This article is written by Shivani Varade, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.com.
Cadbury hired Amitabh Bachchan to promote the brand when their sales dropped by 30%. Soon after, the advertising revived people’s passion for the brand and improved Cadbury’s sales to the point that it was able to restore its sales crisis in just 8 weeks. Similarly, MakeMy Trip, a travel portal, uses Ranveer Singh and Alia Bhatt in its advertising campaigns because of their easy-going, and happy-go-lucky personality that aligns with the brand’s values. This type of advertising refers to celebrity endorsement, where a brand uses a celebrity to promote a product or service as the audience is highly impacted by the fame and lifestyle of the celebrities. This article aims to provide an overview of the celebrity endorsement agreement, its pros and cons, essential clauses in a celebrity endorsement agreement, and the points to consider while negotiating this agreement.
What is celebrity endorsement?
A marketing technique including the employment of one or more celebrities to promote a certain product or service is known as celebrity endorsement. In this case, the major goal is to reach a larger audience, which is represented by the celebrity’s fan base. These sponsorships not only result in billions of dollars for the corporations (and steady paychecks for the celebrities), but they also increase positive publicity, exposure, and engagement.
What is a celebrity endorsement agreement?
A celebrity endorsement agreement is a contract between a well-known celebrity and a company or organisation that wants to advertise their company or products using the celebrity’s name. The company pays the celebrity compensation or a fee in exchange for the celebrity’s fame and goodwill. This endorsement can happen as a result of a celebrity’s appearance in a commercial or simply by wearing the brand’s (company) product. For example, Shah Rukh Khan promotes a well-known online education application company called ‘Byjus’, by promoting their services in their television commercials.
Purpose of a celebrity endorsement agreement
The major purposes of a celebrity endorsement agreement as are as follows-
1. To enhance the credibility of a business
By selecting and promoting the correct celebrities and celebrity endorsements for their products, businesses gain increased credibility. Celebrity endorsement has its own niche, which can vary from music and cinema to fitness, fashion, and sports. So, a business should take advantage of this and hire a celebrity whose expertise matches the product or service you want to promote. For instance, a fitness trainer or author might be a good fit for supporting a health and fitness product or service.
2. For the great promotion of the product
Celebrity endorsements tend to bring a lot of value to a company’s public relations because they immediately draw the attention of the paparazzi and the media in general. Therefore, the most effective way to sell your product is to have a celebrity speak about it. When a celebrity does this, it generates a lot of buzz in the media and draws a lot of attention from the general public.
What are the essential clauses in a celebrity endorsement agreement?
The following are the essential clauses of a celebrity endorsement agreement for having a good deal for the celebrity and organisation:
The length or the duration of the agreement is determined by this clause. The term can vary from some months to several years, generally, the term will be at least stipulated for 12 months. With the expiry of the term, it should be noted that there will be some clauses in the agreement like confidentiality, cooling-off periods, etc. which will be automatically invoked. These clauses survive even after the termination of the contract.
- The Agreement shall be effective during the Term and automatically expire upon the completion of the Term, subject to renewal of the Term or earlier termination thereof, under the provisions hereof.
- There will be no automatic renewal of the Agreement. In case the Company wishes to renew the Term of the Agreement, then the Company shall notify the Artist, in writing, no later than 3 (three) months prior to the expiry of the Term, with its intention to renew. Parties shall be required to decide on the renewal of the Term, within 21 (twenty-one) days of receipt of the intimation from the Company and if Parties do not mutually agree to the terms and conditions of renewal then the Agreement shall expire on the completion of the Term.
The agreement shall have an indemnification clause to make the other party responsible for any loss that may occur due to the following acts of the party-
- Inaccurate representation and warranty;
- Act of negligence;
- Act of omissions.
This clause must carefully set out the scope and procedures for using the clause. The clause shall only cover the direct damages rather than remote ones. A commercial cap can also be inserted in the clause to limit the obligation of a party when liability arises.
The Company hereby agrees to indemnify and hold the Artist, harmless with respect to all liabilities, claims, damages, costs, and expenses including reasonable attorney’s fees and disbursements(s) arising out of or in connection with the breach of any obligation, warranty or representation made by the Company.
Further, the Company also agrees to indemnify and keep indemnified that Artist against any claims, damages, losses, liabilities, costs, and expenses (including attorney’s fees and disbursements) that may arise due to any undertakings, representations, promises, made/provided by the Company to the buyers of the Endorsed Product with regard to the quality of the Endorsed Product, committed to the buyers.
The maximum aggregate liability of the Artist, including indemnities, damages, costs, expenses, claims, etc. arising under this Agreement, for any reason whatsoever, of the Artist arising out of or related to this Agreement, shall be limited up to an amount equivalent to the Fee received by the Artist till the date when such liability arises.
3. Duties of the celebrity
This clause shall include the duties of the celebrity which is supposed to be performed by the celebrity as per the needs of the organisation. The points which can be included in the clause are-
- The celebrity shall not engage in any action which derogates the character, reputation and work culture of the organisation.
- The celebrity is bound not to participate in any other activities including the functions of the rival organisations, which will hamper the goodwill and reputation of the endorsing company until the term specified in the agreement.
- agrees that the Company shall be entitled to use and permit the use of the Celebrity’s name, biography, photograph, and fair likeness for the purposes of promoting and advertising the Product during the term of this agreement;
- agrees not to participate in any activities which would prejudice the goodwill and reputation of the Company and/or the Product during the term of the agreement and for twelve months subsequent to the termination;
- agrees not to take or engage in any action or conduct in the Territory which would impugn their character or reputation or that of their work;
The methods and schedules of payments are included in this clause. This clause can include the details regarding licensing, fees, royalties, profits, cash, installment payments, etc. the companies can put certain conditions which are to be fulfilled by the celebrity before getting full payment. If the celebrity fails to perform the required conditions, then the company can cut the amount as per the rules of methods and schedules for the payment. The amount of consideration is mutually decided by the parties.
In consideration of the rights granted to the Company, as per clause 3, and the services to be rendered by the Artist, the Company shall pay the Artist, towards Services to be rendered by the Artist for Endorsed Product under Brand, a compensation of Rs. 5,00,00,000/- (Rupees Five crores only), along with the applicable service tax or applicable succeeding tax (“Compensation”) payable as under:
- 40% of the Fee, i.e. Rs. 2,00,00,000 /- (Rupees Two crores only), shall be simultaneously due and payable with execution hereof;
- 30% of the Fee, i.e. Rs. 15, 000, 000/- (Rupees One crore Fifty lacs only), shall be due and payable 7 (seven) days prior to usage of the 1st Work Day or November 19, 2016, whichever is earlier.
- 30% of the Fee, i.e. Rs. 15, 000, 000/- (Rupees One crore Fifty lacs only), shall be due and payable 7 (seven) days prior to usage 2nd Work Day or on January 19, 2017, whichever is earlier.
5. Force majeure
The force majeure clause includes acts that are out of the control of the parties, e.g., the Act of God, war, terrorist attacks, natural calamities, etc. If the force majeure stays for a longer period time than expected then the parties have the right to terminate the agreement between them. In case of a pandemic, such clauses should be adequately negotiated because the celebrity would not be able to endorse the product.
- Acts of God, fires, floods, weather, illness (including any mental or physical disability) of the Artist or other catastrophes, epidemics or quarantine restrictions, illness or death of family members of the Artiste, or other cause(s) beyond the reasonable control of a Party, not reasonably foreseeable, and that could not have been avoided which prevent the Artist from providing the Services, or Company from receiving Services (“Event of Force Majeure”), shall suspend such affected Party’s obligation to perform hereunder during the period required to remove such Force Majeure Event.
- However, if the event of Force Majeure or disruption in compliance of obligation by the Parties due to the Event of Force Majeure event continues for a period beyond 30 (thirty) calendar days from the date of commencement of the Event of Force Majeure, the non-affected Party shall be entitled to terminate this Agreement.
6. Moral clause
Moral clauses shall be considered as one of the essential clauses in this kind of agreement. It can also be termed as a ‘harmful behaviour’ clause. This helps the parties to terminate the contract unilaterally. This permits the brand to terminate the agreement with the celebrity who has been engaged in any illegal, immoral, indecent, scandalous or harmful behaviour or activities.
The Company has the right to terminate this agreement if the Celebrity commits a crime or engages in any situation or activity (including the use of illegal or illicit drugs) that, in the reasonable opinion of the Company, brings the Company into disrepute, contempt, scandal, or ridicule, or shocks, insults, or offends the public, or reflects unfavourably on the Company’s reputation.
Insurance policies are required for the corporation to cover money paid to the celebrity in case the celebrity dies or gets any permanent injury. This clause will save the corporation from the expenses incurred by them for booking the television commercials, the cost of production, print advertisements, and other promotions. Some insurers also cover the replacement cost like, for booking new celebrities or commercials.
During the Term, the Company shall at its own cost, charges and expenses bear all cost towards obtaining appropriate insurance policy for the benefit of the Artist, of value not less than the Fee payable to the Artist, for the health of the Artist against any injury, accident, illness, sickness, mental incapacity, physical incapacity, death, and other incidences, etc. arising out in connection with the Services to be rendered by the Artiste. The Artist shall be the sole beneficiary of such policy. The liability of the Company in any such eventuality is restricted to the extent of taking an appropriate insurance policy.
8. Obligations of the company/brand
There are certain obligations that are required to be followed by the company while entering into the agreement-
- The company shall inform the celebrity that he/she is the principal authority to endorse, present or advertise the product or service throughout the territory during the term of the agreement.
- The company shall not disclose any personal details regarding the life and views of the celebrity without prior permission from the celebrity.
- undertakes not to disclose any material nor make any statement, whether true or not, concerning the Celebrity’s private life, politics and personal views to the media at any time without the prior written consent of the Celebrity;
- undertakes that no material of any nature concerning the Celebrity shall be used by the Company which would impugn the character or reputation of the Celebrity;
- agrees to provide the Celebrity with reasonable notice of all meetings and promotional events at which the Celebrity is requested to attend under this agreement;
- agrees that upon reasonable request it shall provide a copy of any record, document, accounts, or other material which assist the Celebrity in establishing the validity and accuracy of the sums due.
9. Intellectual property
Intellectual property clauses in such agreements play a significant role as to limit the use of the endorser’s name, image, signature, etc. by the company. Both the parties under the agreement shall respect the intellectual property rights of each other. The ‘right to retain’, i.e., the right of the celebrity for which his prior approval is required for any promotional material can also be included under the clause.
- In consideration of the Compensation, the Celebrity assigns to the Company all present and future Intellectual Property Rights in the Territory in all media in the Product for the complete period of those Intellectual Property Rights.
- The Company shall only be entitled to use, exploit or licence any of the material produced or created as a result of the provision of the Services or as part of the Product in which the Celebrity appears in sound or vision for the endorsement of the Product anywhere in the Territory.
- Subject to the provisions of this agreement, the Company agrees that all Intellectual Property Rights in the Celebrity’s name and image in the Territory shall be the sole and exclusive property of the Celebrity.
Confidentiality is also considered a standard provision for endorsement agreements. The parties shall agree to keep the financial and contractual related matters confidential even after the termination of the agreement subject to a few standard exceptions.
- Neither party shall (except in the proper course of their duties), either during the term of this agreement or at any time after its termination, use or disclose to any third party (and shall use their best endeavours to prevent the publication or disclosure of) any Confidential Information.
This restriction mentioned above does not apply to:
- any use or disclosure authorised by the party to whom the disclosure relates;
- any use or disclosure required by law, by any government or other regulatory authority or by a court or other authority of competent jurisdiction;
- any information which is already in, or comes into, the public domain otherwise than through the disclosing party’s unauthorised disclosure; or
- any use by or disclosure made to legal advisors or any bona fide prospective purchaser or subscriber who is intending to acquire shares in the Company.
How do you negotiate a celebrity endorsement agreement?
The stake in the celebrity endorsement agreement is high as compared to any other agreement. Both the parties’ name, fame, and reputation are put on the paper, thereby proper due diligence shall be taken while drafting the terms and conditions of the contract. Some points which are recommended to be noted are:
1. Ensure the parties with whom you are entering into the agreement
First and foremost, an important aspect which shall be kept in mind is regarding the parties which you want to be on the table while agreeing. While selecting a celebrity, the company would not be directly entering into a contract with the celebrity, rather they have to connect with the agency or management company of the celebrity. Therefore, keep in mind the requirements of the parties with whom you are entering into a contract.
2. Tailor your pitch as required
This skill is important to negotiate the terms and conditions which are to be included in the contract. For example, while entering into the consideration topic, the company will always pitch a lower amount than their budget. And the celebrity side will pitch more than the normal range. Therefore, it is on the parties to understand the skill regarding tailoring the pitch as per the requirement.
3. Come clean with the product
While negotiating, make sure to Byjus put a definition of the ‘endorsed product’. A proper definition will be helpful for both parties and can save both from future negotiations. The definition can include the kind of endorsement required, the territory boundaries, quality details of the products, any controversies that have surrounded the product in the past, etc.
The duration of the agreement shall be made as long as possible by the company, however, the celebrity can negotiate on the terms of duration or else can ask for flexible ways to terminate the contract when required.
5. Scope of services
The services which are required need to be specifically mentioned in the agreement. How many appearances, when, where, duration of serving notice, scheduling procedure, all such criteria are to be mentioned in the agreement.
What are the important things to consider under the Consumer Protection Act, 2019 while drafting a celebrity endorsement agreement?
As per the new Consumer Protection Act, 2019 (“Act”), there is a liability on the endorser for endorsing products or services which are against the interests and safeguards of the consumer. Earlier, there was the Advertising Standards Council of India (ASCI) Code, which used to provide certain guidelines for celebrities, but was not considered as a comprehensive law to regulate or monitor such misleading celebrity advertisements.
So today we have the Consumer Protection Act, 2019 which covers the statutory sanctions or penalties for such misleading advertisements. Under Section 21 of the Act, the central authority may order discontinuation/modification of a misleading advertisement that is prejudicial to the interest of the consumer or in contravention with consumer rights. The central authority may impose the following punishments on the endorser in the event of any misleading advertisement-
- impose a penalty on the endorser which may extend to ten lakh rupees and up to fifty lakh rupees for every subsequent contravention.
- Prohibit endorsers from making any endorsement for a period that may extend to one year and up to three years for every subsequent contravention.
The only defence available to the endorser is that they had conducted due diligence and had checked the veracity of the claims made in the advertisement regarding the product or service endorsed by them.
Pros of a celebrity endorsement agreement
Some of the advantages of engaging in a celebrity endorsement agreement are-
- Direct Sales- Well, that’s really what a corporation wants from direct sales! Imagine a Barcelona fan who sees the latest advertisement with Lionel Messi wearing Adidas shoes. Similarly, if the outdoor board is placed near an Adidas store, a sale could be made right away.
- Name recall- When a well-known celebrity endorses a product, consumers are more likely to remember the brand name every time they see or think of that celebrity. For example, when you think of Michael Jordan, you automatically think of Nike.
- Confidence- People trust well-known individuals. Why would a celebrity purchase a low-quality item? As a result, an endorsement is a tactic for instilling trust. And in a market where there are a lot of choices and a lot of rivalries, this may be a major differentiator.
Cons of a celebrity endorsement agreement
Despite the advantages, there are few cons of a celebrity endorsement agreement such as-
- Expensive- Many businesses are concerned that obtaining a celebrity sponsor will be extremely expensive. This is why it is so easy for a superstar to become a multimillionaire in a short period. Only large corporations, however, can afford to invest in this marketing technique. Smaller companies may have a harder time competing in this area.
- Controversy- Celebrities are well-known individuals. Because celebrities are not like employees who are trained to follow a company standard, they are sometimes involved in scandals that might negatively impact your brand. Whether or not a controversy involving your celebrity endorser is accurate, it will inevitably bring your brand down.
- Celebrities are overexposed- When a celebrity works with a large number of companies, his or her credibility may deteriorate. People may believe that the celebrity will promote anything to make money.
Using a celebrity’s image to promote a brand makes the advertisement alive, appealing, and intriguing, as well as attention-getting, because the public views the celebrity as a role model, and these celebrities, in turn, have an impact on their lives. Therefore, through a celebrity endorsement agreement, a company gets proper consent from the celebrity and uses his/her name and reputation to promote their products or services. In this agreement, it is to be noted that the above-mentioned essential clauses are included as they highly affect the scope of services of the celebrity and the company. Additionally, while negotiating the agreement, obligations of the celebrity/company, compensation, and indemnity should be carefully considered to avoid future disputes.
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