Although there almost always are a few minor hiccups along the way, most sponsorships run their course without serious conflicts between the parties.

However, no deal, no matter how big or how small, is immune from the possibility that a major dispute may arise. There are far too many variables–some completely out of the control of the impacted partners–for sponsors and properties to ignore the potential that significant problems can appear.

Smart rightsholders and their sponsors do their best to address in advance situations such as bankruptcies, changes of ownership and other developments that can throw a wrench into the best laid plans.

For example, sponsors may want to have options in the event a sponsored property is sold. That is why computer retailer CDW Corp. has an escape clause in its contract with the RuSport Champ Car World Series racing team that would have allowed the company to end the sponsorship when the team changed owners late last year. (CDW chose to stay with the team.)

“Not only do sponsors invest in a property, but the ownership as well. You want to have the right to continue the relationship based on your acceptance of the sale,” said Henry Rischitelli, president of motorsports marketing agency Next Marketing, which represents CDW.

As the CDW example demonstrates, anticipating circumstances that could cause either party to want to end or drastically change the relationship–and negotiating outcomes up front and including them in the sponsorship agreement–is key.

“The more you address realistic changes that can occur throughout a sponsorship in contract negotiations, the smoother the relationship will go,” said Wendy Heimann-Nunes, a former Universal Studios, Inc. attorney who now works with both sponsors and properties.

Often a concern for properties is the future financial health of their corporate partners. In fact, it is in both sides’ best interests to be specific about bankruptcy-related termination in the initial agreement, as sponsors will want to be able to extricate themselves from deals they can no longer afford, while properties–in addition to making sure they receive fair compensation–may also want to end the association with a bankrupt company, even if the sponsor is staying current on its payments.

Attorneys advise that rightsholders also should consider morals clauses for sponsors. While such language was once the domain of sponsors’ endorsement deals with athletes and celebrities, the growing number of cases of corporate malfeasance show the potential for a sponsor to do damage to a property’s reputation.

“The issue isn’t solely whether or not a company in trouble can pay its rights fee, but whether it would be a public embarrassment for the property to continue to be sponsored by a company under scrutiny,” said Pam Lester, an attorney and president of Lester Sports and Entertainment, a consultancy specializing in sports marketing, licensing and management.

Preparing For Getting Out When You Are Getting In
In addition to anticipating changing circumstances, sponsorship contracts should be drafted with an eye toward making the obligations of each party crystal clear and must address what will happen if those obligations are not met.

“The contractual grant of rights should be as specific as possible,” Lester said.

Agreements should completely spell out every right and benefit and every operational arrangement necessary to deliver those rights and opportunities. This makes it easy to identify when either party is not fulfilling its obligations.

There are usually far fewer ways for sponsors to be in breach of a contract than properties. They typically include failing to make payments or improperly using a property’s logo and other trademarks.

On the flip side, properties generally have more ways to breach because they have many more deliverables. The key protection for a sponsor is to account for all the variables that could impact the value of the benefits they have purchased.

For example, “sponsors will want to protect themselves in the event that new technology lessens the value of their rights, such as Internet broadcasting cannibalizing the over-the-air broadcast of a sporting event,” Lester said.

To address breaches of contract, attorneys recommend that agreements include a notice-and-right-to-cure provision that first provides that written notice is given alerting one party that the other party believes there has been a breach.

The provision should then specify that the party in breach has the right to cure the breach within a specific time period, such as 15 or 30 days.

It is very important that the contract spell out remedies if the situation is not cured in that time period.

Remedies For Sponsors
The remedies sponsors have in case of breach might include what attorneys refer to as “specific performance,” which simply requires the property to provide the rights and benefits spelled out in the contract.

Remedies also could include liquidated damages, which can take the form of an agreed-to sum that the rightsholder must pay for failure to deliver a certain benefit, or a full or partial refund of the fee paid. If it is a partial refund, the agreement needs to make clear on what basis it will be calculated.

Negotiating the monetary value of benefits up front is critical, said Wesley Zirkle, general counsel with motorsports agency Just Marketing Int’l. “I don’t expect two parties that may hate each other to sit down and fairly determine value. The clause demonstrates that the two parties convened at one time and determined that this is the money that would be owed back if the contract was terminated early.”

A sponsor also will want to specify that if the event to which it bought sponsorship is canceled for any reason other than an act of God, then the sponsor should not be obligated for any future payments.

In that situation, the sponsor should also receive a rain date, i.e., the same rights and benefits the next time the event is held. That would prevent the property from breaching its contract because it received a more lucrative offer from another sponsor.

In the case of new properties, or if there is a question about a property’s financial wherewithal, a sponsor may require the rightsholder to post a performance bond that would provide reimbursement if the event does not take place, said Mary Hutchings Reed, an attorney with law firm Winston & Strawn who represents both sponsors and rightsholders.

Sponsors also will want to ensure that if the entire contract is terminated due to a breach by the rightsholder, the sponsor is reimbursed for part or all of the fee that it has already paid. Additionally, sponsors will want to secure the right to continue using property trademarks so that, if it desires to, it can still promote its association and benefit from the relationship.

Sponsors and properties should note that breaches of contracts do not result only from direct actions or omissions in fulfilling agreements, but can be caused by seemingly far removed activity.

For example, contracts with properties that sell sponsorship across multiple assets, events or venues should include language that addresses what will happen to its corporate partnerships if one of those assets is sold.

Such could be the case for deals involving mega properties like The Walt Disney Co. and Universal, which often cross multiple divisions, including theme parks and movie studios. “In this climate there is a lot of buying and selling of those types of assets, and a property possibly could be in breach if a sale were to take them away,” she noted.

Remedies For Properties
If a sponsor is responsible for a breach, rightsholders should ensure that the contract specifies that future installment payments remain due and must be made. Without such a clause, a sponsor could deliberately breach the contract as a way to walk away and owe nothing.

If a sponsor misuses its partner’s trademarks, properties should be able to terminate the contract and receive liquidated damages in addition to any money owed for the rights fee.

Rightsholders should try to establish a payment structure in which they receive as much of their fees as possible early in the relationship, and are fully compensated by the time of an event, Reed advised. That may lessen the need for legal action in the event of a sponsor breach, she noted.

“A property doesn’t want to have to sue to recover fees and damages–not only is it time consuming, distracting and expensive, but it is likely to lead to bad publicity,” Reed said. “The sponsor will always produce reasons–such as the rightsholder’s breach or incompetence–to justify its own breach. That is destabilizing for an event.”

Rightsholders also should include a clause addressing late payments by the sponsor. The contract should specify the penalty and an interest rate to be charged per month until payment is received.

Properties concerned about a prospective partner’s financial situation and its ability to make payments on time and in full can protect themselves by asking for a letter of credit or an escrow account, with payments made upon performance of certain deliverables.

“There is a cost to carrying a letter of credit, but it does provide some protection to the rightsholder,” Reed said.

Just as sponsors may desire to continue promoting the association with a property when a contract is terminated early through a rightsholder breach, a property will most likely want to immediately suspend those rights when it is the sponsor that has broken the agreement.

Regardless of whether a contract is terminated early or simply expiring, it should specify when the sponsor is obligated to stop using the property’s trademarks.

If a sponsor continues to use promotional footage, branded merchandise and other property imagery after the end of a contract, it may conflict with the rights being granted to a new sponsor and, if continued, may insinuate an ongoing association with the property.

As a result, provisions must be made for the sponsor to remove inventory bearing property marks from retail and other distribution channels. In general, when a contract is expiring normally, a sell-off period will be provided whereby the sponsor has the ability to sell off the stock for a defined period, after which all stock should, at the option of the rightsholder, be either destroyed or acquired by the rightsholder.

Finally, in any circumstance resulting in termination, contracts should indemnify and protect the rightsholder from legal action taken by other sponsors of the property that may be negatively impacted by a cosponsor’s exit.

For example, a sponsor that aligned with a property to piggyback another sponsor’s media campaign may feel injured if that sponsor ends its relationship early, said Mel Poole, president of SponsorLogic, a sponsorship sales agency.

“There shouldn’t be any compensation involved with soothing the sponsor, but properties should at least indemnify themselves from risk,” he said.

Editors Note: This article does not constitute legal advice and should not be regarded as a substitute for legal advice.