This article has been written by Anitta Varghese, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
The restaurant and bar business is one of the most financially rewarding businesses which provides high returns within a short period of time. It is often profitable for an independent bar service to collaborate with a restaurant business or vice versa to offer their services to the other party. However, the risks of carrying out such a business and the legal issues pertaining to the same cannot be overlooked. This article focuses on the significance of entering into an exclusive services agreement between a restaurant and a bar, key concerns regarding the drafting of such an agreement and the important clauses to be included in those agreements with the aid of some case laws.
What is an exclusive services agreement?
An exclusive services agreement is an agreement between the parties for the purpose of obtaining or providing a defined set of services, exclusively for a fixed period of time. The party that provides the services (service provider) will give the other party to the contract (service recipient) an exclusive right over his services. This agreement will prohibit the service provider and his agents from soliciting, initiating or encouraging, any offers or proposals relating to the agreed services for any other party without the approval of the service recipient.
On the other hand, the service provider ensures that the service recipient will not receive similar service from any other party during the term of the agreement. That is, the service provider will have the sole right to provide the agreed services to the service recipient. Therefore, an exclusive services agreement gives both parties a mutual right for the exclusive use of a particular set of services.
Recently the famous gay bar, Twin Peaks Tavern, collaborated with neighbouring diner Orphan Andy’s, which is a restaurant that serves pancakes, french toasts and sandwiches. Taking this as an example, if they entered into an exclusive services agreement in which Orphan is providing pancakes to Twin Peaks’ customers, Orphan will not be permitted to sell its services to any other competitors of Twin Peaks or Twin Peaks will not buy any similar services from any other party, maybe for next 5 years. This is an exclusive services agreement.
The exclusive service agreements are synonymous to “exclusive supply agreements” defined under Section 3(4)(c) of the Competition Act, 2002. Under this section, exclusive supply agreements include any agreement restricting, in any manner, the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.
Significance of an exclusive services agreement
Teaming up with related services is always a smart way to restart a business, attract customers and generate high returns. It is because some businesses may not have facilities or resources to provide a particular service that is interconnected to their business. This is very frequent and common in the restaurant and bar industry, especially in the wake of COVID-19 where most of them prefer outdoor dining and combined services for a fresh restart.
However, it will add value and stability if these businesses opt for exclusive services. Obtaining exclusive services from a party will give the benefits of reliability, consistency, and efficiency. The main advantage of availing of an exclusive service is to gain competitiveness over other competitors. Therefore, an exclusive services agreement is very important to avoid any legal complications in future. Exclusive services agreement provides legal protection when resorting to exclusive services. It also helps in defining the scope, term, payments and other conditions of exclusive services.
Key concerns to keep in mind while drafting an exclusive services agreement between a restaurant and a bar
Scope of services
Defining the scope of services is most important in an exclusive services agreement between a restaurant and a bar. A restaurant or a bar might have a wide variety of services. A restaurant may grant food and beverage services, delivery services, indoor and outdoor dining services, etc. A bar may have a wide variety of cocktails, alcoholic beverages and other drinks. Sometimes all services may not be offered to the other party. In such cases, it is very significant how a party defines its services granted.
Terms of exclusivity
The exclusivity of services is the crux of an exclusive services agreement and it should be drafted with care. The parties should agree on the terms and conditions upon which the exclusive services are granted. The exclusive services of a bar or restaurant should not be made available to the competitors of the service receiving party. Also, the service recipient should not avail of similar services from the competitors of the service grantor. The extent of these terms and conditions and remedy for breach should be clearly mentioned.
It is very essential for entering into an exclusive services agreement to conduct due diligence, especially in bar and restaurant businesses. This is because the legal requirements and compliances required for carrying out a restaurant service differ from that of a bar service. Therefore, when one party provides or receives services from another party, it is very crucial to ensure that the other party has obtained all the licenses and is in compliance with all the applicable rules and regulations.
When a restaurant provides its food and beverages services exclusively to a bar, it is to be clearly mentioned in the exclusive services agreement that either of the parties will not be an agent or representative of the other party. This will avoid future disputes in this regard to a certain extent. Also, it is to be noted that the service grantor will not be liable for any loss or damage caused by the service recipient on account of any additions or alterations made to the exclusive services by the recipient without the permission of the service grantor.
Important clauses of an exclusive services agreement between a restaurant and a bar
The title of the agreement gives an idea about the nature of the agreement. In the case of an exclusive services agreement between a bar and restaurant, it can be an ‘exclusive services agreement’.
The recitals clause provides background to the agreement and exhibits the purpose of the agreement and the intention of the parties. A recitals clause in an exclusive services agreement between a bar and restaurant should include the business of the respective parties and state which party is providing and receiving services.
Exclusive services granted
This clause is very important as it defines the scope of the services granted or provided by a party. For example, if the restaurant is providing its services to the bar, it should clearly define all the services of the restaurant which are exclusively granted to the bar. It may specify the cuisines, dishes, serving and staffing, delivery and dining facilities, etc. On the other hand, if the bar is providing its services to the restaurant, it may specify its services including but not limited to the kinds of drinks they offer. The list of services may also be provided under a separate schedule and mention the same in the Service Granted clause. The clause should clearly state that the services will be exclusive services and specify the term for which the services are granted.
A model clause may be as follows:
The ABC Restaurant hereby grants to the XYZ Bar the exclusive right, on the terms and conditions set forth herein, to avail the services of ABC as listed in the Schedule I provided hereunder for a term of five years commencing from 9th day of September 2021 (“Effective Date”).
Obligations of parties
The obligations of the service grantor and the service recipient shall be clearly specified under this clause. The primary obligation of the service grantor is to provide his specified services exclusively to the service recipient. If the restaurant is the service grantor, he shall not market or trade his services to any other party unless approved by the bar owner or the person authorised. At the same time, the bar is also obliged not to avail similar services from any other party without the prior approval of the restaurant owner.
The bar owner or his agents should not alter or modify any of the services of the restaurant without the written permission of the service grantor.
The service grantor is obliged to perform his services without fail during the period of the agreement. The service should be delivered in a timely manner.
During the course of this agreement, the parties are obliged not to enter into any joint ventures, partnerships, mergers, collaborations without prior notice to the other party.
Licenses and permissions
Since the restaurant and bar businesses require a lot of licenses and compliances, the parties should also agree on who is responsible for obtaining those licenses and compliances.
The exclusive services are for consideration. The Payments clause is to mention the details of the payments made by one party to another. It should include the amount, the date, mechanism and mode of payment. It should also include the consequences of a party failing to make a payment due under the agreement.
Marketing and advertising policies
Since the restaurant services are exclusively provided to the bar, the bar may be responsible to cooperate with the restaurant to promote vigorously and effectively the services of the restaurant through the channels of the bar.
This clause will guide the parties with regard to their respective IP rights including trademarks, logo, etc. Exclusive services agreement does not sell, transfer or license any intellectual properties of the parties unless specified.
The parties may share their confidential information for the purpose of agreement. The first thing is to define what all is included as Confidential Information. The parties should not disclose the confidential information received to any other party without prior approval. This clause should also include the remedies for accidental breach and general exceptions to the breach of confidential information.
Relationship of the parties
The relationship between a restaurant and bar under an exclusive services agreement is that of service grantor and recipient and does not create any relationship between employees, agents or representatives. This is a vital clause, otherwise upon a party committing any negligent activity, the other party may be held liable under the law of agency. Also, the agreement does not confer any right upon the parties to enter into any agreement on behalf of the other party.
There can be a termination by default by convenience and by expiration. It is advisable to specify the material breach which results in the termination of the agreement.
The exclusive services agreement is one of the most important commercial agreements which provides exclusive rights to the parties and improves the returns of the business. The exclusive services of a restaurant will boost the business of the bar entities which cannot afford or facilitate the supply of such services. The effect is the same for the restaurant business which avails the services of a bar. However, in order to ensure ease of business, it is always advisable to enter into an enforceable Exclusive Services Agreement that is well-drafted. A clearly specified term of the agreement, the well-defined scope of services, comprehensive obligations of the parties, tailor-made exclusivity terms and conditions, details of consideration, etc. are the essential elements of an exclusive services agreement between a restaurant and a bar.
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