Written by Marlysa Razak and Brenda Tan

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.

 

Meeting space contracts are developed for groups or organisations that want to utilize the meeting space, meeting rooms, and exhibition halls for large events. These contracts are commonly used in the hospitality industry such as hotels, convention centers, country clubs, restaurants and catering services that offer the services of renting out space to hold such events. For hotels, they are usually offered by large hotels as they have large halls and facilities, and at the same time are also able to provide room and food and beverage services for those attending the event. As such, the contracts will entail the terms and conditions of renting its meeting space and services.

Group lodging contracts are developed for individuals or organizations that require a large number of hotel rooms. The contract will usually include details such as the total number of rooms, arrival and departure dates, rates of the rooms, reservation procedures, taxes and surcharges, and complimentary rooms (if any). As group room contracts involve a large number of rooms being booked at once and at times rooms may be booked months or even years in advance, a written contract that outlines the terms and conditions of their booking is needed to act as a guarantee for the guests and/or sponsors, as well as hotels as they can expect their revenue for the use of its room for that period of time. 

We have seen a surge of cancellations and postponements of event space and hotel rooms bookings due to the pandemic. This had caused so much problems between the service providers and their customers to a point of litigation in some cases. Service providers are encouraged to review their terms and conditions for their services to allow a little flexibility in the terms as well as to protect the rights and commercial interests of their businesses. At the same time, it is also prudent for the customers to be aware of the terms and conditions to understand the implications should there be any cancellations or postponements. Some of the terms which are worth reviewing:-

  • Bookings
  • Cancellations
  • Postponements
  • Amendments and Changes
  • Terminations
  • Refund of Deposit
  • Force Majeure

Conclusion

In conclusion, this article aims to bring about awareness of the existence of the different types of contracts in the hospitality industry. These specialised contracts in the hospitality industry are usually agreements that entails the operation of businesses as well as agreements between the businesses and their customers. As such, it is crucial for parties to understand the terms and conditions outlined in the contracts to ensure that they are aware of the legal rights and obligations that they need to adhere to. 

References 

https://www.cleverism.com/management-contract-definition/

https://www.franchising.com/guides/the_franchise_agreement.html#:~:text=The%20franchise%20agreement%20is%20essentially,every%20facet%20of%20the%20business.

https://smallbusiness.chron.com/advantages-disadvantages-management-contracts-18886.html

http://www.mfa.org.my/newmfa/regulation-under-the-franchise-act-1998/

Stephan Barth J.D, ‘Hospitality Law, Managing Legal Issues in the Hospitality Industry’ (4th edn, John Wiley & Sons, Inc) 

Negotiating a Restaurant Management Agreement

 

Published on 31 March 2021 

Photo by Cytonn Photography on Unsplash

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