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CHAPTER 4
Contract Law and the
Hospitality Industry
CONTENTS
A. Chapter Competencies
B. Introduction
C. The Elements of a Contract
D. Ambiguous Terms/Trade Usage
E. Contracts Formed on the Internet
F. Breach of Contract
G. Contracting for a Room
H. Overbooking and Breach of
Reservation Contract
I. Intentional Interference with
Contractual Relations
J. Catering and Convention
Contracts
K. Answers to Case Example
Questions
L. Answers to End-of-Chapter
Questions
Chapter Summary
Hospitality students learn that through the use of contracts a hotel or restaurant can create a legally binding
obligation. A contract is considered enforceable when it satisfies the following essential elements: contractual
capacity, mutuality, legality, consideration, proper form, and genuine assent.
A failure to perform a contractual obligation constitutes breach of contract. An excellent example of a
breach of contract is the overbooking by a hotel resulting in cancellation of reservations, as does the cancella-
tion by a guest.
A party breaching a valid contract will be liable to compensate the nonbreaching party for its resulting loss. The
nonbreaching party must be able to prove the damages to a reasonable certainty and must attempt to mitigate.
While most oral contracts are enforceable, they may be difficult to prove. Whenever possible, contracts
should be reduced to writing. This is particularly important for catering and convention contracts because of
the many details involved with the event. A well-written contract will help achieve and maintain good relation-
ship with patrons and avoid lawsuits.
A. Chapter Competencies
After studying Chapter 4, the student should be able to
1. define a “contract.”
2. provide examples of contracts in the hospitality industry.
3. explain a breach of contract.
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4. list the forms of contract.
5. list and explain the essential elements of a valid contract.
6. define a “voidable contract.”
7. explain the term “the right to avoid or disaffirm.”
8. explain the term “meeting of the minds.”
9. define “offeror” and “offeree.”
10. explain the term “invitation to negotiate.”
11. list the two options of the offeree.
12. explain the term “acceptance.”
13. define “void contract.”
14. explain the term “price fixing.”
15. state the function of antitrust laws.
16. define, in legal terms, “consideration.”
17. distinguish between a gift and a contract.
18. list the three forms of consideration.
19. define “forbearance.”
20. explain the term “illusory contract.”
21. discuss the enforcement of an oral contract.
22. define and discuss the statute of frauds.
23. list the types of contracts that must be in writing to be enforceable.
24. discuss the exceptions to the statute of frauds.
25. discuss the nature of writing in written contracts.
26. explain the doctrine of part performance.
27. explain the parol evidence rule.
28. explain the term “genuine assent.”
29. explain the term “duress.”
30. define and discuss “fraud.”
31. define and discuss “misrepresentation.”
32. differentiate between unilateral and mutual mistakes.
33. discuss the effects of ambiguous terms in a contract.
34. define “trade usage.”
35. explain the term “absolute” in relation to contractual obligations.
36. define “condition.”
37. discuss the challenges related to contracts formed on the Internet.
38. define “breach of contract.”
39. list the two types of damages that remedy a breach of contract.
40. explain the requirements a plaintiff needs to prove in order to collect damages in a breach of contract.
41. explain the term “mitigate.”
42. discuss the concept and ramifications of overbooking in hotels.
43. define “goodwill.”
44. explain the term “agreement not to compete.”
45. discuss the remedy for breach of contract by a guest.
46. explain the term “attrition clause.”
47. explain the term “no-cause termination clause.”
48. distinguish between a guaranteed and a nonguaranteed reservation.
49. define “tort.”
50. list the elements of the tort of intentional interference.
51. discuss the importance of care in catering and convention contracts.
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B. Introduction
❊Begin by asking the students what a contract is.
■Provide the definition of a contract from the book.
■Ask the students to give some examples of contracts in the hospitality industry.
■Explain what constitutes a breach of contract.
■Discuss the forms of contracts.
C. The Elements of a Contract
❊Explain that a contract must be valid, meaning enforceable in court.
❊List and explain the elements in a contract.
■Explain contractual capacity or capacity to contract.
•Define “voidable contract.”
•Explain the term “right to avoid or disaffirm.”
•Discuss the exceptions to the right to cancel.
•According to law, minors (under 18, 19, or 21), very intoxicated persons, and mentally in-
competent people do not have the capacity to contract because they lack sufficient judgment
or mental ability to comprehend fully the nature of a contractual commitment.
•Purchase of necessities—most significant exception.
– Concern for the well-being of the minor.
■Explain the element of mutuality.
•Explain the meaning of the term “mutuality.”
•Define the terms “offer,” “offeror,” and “offeree.”
•Explain that the terms of an offer must be definite.
– General or vague statements may not constitute offers but rather “invitations to negotiate.”
•Explain the responses to an offer.
■Explain the element of legality.
•Define “void contract.”
•Explain price fixing.
•Discuss the scope and function of antitrust laws.
■Explain the element of consideration.
•Give examples of consideration.
•Explain the three forms consideration can take.
•Explain forbearance.
•Explain the concept of illusory contracts.
– Sometimes the terms of the contract do not contain a firm commitment. If an apparent
commitment is so indefinite that the party has not in fact promised to do anything, the
promise is said to be illusory.
■Explain the element of proper form.
•Ask the students if an oral contract is enforceable.
•Define the statute of frauds.
•Explain which agreements have to be in writing and what criteria are used when oral agree-
ments are not enforceable.
– An exception exists to the need for a written contract for the sale of goods valued in excess
of $500. In two situations, a writing is not required: (1) if the seller has delivered the goods
and the buyer has accepted them or (2) if the buyer paid for the goods and the seller ac-
cepted the payment. In both of these circumstances, each party to the contract evidenced
the existence of the contract by their actions.
•Explain the parol (oral) evidence rule.
– Prevents the parties from successfully modifying the written agreement with evidence of
oral agreements made prior to signing the written agreement.
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– Tentative terms are added or dropped before the final agreement is put in writing. Any terms
that are not put in writing are viewed by the law as purposely abandoned by the parties.
– The parol evidence rule does not apply to oral agreements made after a contract is signed.
■Explain the element of genuine assent.
•Explain the term “duress.”
•Define fraud and misrepresentation.
•Explain the legal significance of mistakes.
– Some mistakes have legal significance while others do not.
– Mistaking the value or quality of a product or service will not affect the validity of a
contract.
– Factual mistakes: Unilateral mistake: error made by only one party to the contract as to the
terms or performance expected.
– Mutual mistake: made by both parties.
D. Ambiguous Terms/Trade Usage
❊Explain, giving examples, the consequences of ambiguous or unclear and vague terms in a contract.
■Contracts have to be carefully drafted—the terms should be clear and intentions should be ob-
vious. The language should not have dual meanings.
❊Explain trade practices.
■Practices or modes of dealing, generally adhered to, in a particular industry will be honored in a
transaction if an expectation arises.
■When contract terms are ambiguous, the court will use trade practices.
❊Explain the term “condition.”
■In most contracts, the promises of the parties to perform their contractual obligations are
absolute, meaning they must be performed or the promising party will be in breach of contract.
Occasionally a contractual duty is not certain, but rather is contingent upon the occurrence or
nonoccurrence of a specified event. That event is called a condition.
E. Contracts Formed on the Internet
❊Discuss the impact of technology such as the Internet on contract law.
■“Click-on-acceptance” signified consent.
■Many of the problems that arise with computer-generated contracts are identical to problems
with traditional contracts.
■Today, as a general rule, contracts entered into online are as enforceable as their “land-based”
counterparts. The on-line versions are subject to similar rules of contract law.
F. Breach of Contract
❊Explain what constitutes a breach of contract.
■It is a civil wrong.
■A nonbreaching party is entitled to a remedy: damages or specific performance.
■Explain what types of damages are awarded in a breach of contract case.
❊Explain compensatory damages.
■Discuss the conditions a plaintiff must satisfy to collect damages.
•The controlling principle is that speculative, remote, or conjectural damages are not recover-
able. . . . Although the law recognizes that it is more difficult to prove loss of prospective prof-
its to a new business than to an established one, the law does not hold that it may not be done.
•Explain the term “mitigate.”
❊Explain punitive damages.
■Punitive damages are a sum of money sometimes awarded to a plaintiff in excess of compensa-
tory damages, the purpose of which is to punish the defendant. Punitive damages are awarded
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only if the defendant’s actions are wanton or malicious. This type of damage is not often awarded
in a breach of contract case.
❊Specific performance.
■Another remedy for breach of contract.
G. Contracting for a Room
❊As with all contracts, a contract for a room between an innkeeper and a guest must satisfy the essential
elements: contractual capacity, mutuality, legality, consideration, proper form, and genuine consent.
❊Most contracts for hotel rooms begin with an invitation to negotiate from a would-be guest who
inquires as to room availability and price. An offer is often thereafter made by the hotel or guest.
If it is accepted, the necessary mutuality exists.
❊Discuss potential misunderstandings in room reservations or room contracts.
H. Overbooking and Breach of Reservation Contract
❊The hotel reservation, once made and confirmed, constitutes a contract and binds the hotel to pro-
vide accommodations. Nonetheless, hotels sometimes overbook; in other words, they confirm
more reservations than the number of rooms they have available.
❊Discuss the damages allowed for overbooking.
❊Discuss damage to goodwill.
■A favorable reputation producing an expectation of future business.
❊Discuss agreements not to compete as a part of goodwill.
■When an owner of a restaurant or hotel sells the business, the sales contract customarily includes
an agreement not to compete, which is a provision barring the seller from competing in the
same geographical area for a specified period of time. This type of agreement attempts to pre-
serve for the buyer the business’s goodwill; that is, the expectation that the firm’s established
customers will continue to patronize the purchased business. If the seller reenters the market and
competes with the buyer for the same customers, the buyer is denied part of what was sold to
him or her. The agreement, called a noncompetition clause or an agreement not to compete, is
generally enforceable provided the time and territory within which competition is restricted is
reasonable in duration and area.
❊Discuss the penalties to guests who breach the reservation contract.
■Block reservations.
■The hotel must mitigate its loss by attempting to sell the available rooms.
■Many hotels have cancellation provisions in the contracts for blocks of rooms.
■Explain the attrition clause for organizations that do not utilize all rooms on hold.
•It is a contract provision that obligates the organization to compensate the hotel if less than
the contractual number of rooms are rented by conventioneers. The terms of the contract will
control the liability of the association.
■Explain the no-cause termination clause.
•Some contracts have a no-cause termination clause, which is a contract provision permitting
either party to terminate the contract for any reason or for no reason at all. If the terms
of the contract permit termination, ending the contractual relationship is not a breach of
contract.
I. Intentional Interference with Contractual Relations
❊Define “tort” and explain the tort of intentional interference with contractual relations.
■The third party inducing the breach will be liable in damages to the contracting party who did
not breach.
■Explain the three elements that constitute to the commitment of the tort of intentional inter-
ference with contractual obligations.
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J. Catering and Convention Contracts
❊Explain the importance of details and care in entering catering and convention contracts.
■Given the many details involved when planning a catered event, there is virtually no excuse for
not having a written contract. The items that should be included in the writing are identified in
Figure 4-1 in the text.
■The written contract goes a long way to ensuring a successful event, goodwill with the patron,
and avoidance of litigation.
■Explain the scope of conferences and conventions.
•The written contract should include the terms identified in Figure 4-2 in the text.
K. Answers to Case Example Questions
4-1-1. What actions could UHD have taken to ensure that it would have an enforceable claim
against Dusterhoft for the costs of relocating Dusterhoft’s portion of the sewer line?
All negotiations should have been in writing between all parties.
4-2-1. How might the wording of The Regency’s “contract” have been changed so as to obli-
gate ASSA to rent rooms from The Regency?
Customarily, convention planning includes a time period when the hotel(s) at which the
convention is housed agrees to reserve for a period of time a number of rooms without a
firm commitment that conventioneers will reserve them. To change that arrangement and
require by contract that all rooms set aside by the hotel(s) will be paid for by the conven-
tion would require clear contract language. Convention planners, rather than accept liabil-
ity for rooms, may as well choose a different hotel. The Regency might use the following:
“The Regency is reserving 375 rooms for the use of ASSA members at their annual con-
vention to be held from (date) through (date). ASSA will pay to The Regency $XX per room
for each of the 375 rooms so reserved, regardless of whether members utilize the 375 rooms
or not.”
4-3-1. What contract in this case would require a writing? Why?
A sales contract between the “listing agent” of the restaurant and the restaurant owner would
be required. It would be required to clearly identify what the “listing agent” would receive as
a commission.
4-4-1. Why does the statute of frauds dispense with the need for a writing where the seller has
delivered goods and the buyer has accepted them?
Among the type of contracts within the statute of frauds that must be in writing to be enforce-
able are contracts for sale of goods in excess of $500. An exception to this clause is considered
in two situations: (1) if the seller has delivered the goods and the buyer has accepted them or
(2) if the buyer paid for the goods and the seller accepted the payment. In both these circum-
stances, each party to the contract evidenced the existence of the contract by their actions.
The facts in the case were that Adams, or someone associated with Adams, ordered meat
products from H&H; the meat products were delivered to SR Forwarding per Adams’s instruc-
tions; and Adams received the meat products and accepted them. These facts satisfy the clauses
for exception to the need for writing with a contract for the sale of goods valued in excess of $500.
4-5-1. Identify four fraudulent statements made by Klein and LeVine and two fraudulent prac-
tices they perpetrated.
The four fraudulent statements made were
•Klein guaranteed CCLG a 20 to 40 percent increase to the bottom line.
•Klein also told Salazar that Klein could sell him colored napkins for “a little bit more” than
the white napkins they were using, though he knew he could not.
•Klein told Salazar that the application Salazar signed was “a mere credit application and
nothing more” needed to check references, though Klein had been told that it was more
than a credit application. It was a credit application and a purchase order designed to bind
the customer to terms in the ultimate transaction.
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