Let's Make a Deal: Hotel Management Contracts in the 21st Century
By William A. Brewer III Managing Partner, Bickel & Brewer | October 28, 2008
"You have undertaken to cheat me. I won't sue you, for the law is too slow. I will ruin you." - Cornelius Vanderbilt, 1853
Business is always changing and it has come a long way since the days of Cornelius Vanderbilt. Today's business is sophisticated, complicated, and dependent on the legal system. Gentlemen's agreements have given way to written contracts devised by law firms, and the hotel industry is a prime example.
This is No Arm's-Length Affair!
Business transactions are generally arm's-length affairs where each side bargains in their own self-interest. Agency relationships, however, are entirely different. In general, an agency relationship exists where one person conducts business on behalf of another. For instance, managers are generally considered to be agents of the owner because the manager operates the owner's business. The existence of an agency relationship creates significant legal implications because the law imposes special obligations upon an agent in favor of the principal. Broadly referred to as the duty of loyalty, the law requires that an agent put its principal's interests ahead of its own. This means that the agent must fully disclose all relevant information, act honestly and in good faith, and generally act obediently toward the principal.
Thus, it is no wonder that many hotel managers drive hard bargains to include a provision in their management contract that expressly disclaims the existence of an agency relationship. However, courts do not permit agency obligations to be bargained away by contract. Since Woolley v. Embassy Suites, Inc., 227 Cal. App. 3d 1520 (Cal. Ct. App. 1991), was decided by a California court in the early 90s, there has been little question that a hotel manager is an agent of the owner, and courts largely ignore any provision that attempts to say otherwise. Therefore, managers and owners need to understand the legal consequences.
A significant consequence of an agency relationship is the effects it has on the term of the contract. Importantly, under agency law, either party may decide to unilaterally terminate the agreement at any time, with or without cause. Because the hotel management relationship is one of agency, the hotel management contract may be terminated at any time at the discretion of either party. This concept is not well-accepted by managers, or most owners. After all, managers seek the financial certainty of fixed, long-term contracts, and owners do not generally relish the thought of their hotel flag being uplifted and carried away without notice.