The FA and Nike are reportedly close to signing a new sponsorship deal, to take effect on the expiry of their current agreement, which is set to expire in 2018. The new 12-year agreement is reported to be worth £400 million. Whilst this new deal is, on one level, “the most lucrative England kit sponsorship deal in its history”, it has not gone unnoticed that this figure is a relatively modest increase on the value of the existing deal, with many speculating that this is due to England’s disappointing performance in Euro 2016 (readers who haven’t blocked it out will no doubt recall the painful early exit to Iceland).
Despite the slim increase in deal value, in the context of previous rumours that Nike might decline to renew altogether, the income will nonetheless be welcomed (on top of the recently concluded £820 million broadcast rights deal), with Martin Glenn indicating that the FA will seek to reduce some of its £200 million Wembley debt. However, the Times, in particular, has reported that the sponsorship deal contains new “penalty clauses” which will kick in if the senior men’s team fail to qualify for the World Cups or European Championships and that incentive bonuses will be paid for reaching the semi-finals or beyond of leading tournaments from 2020. Possibly this is part of the price England is now paying for its shortfalls last season.
From a commercial perspective, it is not unusual in a sports sponsorship deal to incorporate mechanisms to adjust the sums paid by the sponsor such that they increase or decrease by reference to the success of the sponsored team or individual. The success of the team inevitably increases its value to the sponsor and thus it often makes sense for the consideration to vary to some extent to reflect this. However, for lawyers following the media coverage of the deal renewal, their interest may have been piqued by the references to these “penalty clauses” and “incentive bonuses”. For those readers less familiar with the intricacies of English contract law, this is because the basic legal position is that penalty clauses in contracts are not legally enforceable. Therefore, when drafting agreements containing provisions which adjust the sums of money received or payable by one party, care must be taken to ensure they are drafted in a way which is enforceable at law.
The basic legal test is that a provision will be unenforceable if it is a secondary obligation (i.e. an obligation which is triggered only upon the breach of another obligation) which imposes a detriment on the party at fault out of all proportion with any legitimate commercial interest of the innocent party. Bonus or incentive payments, therefore, are generally unlikely to fall foul of the penalties rule. However, the drafting of a provision giving rise to a decrease in the sums paid, or an arrangement whereby sums must be repaid upon a certain event, needs more careful thought. In general terms, provided it is phrased as a primary obligation, a mechanism which reduces the consideration payable by the sponsor should be enforceable, as it simply reflects a commercially legitimate adjustment to the price which the sponsor is willing to pay in a prescribed set of circumstances.
In any event, the England team will doubtless have plenty of incentive (regardless of its sponsorship arrangements) to strive to improve on last year’s results.