Hunton Retail Law Resource

In a 2017 interview, Nigel Travis, former CEO of Dunkin’ Brands, stated that “delivery will be the next wave” in the restaurant industry and that it would “be like a revolution,” occurring “faster than anyone thinks.” Travis was not wrong; in fact, recent statistics shared by Melissa Wilson at the 2018 Restaurant Leadership Conference show Travis’ prediction quickly taking hold – 86% of consumers are using off-premise delivery services at least monthly and one third of consumers are using it more than they did a year ago. By some estimates, delivery services are projected to grow at least 12% per year over the next five years. While a handful of restaurants are filling the delivery demand themselves, more and more restaurants are looking to third-party delivery service providers to help them connect with the consumer. In fact, “third-party delivery services like UberEats, Grubhub, and Postmates currently represent $9 billion in restaurant sales today, and they are predicted to account for $16 billion in sales by 2022.”

Beyond simply filling the consumer demand, these food delivery service providers offer a range of benefits to the restaurants who engage with them. Third-party delivery service providers help streamline deliveries to consumers, offer additional marketing for the restaurants, and assist in building new channels for sales. Some research also suggests that consumers spend more money and increase check averages when they use these delivery services.

Though this new model presents plenty of benefits for the restaurant, it is not entirely without risk. As with any new business structure, restaurants should consider the various legal implications and potential issues that accompany third-party delivery services such as:

1. Defining the Relationship between the Parties. Clearly delineating the obligations between the parties and what the parties’ relationship is (and is not) in an agreement is imperative when engaging these types of vendors. In the past, not all third-party delivery service providers required an agreement with the restaurants listed on their site. While having an agreement with your vendors is important in any vendor relationship, it is especially important to put parameters in place governing the relationship in this context. In addition to setting out the obligations between the parties, an agreement with a third- party delivery provider is important to ensure consistent pricing across platforms to protect the restaurant’s brand integrity. It should also put procedures in place for handling customer complaints. From a legal perspective, an agreement between the restaurant and the delivery service provider is important because it helps prevent courts and customers from implying an agency relationship between the driver and the restaurant, and/or the third-party delivery service provider and the restaurant. If an agency relationship is inferred due to the restaurant’s interactions with the drivers, the restaurant would be vulnerable to claims for the driver’s actions and omissions, opening them up to potential liability. When entering into a relationship with a third-party delivery service provider, a well-negotiated contract is critical for minimizing risk and maximizing returns.
2. Access to Data. The structure of the restaurant’s relationship with a third-party delivery service provider will determine how much customer personal information and payment information the restaurant will have access to. When a restaurant performs delivery services on its own behalf, it must collect all personal and payment information necessary to fulfill and deliver the order (e.g. payment information, phone number, address, etc.), which exposes the restaurant to heightened compliance obligations and additional liability for a security breach. While collecting customer data can be valuable for marketing, a restaurant only requires a small subset of information, such as customer name and order information, to properly fulfill orders. Currently, a majority of third-party delivery service providers take the position that the individuals who order food through their platforms are the customers of the delivery service provider and not the customers of the restaurant. Therefore, the data security and privacy obligations associated with collecting and storing customers’ personal and payment information shift from the restaurant to the applicable third-party delivery service provider. While the restaurant may still have some confidentiality and data security obligations, the burden and risk of protecting that information will be far less than the compliance obligations and risk involved if the restaurant were to collect and store the information itself. If a restaurant requires that customer information for its own business purposes, it may want to try to negotiate a license to the relevant data. However, it is likely a third-party delivery service provider will require the restaurant to sign up to the data security obligations that it would have otherwise avoided. Therefore, a restaurant needs to determine what its priorities are in structuring these relationships – accessing valuable data or limiting its liability.
3. Responsibility for Drivers. Beyond just having an agreement that details the parties’ relationship with one another, it is important to appropriately allocate the risk for claims that may arise due to the drivers’ actions. With recent cases in California like Lawson v. GrubHub Inc., third-party delivery service providers can more confidently argue that their drivers are independent contractors and not employees, which is the position that many delivery service providers take when negotiating an agreement with a restaurant. As a result, the restaurant using the delivery services could be on the hook for the driver’s acts or omissions. However, by incorporating strong indemnification obligations and insurance requirements to cover the drivers’ acts and omissions, the restaurant can try to allocate these risks away from the restaurant and back to the company with the direct contractual relationship with the drivers – the delivery service provider.
4. Limitations of Liability. Restaurants should carefully negotiate any limitations of liability proposed by the delivery service providers. Restaurants should also think about how any proposed limitations of liability will affect the restaurant’s corporate entity, as well as any of its franchisees. Many third-party delivery service providers require a restaurant’s franchisees to sign separate contracts from the contract that is negotiated by the corporate entity. It is important to consider how the limitation of liability under the franchisee agreements relate to the limitation of liability at the corporate level. A restaurant may choose to make each franchisee subject to its own (likely lower) liability limit pursuant to each of those franchisee agreements in order to insulate the corporate entity from risk. Alternatively, a restaurant may want to negotiate an aggregate limitation of liability, which includes all of its franchisees. If a limitation of liability is based on the spend under the contract, make sure that the spend is adequate on a franchisee-by-franchisee basis – or if the corporate entity does not have any restaurants (and therefore does not incur any direct spend), consider adding a floor to ensure a base level of liability. And, as with any contract, it is important to negotiate appropriate carveouts to the limitation of liability. Finally, if a restaurant has franchisees, it should review its franchisee agreement to make sure that there is nothing in that agreement that either conflicts with the delivery services agreement or exposes the corporate entity to undue liability due to the delivery service provider relationship. In some cases, it may be appropriate to amend the franchisee agreement to address these issues and to allocate some of the administrative costs to the franchisees.
5. Policies and Procedures Regarding Food Handling. Finally, because these drivers and restaurants are handling the food products, it is also important to include language addressing the delivery service provider’s compliance with restaurant policies or the delivery service provider’s own policies. This provides clear obligations with respect to quality control and food safety. In addition, incorporating some method for tracking orders can also be helpful to establish a chain of custody, in the event that any issues arise relating to foodborne illnesses. Adherence to a well-crafted policy will also go a long way in ensuring customer satisfaction.

As restaurants adapt to this delivery revolution, it is important to be mindful of the risks involved in using these third-party delivery service providers and to structure a relationship and a contract that protects the restaurant while reaping all of the benefits these services have to offer.