship only to have the original sponsor match the offer in the end. Not only does this require the property to expend resources in the pursuit of another sponsor, but it will almost certainly create ill will with the prospect that spent time and resources negotiating in good faith only to have the package snatched back from them in the end.
It is often said that a good partnership is one in which neither party feels the need to constantly refer to the contract over benefits and deliverables. That is indeed true, but taking the time to ensure that there is clarity over the financial and legal language in current and future agreements can help to protect and extend those relationships, or at the very least assist in resolving conflicts as quickly and cleanly as possible.