The agency challenge: how Woolley, Woodley, and other cases rearranged the hotel-management...

A series of court cases have redefined the relationship between hotel owners and their management companies and their franchisors. Beginning with a 1991 California decision, courts have determined that hotel-management firms are agents for the

owners with whom they contract--even if the management contract says otherwise. In part, a key indication of agency is when one party provides services to the other for a fee--which is the nearly universal arrangement in a management contract. Two key aspects of agency have tripped up such industry giants as Embassy Suites, Hyatt, Marriott, Radisson, and Sheraton. The first element of agency is that the principal (i.e., the owner) can dismiss the agent at any time, despite what the parties' contract says. Second, the management company as agent is required to act in the principal's best interest. So, when a Washington, D.C., jury determined that some practices common in the hotel industry are not in the owner's best interest, that jury ordered Sheraton to pay compensatory and punitive damages to the hotel's owners. Franchisors may also be considered as "agents" when they provide services to their licensees--as occurs, for instance, when hotel chains provide reservation services for a franchisee. Following the logic of the management-contract cases, a New York court determined that Radisson was an agent for a hotel in that city, even though it did not operate the hotel itself, because it did provide a service (the reservation system) for a fee. Taken together, the lesson to be learned from the cases reviewed in this article is that, no matter what the owner-manager contract states on paper, it is the characteristics of the relationship and existing legal precedent that will dictate the terms during any dispute.

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Prior to the 1990s, no established body of legal precedent defined and governed the relationship between hotel owners and hotel-management companies. The few published decisions that did exist were isolated opinions that carried little weight in resolving subsequent conflicts between owners and operators.

The Woolley v. Embassy Suites decision in 1991 marked the beginning of a line of cases that have brought about dramatic changes in the way hotel owners and management companies view the legal relationship between them. Because of cases such as Woolley, Pacific Landmark v. Marriott, Government Guarantee Fund v. Hyatt, and Woodley Road v. Sheraton, it is now common knowledge among owners, institutional investors, lenders, asset managers, and operators that the relationship between owner and manager is much more than an arms-length contractual arrangement. Those in the hospitality industry now realize that, although the terms and provisions of the written management agreement are important, they are by no means the parties' sole source of the rights and obligations.