Sports sponsorship agreements in the coronavirus age

There are a range of options available to negotiators to ensure that both parties to sponsorship agreements can derive value from the contract even if the public health emergency and related government restrictions persists for longer than anticipated and impinge on the commercial drivers of sports rights.

The pandemic, sports rights and contracts

The coronavirus pandemic and government-imposed social distancing measures have had a fundamental impact on the market for sponsorship rights in sport. Sporting bodies have had to react to the measures by cancelling or postponing fixtures and competitions, or by introducing restrictions on sporting events to enable them to take place in the future. This has had and will continue to have a direct impact on any sponsors' rights connected to those events or the venues in which they are played.

In this landscape, a rights holder will still be keen to complete new deals and secure future revenue streams. A sponsor will seek to protect its investment and to ensure it can take advantage of sponsorship opportunities with confidence that the risks associated with the coronavirus pandemic are adequately managed to provide value for money. In order to do this, parties will need to consider more creative contractual measures to govern the arrangement and to structure deals so that they are agile and provide more certainty.

At this stage of the pandemic the more traditional approach to contracts in sponsorship arrangements may not provide parties with the necessary flexibility to meet their aims. Force majeure clauses, which deal with the impact of unexpected events, may have limited application as the impact of the coronavirus can no longer be categorised as unexpected or unforeseen. In addition, force majeure clauses can be blunt instruments, as they typically provide for suspension or termination of contracts which is a path that parties are unlikely to want to pursue. Parties will more likely want their sponsorship arrangements to continue, provided that they will get the benefit of the promised revenue stream and full enjoyment of sponsor rights.

The pandemic has changed the risk profile of sponsorship contracts. The cancellation of an event would have been a risk in any sponsorship arrangement but at this time it would be regarded as more likely, particularly with a second wave of the virus upon us and the prospect of further 'waves' to follow – with associated 'lockdown' restrictions – until such time as a vaccine is found and immunisation programme implemented. In this context, the restoration of live sporting events in full stadia is likely to be some way away.

For amateur teams and premier events alike, these restrictions impact upon ticket sales, media broadcasting and fan engagement which are all elements that the business of sport, including sponsorship deals, relies upon.

A time for collaborative contracting

It is possible for parties in a sponsorship deal to manage these risks and uncertainties, and inject value into the arrangement, by entering into a more collaborative contractual model under which parties share the burden of the coronavirus risk. This approach could provide benefits that more traditional risk allocation methods may be unable to provide under the circumstances. There is no 'one size fits all' approach to this, but as a starting point parties should consider the following to help create a mutually beneficial relationship:

• Each party should consider what their objectives are under the sponsorship deal. A sponsor should consider what rights it would seek to exploit while the rights holder should consider which rights it is willing to offer. If the sponsorship relates to a sporting event, parties could look beyond that and consider other property from which value could be derived through sponsorship. Examples include personal or team endorsement deals where value is driven by an individual or team rather than a specific event and are not as exposed to the risks arising from the impact of the pandemic. Nevertheless, to be effective, such types of endorsement usually rely on the activity of those teams and individuals, which is currently limited by the pandemic. Alternatively brands may seek to acquire rights relating to a sports team in e-sports given that the gaming sector has comparatively thrived during these times when consumers are locked down at home.
• The scenarios that could impact the event and consequently the value of the sponsorship should be considered. Recent experience tells us that there is a risk that events will be cancelled, rescheduled, or held with a reduced crowd or no spectators at all.
• The sponsor should establish when it will incur its costs and receive the value of the sponsorship. It may be the case that the costs incurred by the sponsor in activating its sponsorship could be several times the sponsorship fee paid to the rights holder.
• How the value of the sponsorship will be impacted by the variety of scenarios that can be anticipated should be assessed. The value of sponsorship rights extends beyond the sporting event itself. In certain circumstances the very association with certain established and cherished brands, regardless of whether the event takes place, can be of significant value.

Contractual options for sharing risk

Once the particular circumstances surrounding a deal have been considered there are a number of options which can be used to create a mutually acceptable and robust contract. Basing this on a contract structured around a shared incentivising model will help derive value from the arrangement in both parties' interests.

Consideration should be given to:

• The payment schedule: sponsors are likely to want to spread their payment obligation and are likely to be more resistant than usual to large up front payments. Payment schedules that are more closely linked to when the sponsor receives value may be preferred.
• Price adjustments: it may be that the parties will be able to agree a fee structure where the fee is varied in the event of certain specified events occurring; for example, if an event is rescheduled or played with limited or without spectators.
• Cancellation and refund rights: this is likely to be strongly resisted by event owners whereas prospective sponsors will want to get the sums they have paid in advance back should the event not proceed. How this debate plays out will be driven by the demand for the particular sponsorship opportunity. It may be that in some cases compromises can be reached where there is recognition that a sponsor may still get value from the sponsorship even if the event is cancelled, the arrangement could continue but parties could agree on a level of risk sharing in respect of coronavirus related risk.
• Third party resolution: it is unlikely that every scenario can be identified in advance. The parties may wish to provide for a third party expert to be consulted to determine the appropriate fee adjustment in the event that coronavirus has an impact that has not been specifically provided for in the contract.
• Replacement rights or make-up rights: parties could prepare a menu of rights or a method of collaboratively agreeing alternative rights that could be substituted for any sponsor rights that are hindered by the coronavirus pandemic.

Overall, creativity, flexibility and cooperation are likely to be key watchwords in negotiating sponsorship agreements in the post COVID-19 environment.

Co-written by Zara Early of Pinsent Masons.