The hotel industry is a mature industry, and hotel management agreements have been evolving for a long time. In the United States, hotel management agreements have a more or less standard set of provisions, and their content is more or less consistent with reflecting what at any particular point is “market.” This is not exclusive to the hotel industry or management agreements; many agreements share this same particularity. For example, most nondisclosure agreements have a common set of provisions that are considered “standard” or “market.” However, what constitutes “market” can change rapidly; not long ago, third-party management contracts were long-term and not easily terminable by the owner, but alas, those days are gone.
Although everything is always negotiable, the job of a hotel attorney is to understand why the provisions in the form of agreement say what they say, so it can explain if an issue on the table conforms to market and is reasonable or not. Clients can then decide if they should accept a proposed provision or spend time and money asking for something that may be hard, if not impossible, to get.
Rights and Obligations
Hotel management agreements, like most agreements, are designed to provide for the rights and obligations of the parties in respect of a transaction, and to allocate the risk of the many things that can happen along the way. One of the standard provisions in management agreements states that the operator is not responsible for the acts or omissions of the hotel staff and is only responsible for the acts or omissions of its corporate personnel. Sometimes a different dividing line is negotiated, from the operator being responsible for the acts of the executive team at the hotel to only being responsible for the acts of its corporate personnel at the VP level and above. Does that mean that the operator will never be liable for any action taken by a member of, for example, the housekeeping staff?
Imagine that a member of the housekeeping staff failed to clean a guest’s room; the guest is now bothered, and the only way to appease him or her is to extend a discount on the rate charged for the room. If the operator is liable for the failure of the housekeeper to clean the room, it would have to reimburse the hotel owner for that discount; if not liable, the cost of the discount will be borne by the owner.
Leaving aside other intervening legal issues (such as standard of liability, the fact that the housekeeping staff is employed by operator and the exclusion of consequential damages), in oversimplified terms, if the housekeeper failed to clean the room because, for example, he or she received an instruction from a corporate employee of operator not to do so, then the operator would be liable because the failure to clean the room can be attributed to an action or omission of the operator (i.e. the instruction). But in the absence of that (or other action attributable to the operator), the failure by the housekeeper in cleaning the room will be assumed by the owner. So why are the actions of the housekeeper (and the risk associated with them) not attributable to the operator? Isn’t the operator supposed to operate the hotel?
Different Businesses, Different Services
To understand the rationale, we need to take a step back and look at what the business of each of the parties is. The owner is in the business of providing overnight accommodations and related services to guests, and the operator is in the business of providing certain services to the owner. Cleaning the rooms is a service provided by the hotel to the guest, by the operator to the owner, of both? It’s a fine line, but one of the guiding factors has to do with costs. A rule of thumb could be that the operator is providing to the owner those services for which it assumes the cost. If the cost of cleaning the rooms is not assumed by operator, that means operator is not providing to owner cleaning services, and therefore is not assuming the risk of the rooms not being cleaned due to an action of the housekeeper. So then what services are being provided by operator? With respect to the cleaning of the rooms, the operator provides manuals, procedures, supervision and other services designed to cause the housekeeper to properly clean the room, and which cost the operator is assuming. So if the failure to clean the room is the result of one such services not being correctly provided (for example, the operating procedure for cleaning the room is inappropriate, and even though the housekeeper followed it, the room was not properly cleaned), then operator should be liable for the action (or omission) of the housekeeper—again leaving aside the standard for liability and the exclusion of consequential damages.
This dividing line is not exclusive of hotel agreements. For example, if a customer hires a purchasing agent to buy certain products on its behalf, the agent may be required to select a reputable supplier, place a purchase order and inspect a sample the products. If the purchasing agent does all activities correctly, but then some of the products are defective (because the sample did not cover defective products or the inspection did not reveal the defect), the agent would not assume the consequences because it did not assume the cost of the products (as would have happened if the agent would have purchased and resold the products to the customer). If the purchasing agent failed to correctly do some of the activities for which it is assuming the cost (say, selecting a reputable manufacturer or sampling the products), then it would be liable.
Unfortunately, the analysis of a simple event such as a housekeeper failing to properly clean a room is not as straightforward as described above—there are many intervening issues and other provisions in the agreement that would come into play, but dividing an event into different pieces an analyzing each separately and try to determine how it would affect the outcome could be useful.
David Camhi is a partner in the Miami and Fort Lauderdale offices of Berger Singerman.