27 March 2013
Hotel Lawyer with a major legal development on terminating hotel management agreements — Marriott v Eden Roc.
Under a New York Appellate Division court decision issued March 26, 2013, virtually all hotel management agreements are now terminable at will by owners. And this result will prevail even against the Marriott-style management agreements that seek to avoid an “agency” characterization of the owner-operator relationship.
The decision was rendered in the case of Marriott International v. Eden Roc reversing the November 7, 2012 decision of Judge Melvin L. Schweitzer, who had granted Marriott’s motion for a preliminary injunction, halting the owner’s ouster of Marriott for poor performance.
In reversing the lower court decision, the Appellate Division succinctly stated that hotel management agreements giving full control to operators are personal services contacts and cannot be enforced by injunction. The court said:
The parties’ detailed management agreement places full discretion with plaintiffs to manage virtually every aspect of the hotel. Such an agreement, in which a party has discretion to execute tasks that cannot be objectively measured, is a classic example of a personal services contract that may not be enforced by injunction (see e.g. Wien & Malkin LLP, v Helmsley-Spear, Inc., 12 AD3d 65, 71-72 [1st Dept 1991], revd on other grounds, 6 NY3d 471 [property management agreement a personal services contract]; Woolley v Embassy Suites, Inc., 227 Cal App 3d 1520, 1534, 278 Cal Rptr 719 [Cal App 1st Dist 1991]; Restatement 2d of Contracts, § 367). [emphasis added]
Termination may or may not be “free”
Please note that this decision has not addressed the question of damages that an owner may owe the operator for termination of a hotel management agreement under such circumstances. We should assume that unless there is adequate legal justification for the owner’s termination, that the owner will be liable to the operator for damages. In a long-term, no-cut contract, these damages could be substantial unless the operator has materially breached the contract. In the latter case, the owner might be entitled to terminate the contract without cost — in fact, the owner might be entitled to recover damages from the operator.
Why Marriott v Eden Roc is particularly important for hotel owners
For some unexplained reason trial courts are notorious for rendering the wrong legal answer on termination of hotel management agreements. The lower court had to be reversed in the Eden Roc case. The same has been true in many other well-known cases such as Woolley v Embassy Suites (cited by the <i.Marriott v Eden Roc decision), Marriott v Pacific Landmark, and others.
About the same time we successfully terminated the Fairmont management agreement for the Turnberry Resort last year [see How to terminate a hotel management agreement: A Tale of Two Hotels — Marriott’s Edition Waikiki and Fairmont’s Turnberry Isle Resort], the owner of the Honolulu Edition lost a similar suit in the New York Supreme Court and filed bankruptcy to avoid reinstating Marriott as manager of the hotel.
If the lower court in the Edition case had followed the law as determined by the federal court in our Fairmont v Turnberry case or the law as clarified by Marriott v Eden Roc, there would have been no need for the Waikiki Edition hotel to file bankruptcy.
What it all means — all long-term hotel management agreements are terminable
Under one of two theories, hotel owners can now terminate their long-term hotel management agreements if they feel there is no satisfactory way to work with their operators. They may be liable for substantial damages for breach of contract unless the termination is justified, but they can take back their properties.
We believe the best way to resolve differences with an operator is through a dialog and a process of give and take to resolve the differences. But we have seen a number of cases, where patient owners have tried everything they know how to do and are still frustrated by non-responsive operators.
Thus, when all else has failed, owners may be able to terminate the hotel management agreement and take back the operation of their hotels. This will usually be in the face of a contract that contains many paragraphs in all capital letters, stating that the contract is not terminable and that the owner waives all of its rights to terminate.
Notwithstanding this contractual boiler plate, virtually every hotel management agreement either (a) creates an agency relationship between the owner and the operator, or (b) establishes a personal services contract for the operator’s services.
Despite any provision to the contrary in such contracts, in most jurisdictions, there is such a strong public policy developed over more than a century that the non-termination provisions will be struck down. Except in unusual circumstances, an owner always has the power to terminate an agency or a personal services contract. If the termination is wrongful, the owner will be liable for damages. But the law simply will not enforce the agency or personal services contract against the owner.
For a full copy of the Marriott v Eden Roc decision.
For a full copy of the court’s opinion discussed above, click here and scroll down until you see “Marriott International v. Eden Roc“ and click on that link.
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Articles about terminating hotel management agreements
Ritz-Carlton breached contractual and fiduciary duties under hotel management agreement giving rise to free termination, $10.3 million in damages plus attorneys fees. When will hotel operators “get it”?
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