Hotel, Restaurant, and Travel Law:
A Preventive Approach,
Seventh Edition
Chapter 4
Contract Law and
the Hospitality Business
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Introduction
 A contract is an agreement between
two or more parties that is
enforceable in court
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Elements of a Contract
 Certain essential elements must exist
for the contract to be valid
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Contractual capacity
Mutuality
Legality
Consideration
Proper form
Genuine assent
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Capacity to Contract
 The ability to both
 Understand the terms of the contract
 Appreciate that failure to perform its
terms can lead to legal liability
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Capacity to Contract
(continued)
 People who lack contractual capacity:
 Viewed by the law as having diminished
mental abilities
 Minors
(under 18, 19, or 21 depending on state)
 Very intoxicated
 Mentally incompetent
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Voidable Contract
 One that may be canceled at the
option of one party
 Right to cancel, also called the right
to avoid or disaffirm
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Mutuality
 All parties to the contract are
interested in its terms and intend to
enter an agreement to which they will
be legally bound
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Mutuality
(continued)
 Offer—a proposal to do or give
something of value in exchange for
something else
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Mutuality
(continued)
 Offerer—the person who makes an
offer
 Offeree—person to whom the offer is
made
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Mutuality
(continued)
 Offer must be definite
 If terms are vague, contract may not
result
 Invitation to negotiate—open
discussions that may or may not lead
to an offer
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Responses to an Offer
 Acceptance—an expression of
agreement by the offeree to the
terms of the offer
 Counteroffer—the offeree is
interested in the offer but wants to
change a few terms
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Legality
 Terms of the contract must be legal
 Void contract—one that is
unenforceable in court
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Legality
(continued)
 Price-fixing—competing hotels agree
among themselves to each charge the
same amount for a room
 Antitrust laws—guarantee that
competitors will not undersell each
other with the effect of depriving
consumers of the benefits of
competition
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Consideration
 Something of value exchanged for
something else of value
 Can take one of three forms:
 A tangible item of value or a promise to give
such an item
 Performance or a promise to perform
 Forbearance—agreeing to refrain from doing
something you have a legal right to do
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Illusory Contracts
 The terms of the contract do not
contain a firm commitment
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Proper Form
 Is an oral contact enforceable?
 General rule is yes; however, may be
difficult to prove
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Statute of Frauds
 Objective is to prevent the
perpetuation of a fraud by someone
claiming that a contract exists when
in fact none does
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Statute of Frauds
(continued)
 Some contracts must be in writing
 Contracts for the purchase and sale of real
property
 Contracts that cannot be completed within
one year from when they are made
 Contracts to pay another person’s debt if
that person fails to pay
 Contracts for the sale of goods
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Parol Evidence Rule
 Prevents the parties from modifying a
written contract using evidence of
oral agreements made prior to
signing the written contract
 Does not apply to agreements made
after a contract is signed
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Genuine Assent
 The parties must genuinely agree to
the contract terms
 Duress—threats of harm if they do
not sign
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Genuine Assent
(continued)
 Fraud—intentionally untruthful
statement made for the purpose of
misleading someone
 Innocent misrepresentation—an
untruthful statement that the speaker
believes to be accurate
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Mistakes
 Some mistakes have legal
significance, others do not
 Mistakes made by a buyer as to the
value or quality of a good being
purchased will not affect the validity
of the contract
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Mistakes
(continued)
 Unilateral mistake—error made by
only one party to the contract
 Mutual mistake—error made by both
parties to the contract
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Ambiguous Terms
 Important to state terms of the
agreement clearly, without ambiguity
 If terms are vague or confusing, it
could result in court disputing the
meaning
 Careful drafting can avoid such
lawsuits
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Trade Usage
 Practices or modes of dealing
generally adhered to in a particular
industry, such that an expectation
arises that they will be honored in a
given transaction
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Conditions
 Absolute—in most contracts,
promises of the parties to perform
their contractual obligations
 Contingent—relies on the occurrence
or nonoccurrence of a specified event
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Contracts Formed on the Internet
 Virtually every type of commercial
deal can be, and is, pursued via the
Internet
 How valid are these contracts entered
in cyberspace?
 As a general rule, as enforceable as their
“land-based” counterparts
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Contracts Formed
on the Internet
(continued)
 “Click-on acceptance”—generally
considered to be signed consent
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Breach of Contract
 Failure to perform as required by a
contract
 Civil wrong
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Breach of Contract
(continued)
 Nonbreaching party may be entitled
to a remedy
 Damages—money to compensate for
resulting loss
 Specific performance—performance of
the contract terms
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Compensatory Damages
 Sum of money necessary to cover
loss incurred by the nonbreaching
party as a result of the breach
 Nonbreaching party generally not
entitled to damages for pain and
suffering
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Requirement of Foreseeability
 A plaintiff seeking to collect damages
for breach of contract must prove
that the damages were foreseeable to
the breaching party
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Requirement of Reasonable
Certainty
 Plaintiff in a breach-of-contract case
must prove to a reasonable certainty
that they suffered a loss as a result of
the breach
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Duty to Mitigate
 Plaintiff seeking to collect damages
for breach of contract must prove
that it attempted to mitigate its loss
 Mitigate—reduce or lessen
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Punitive Damages
 Sum of money sometimes awarded to
a plaintiff
 In excess of compensatory damages
 Meant to punish the defendant for
wanton or malicious behavior
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Specific Performance
 A court order requiring the defendant
to perform the act promised in the
contract
 Applicable only to contracts involving
the sale of unique, one-of-a-kind
items
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Contracting for a Room
 Contract for a room between
innkeeper and guest must satisfy the
essential elements
 Most contracts for hotel rooms begin
with an invitation to negotiate from a
would-be guest
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Contracting for a Room
(continued)
 Offer is then often made by the hotel or
guest
 Agreement should be put in writing to avoid
misunderstandings as to:
 Dates
 Duration of stay
 Applicable rate
 Special needs of the guest
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Overbooking and Breach of
Reservation Contract
 A hotel reservation, once made and
confirmed, constitutes a contract
 Binds hotel to provide
accommodations
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Overbooking and Breach of
Reservation Contract
(continued)
 Hotels sometimes overbook (confirm
more reservations than the number of rooms)
 For those guests the hotel cannot
house, it will be in breach of contract
and liable for damages
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Damage to Goodwill
 Goodwill—favorable reputation
producing an expectation of future
business
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Agreement Not to Compete
 Provision barring the seller from
competing in the same geographical
area for a specified period of time
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Breach by a Guest
 When a guest cancels a reservation
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Cancellation Clause for Organization
Reserving a Large Block of Rooms
 An association may reserve many
rooms (sometimes 100s or even 1000s) for
a conference
 Many contracts have a cancellation
provision that identifies the
obligations of each party in the event
of termination of the contract
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Attrition Clause
 Contract provision that obligates the
organization to compensate the hotel
if less than the contractual number of
rooms (block) are rented by
conventioneers
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No-Cause Termination Clause
 Contract provision permitting either
party to terminate the contract for
any reason or for no reason at all
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Forum Selection Clause
 Allows the parties to agree that any
litigation resulting from the contract
will be initiated in a specific forum
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Forum Selection Clause
(continued)
 Three types of forums
 Reference might be to a particular court in a
jurisdiction agreed upon by the parties
 Might refer to a specific kind of dispute
resolution process (mediation, arbitration, hearing
before a special referee)
 Might refer to both, requiring a specific
process to be carried out in a specific
location
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Intentional Interference with
Contractual Relations
 Tort—noncriminal conduct done by
one person that causes injury or
financial loss to another
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Intentional Interference with
Contractual Relations (continued)
 To commit the tort of intentional interference
with contractual relations, three elements are
necessary:
 A valid contract must exist between two parties
 A third party must be aware of the existence of
the contract
 Third party must intentionally cause or induce
one of the contracting parties to break the
contract and do business instead with the third
party
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Catering Contracts
 Contract with caterer or restaurant
for food
 No excuse for not having a written
contract
 Refer to Figure 4-1 in the textbook for
items that should be included in the
contract
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Convention Contract
 Contract between an organization
planning a convention and the hotel
at which the conference will be held
 Refer to Figure 4-2 in the textbook for
items that should be included in the
contract
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