Canada: Are You Ready For Your Close-up? Ten Things To Think About When Negotiating Sponsorship Agreements

Last Updated: September 13 2011
Article by Sharon E. Groom

It's September and that means the Toronto International Film Festival is on, bringing lots of celebrities and corporate sponsors to Toronto. The Toronto International Film Festival ("TIFF") welcomes many sponsors, with Bell Canada and Visa International being two of the most prominent. Sponsorship is a great way to raise the profile of your brand and increase revenue, but what should you consider when setting up such a relationship? We will discuss the top ten points to consider below.

  1. Sponsorship Property/Restrictions. Sponsorships may take many forms; for instance your company may wish to sponsor an athlete, a sports team, an event, a building, a charitable organization or a service. It is essential to accurately describe what you believe you are sponsoring to ensure no misunderstandings and to clarify your rights in relation to competitors. In addition, you should specify any territorial or media restrictions (for instance your rights may be limited to the internet only or restricted to Canada) and placement issues (i.e. are your rights limited to signage inside a building or do you also get outside signage?).
  2. Trade-marks. In sponsoring something, it generally involves the use of the sponsor's trade-marks in association with the event, person, building, etc. being sponsored. The marks that may be used by the entity being sponsored should be clearly set out in writing, along with the design that should be used for the marks (including size, fonts, colours), the markings and notices that should be used in association with the marks (i.e. ® Trade-mark owned by ____ and used under license) and where they can be used (for instance can they be used on merchandise, in publications, on websites, etc.). It is important for a trade-mark owner to control the use of its marks in order to maintain their distinctiveness and resulting validity. The sponsor should also ask for the right to approve materials bearing its marks before they are put into circulation. The sponsor may also want the right to use the marks of the company/event being sponsored so that should also be addressed in the agreement. If there is a new trade-mark being created (i.e. the new LIGHTBOX theatre complex which was sponsored by Bell for the TIFF) then you should specify who owns that new mark (in the case of BELL LIGHTBOX, Bell owns the mark).
  3. Merchandising. There will often be opportunities to create merchandise in association with the event being sponsored, or the building, and in this case you should ensure that the parties are clear on who has the right to design, manufacture, distribute and sell this merchandise and whether any restrictions are being placed on the price that it can be sold for and where it can be sold (i.e. territory, type of retail establishment, online sales). Also, are the revenues associated with such merchandising going to be shared at all?
  4. Sponsor's Products/Services. There may be an opportunity to have the organization being sponsored agree to use the sponsor's products or services in other capacities. For instance, if a telecommunications company is sponsoring a building, they may also ask, as part of the deal, that the sponsored company and its affiliates use the telecomm company's services for all their telecomm needs. Or a household product manufacturer may ask that its household products be the preferred products for use in cleaning the facility being sponsored. Sponsorship relationships can create partnerships between organizations that can go beyond the mere sponsorship itself.
  5. Sponsor Status. Is the sponsor going to be the exclusive sponsor of the particular property concerned or can others also sponsor the same property? This is important to set out right from the beginning. Even if you do not get exclusivity for the property as a whole, you may be able to negotiate category exclusivity that will at least keep out your competitors, i.e. you will be the exclusive sponsor in the soft drink category. In this case you want to carefully define the category – for instance is "soft drinks" specific enough? Or do you want exclusivity for all non-alcoholic beverages? You may also want to provide a list to the company being sponsored of the actual competitors that you would consider to breach your category exclusivity. Finally, you may negotiate a right of first refusal for related categories and the right to approve other sponsors.
  6. Fees. These can be payable in one lump sum, in instalments, or in some cases the consideration may be payment in kind, for instance through the sponsoring organization offering free or discounted products or services to the company being sponsored. Instalments are preferable to a lump sum from the payer's point of view as they allow the sponsor to attach the payments to milestones that must be met before payment will be made. They also allow a sponsor to cease making the payments if the event does not take place, for instance, and allow the sponsor to tie the amount of the payment to the success of the event, i.e. attendance levels.
  7. Representations. The sponsor will want the party being sponsored to provide certain representations about the event/building/person that may include the details of the event such as when and where it will take place, how often it will take place, how long the event will be, its quality, timing, attendance, publicity spend, advertising. If the property being sponsored is a building you will want to include representations about where it will be built, when construction will start and be completed, the architect that will be used, approval over plans, etc. The sponsor will also want guarantees that the party being sponsored will comply with all laws and obtain all necessary approvals for the building/event, and that the property being sponsored will not infringe the rights of any third party. The sponsor should also seek representations that the party being sponsored has the right to enter into this agreement and make these grants.
  8. Liability. The parties should determine who will assume liability for third party claims arising from the event/sponsorship, such as accidents that might occur at an event or in the building being sponsored. Each party is advised to take out specific insurance to cover their liability in this regard. The sponsor is well advised to seek indemnities from the organization being sponsored for any such liability, or at least put a cap on its liability. The parties should also determine who will conduct any court proceedings involving a third party and who can negotiate settlements and enter into settlement agreements.
  9. Right to Terminate. This can be tied to the representations, for instance the sponsor may want the right to terminate the sponsorship of a recurring event if the event does not attract a certain number of viewers, or the event is not televised on a national television station, or the events in the building do not attract the requisite audience numbers. The sponsor should also have the right to terminate if there is some scandal or other adverse publicity involving the person/company being sponsored, or if the person is not winning tournaments, or if the company putting on the event is in financial difficulty, or is acquired by one of the sponsor's competitors. In addition you should address what happens if the event has to be cancelled due to an "act of god" such as an outbreak of disease, or a weather disaster. Does the sponsor forfeit its money or will it receive some sort of reimbursement? Sometimes it is more practical to negotiate that the sponsor will be entitled to sponsor the next event with no payment, or with a reduced payment.
  10. Term/Renewal. The sponsor should consider what rights it wishes to have to renew or extend the agreement. The contract should allow for these issues to be addressed 6 – 8 months before the expiry of the term to allow the company being sponsored to find another sponsor if necessary. In a renewal the challenge is to determine the fees that will be payable for future periods as they may change depending in the success of the event. If a company requests a right of first refusal for future sponsorships, then it has the option to match another offer that the company being sponsored might receive. This gives the company being sponsored more flexibility in setting new terms for the new period, but does create some uncertainty for the existing sponsor. It is important to address these issues carefully to avoid the situation in which Labatt recently found itself when it lost the NHL sponsorship to Molson, even though it thought it was in negotiations to renew the agreement.

This is just an overview of the main issues to consider in negotiating and drafting a sponsorship agreement. Each agreement is unique and will have its own considerations, but this list provides a starting point.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP

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Sharon E. Groom
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