Hotel development in Asia Pacific is witnessing an impressive rise. The region’s hotel construction pipeline (excluding China) has grown over 300 percent over the past decade. Currently, there are over 1,000 hotels under construction, with Indonesia, India, Japan, Thailand and Malaysia home to the lion’s share.
With no slowdown in sight, hotel owners are rushing to lock in their preferred hotel brand and operator, often before breaking ground. But with term commitments of up to 25 years, the modern hotel management arrangement is akin to (an ideal) marriage, and owners need to set aside romantic ideals, and — for posterity purposes — carefully review and negotiate the fine print before rushing to the altar. In doing so, they’ll come across two seemingly innocuous but significant options for contractual designation of their betrothed: “agent” or “independent contractor.”
The chosen designation defines the relationship between the parties and, depending on the contract’s governing law, plays a vital role in determining a host of legal issues, including liability, termination rights, damages and the purchase of goods and services from third-party suppliers. The agent vs. independent contractor debate has been hotly contested and adjudicated in the US; the same cannot yet be said for Asia. Accordingly, to understand the importance of this designation to Asia’s budding hotel management landscape, it is necessary to look at how this designation has evolved in the US, since the modern management contract is often drafted from a US-centric perspective.
The evolution of the agent and independent contractor designations
For years, operators preferred to self-designate as “agents” of the owner. As agents, operators were able to limit potential liability only to those acts committed ultra vires on behalf of the owner, as principal. This designation presented its own problems to operators because an agency relationship can usually be terminated by a principal at any time. It also gives rise to fiduciary duties owed to the principal. Considering these two concerns, operators began self-designating as “independent contractors” who are providing a service to owners.
Concurrently, operators began expressly disclaiming an “agency” relationship and, correspondingly, its implied duties of loyalty, due care and diligence. In this way, operators sought to protect against any allegations of “self-dealing,” a worry for operators seeking to purchase goods and services on arguably less than an arm’s length basis. In addition, operators expressly carved out limitations of liability owed to owners with the exception of acts committed ultra vires. Operators, through the courts, effectively transformed the contractual relationship norm to that of independent contractor, while creating market standard language for significantly disclaiming any liability and fiduciary duties owed to owners.
But whether “independent contractor” or “agent,” operators have been unable to compel specific performance of a hotel management agreement. Rather, courts across various US jurisdictions have almost universally held that a management contract is terminable at the will of the owner, even when unlawful, and that in such instances the operator’s remedy is to seek damages. However, like everything in life, there are exceptions to the rule, and in the hotel management context, the most common exception is when the relationship is an “agency coupled with an interest.” In the hotel management context, such an agency would be most likely to arise when the operator manages the hotel and also has equity in the owning company or some other interest in property subject to the hotel management agreement. In these cases, the agency may be irrevocable.
The relationship status between an owner and operator is complicated in the US and needs to be carefully considered against the backdrop of the relevant court precedents and governing laws. For example, the laws of the State of Maryland state provide that (i) when conflict exists between the express terms and conditions of a hotel management agreement and the terms and conditions implied by law governing an agency relationship, the express terms and conditions of the agreement prevail; and further that (ii) a court may grant specific performance, (ie, an injunction) for an anticipatory or actual breach or attempted or actual termination of a hotel management agreement. An owner would be well advised not to agree to Maryland law in its hotel management agreements as a result.
The question here is whether the designation of agent or independent contractor requires the same level of attention in hotel management agreements in Asia. The answer is yes.
The effect of this designation on the hotel management agreement in Asia
We are not aware of any jurisdiction in Asia where the agent/independent contractor issue has been as hotly contested as in the US. However, this does not make the designation irrelevant. The opposite is true in fact, as with less court precedent to rely upon, courts of first instance are more inclined to look at the four corners of the contract in determining whether the operator is acting as agent or independent contractor, and consequently, how the designation impacts related issues in the contract, inter alia, fiduciary duties and termination rights.
By way of example, under Thai law, substance supersedes form, and Thai courts will look at the body of the hotel management agreement when assessing the nature of the relationship. Therefore, even if the contract dictates that the operator is an independent contractor and disclaims an “agency” relationship, if the owner exerts a certain degree of command and control over the operator and the management of the hotel, then the relationship is more likely to be deemed an agency relationship.
As an agent, the operator would owe certain duties to the owner under the law of Thailand, which — as a civil law country — has numerous principal-agency laws acknowledging certain features of fiduciary duties. By being a principal, the owner in turn would become liable to the third party for any acts which the operator, as the agent, performed within the scope of the authority. An owner is advised to negotiate operator indemnification provisions hard as a result.
In practice, most operators will have a great deal of independent control over the management of hotels in Thailand. This control will deem the relationship independent contractor in nature, regardless of what language in the agreement may state. Owners are therefore recommended to be vigilant when negotiating the management agreement and clearly and expressly spell out any fiduciary duties that are owed.
(The above analysis is specific to Thailand, and a similar analysis would need to be undertaken for each Asian jurisdiction.)
The agent vs. independent contractor issue is more often negotiated in the West, but that does not mean it is less important to hotel management agreements in the East. In this ever more digital world, where privacy and cybersecurity are key concerns, and where operator consolidation is resulting in less and less attention to individual owners, there will be more and more examples of operators failing to act in owners’ best interests, negligently, or in contravention of law. Owners across Asia need to consider carefully how their relationship to the operator is defined legally in order to know whether assertion of any contractual rights is better made against its agent or an independent contractor