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.)
Conclusion
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