Contracts in the Hospitality Industry

Introduction 

In the beginning of 2021, the travel industry and community renewed their hopes and dreams that travelling would soon be possible again, especially with the introduction of vaccines for the Covid-19. With that, the stakeholders which include the hospitality industry, are getting prepared with deals, arrangements, packages, promotions and offers to attract customers as well as to be more prepared for any possible pandemic hit in the future. 

The hospitality industry is part of the service industry which involves business activities such as lodging, food and drink, event planning, theme parks, and transportation. As such, numerous types of contracts are involved in the industry regulating the relationship, the transaction and protecting the rights of the stakeholders. The pandemic era has taught us great lessons in those areas.  

Contracts used in the hospitality sector are very much similar to those used in other industries; such as contacts for employment, employee insurance, routine facilities and ground maintenance, equipment purchases and many more. In addition to these, there are also some specialised contracts that are only applicable for businesses under the hospitality industry such as franchise contracts, management contracts, and conference services contracts.

It is important for all stakeholders in the hospitality industry to understand their obligations and rights under each type of contract entered into by them as well as the purpose of the same. To give a little insights on the types of contracts and their purposes, we append below our brief comments for your understanding. 

(1) Franchise Contracts

Franchising is a marketing strategy for business expansion whereby the parent company (franchisor) allows the operating company (franchisee) to run a business with the brand name, intellectual property, and business model of the parent company. A franchise agreement is a legally binding document between the franchisor and franchisee that outlines the terms and conditions of their franchising. In Malaysia, franchising is governed by the Franchise Act 1998 which aims to regulate the franchise businesses in the country. 

As franchise businesses involve sharing a common brand, at times there will be potential for abuse which may damage the brand reputation, thus the laws and contract terms that govern the sale and purchase of franchises must be drafted in detail and closely regulated. There is no standard form of franchise agreement because the terms, conditions and methods of operations of franchises differ depending on the type of business. 

With that being said, a franchise agreement will usually include the basic elements such as overview of the franchisor and franchisee relationship, duration of the franchise agreement, initial and continuing fees, assigned territory, site selection and development, training supports, use of franchisor’s intellectual property, advertising, insurance requirements, franchisor’s right to audit franchisee’s records, termination and renewal options. The contract terms must be followed by the franchisee or the management company hired by the franchisee to run the business on their behalf. 

If the terms are not followed, the franchisor may have the right to terminate the contract. However, even though the terms are codified in a written agreement, the franchisee would still have some leeway to make contractual modifications to meet their own specific needs, and more importantly to evolve the brand in order to stay competitive. 

It is important to note that there are requirements, procedures and rules to be complied to under the Franchise Act 1998 of Malaysia. As such, proper legal advice is pertinent in this situation. 

(2) Management Contract

In the hospitality industry, some business owners may hire individual managers or a management company to operate their business on their behalf. This is usually because the owners and/or investors may lack the skill and knowledge of operating the business, or they may be mere businessmen with no intention to be involved with the business operation. Thus, with the assistance of management companies, their expertise would allow smooth functioning of the operation and also enable businessmen to focus on the expansion of the business rather than to deal with the day-to-day working of their business. 

In such an arrangement, the terms and conditions of the business operation must be stated in a management contract, and the company in charge will be responsible for the operation, making all of the operational decisions necessary to run the business smoothly.

 The terms of management contract are usually different depending on the kind of operation taking place and parties involved. However, they will usually include the basic elements such as the terms and conditions of the agreement, length and durability of the agreement, fees to be paid, procedure for termination or extension of contract by either party, insurance policies, and employee status. 

Management contracts are commonly used in hotels, which may be for only one outlet or all the outlets of the hotel chain. Normally, such contracts will be long-term contracts because of the nature of the hotel industry. 

Besides that, management contracts are also commonly used in the food services industry, such as in school and public office cafeterias, nursing homes and restaurants. The management company will be in charge of the day to day operations which includes preparing and serving the food. Management contracts in the foodservice industry are not usually the core part of businesses, but they are relatively important as they ensure smooth delivery of food to employees, students and other people. 

(3) Conference Services Contracts

Conference services contracts are typically executed between a hospitality business and groups. Groups such as tour groups, sports teams, conventions, corporate training meetings, wedding parties and travel packages. There are two types of conference services contracts; meeting space contracts and group lodging contracts.