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Feature Articles |
Thunder over Woodley RoadFebruary 15, 2000A new case (Woodley Road v. ITT Sheraton) may prove to be one of the most important in many years for the hospitality industry. In this case, the owner was awarded a $51.8 million jury verdict against Sheraton and was also given a free termination right on a management agreement with 30 years left to run.Big Damages and Free Termination for Bad Practices. Big damages and free terminations of management contracts are the consequences that potentially await every operator who meets the pattern in the Woodley Road case for a material breach of contract and fiduciary duty. Industry experts thinks that many operators will be vulnerable. In Woodley Road the operator's big problem was taking rebates and kickbacks in purchasing goods and services and other such items. Other practices challenged (though not successful with this jury) included aspects of the frequent traveler program, the reservation system, "usable denials" practices, complimentary rooms practices and other such issues. These areas may prove problematic for operators in future litigation. Almost Every Operator Potentially at Risk. This decision could affect almost every operator and owner today, because virtually every management agreement now in effect falls within the centuries old legal doctrines that this case represents The legal principles of the case are not new -- just application of these principles to hotel operators. Woodley Road is the latest in a long series of cases that establish that virtually every hotel operator is an "agent" of the owner. And every agent is a "fiduciary" by operation of law. Fiduciary Duties Are Imposed by Law, Not Contract. The consequences of the operator being a fiduciary can be profound as Sheraton found out. A fiduciary is held to a much higher standard of conduct and is bound by fundamental fiduciary duties. The fiduciary duties do not have to be stated in the management agreement -- they are is imposed automatically by operation of law once the operator is found to be an agent (because every agent is a fiduciary). And virtually every management agreement in existence today will make the operator an agent! Widespread Practices Call for Action by Owners and Operators. The drama of Woodley Road is not its ancient legal principles. Nothing really new there. It is in the award of big damages and free termination rights for conduct that many believe has been common practice for many hotel operators for years. This sends an urgent message to hotel owners and operators alike. Owners and Operators need to understand the consequences of "agency" and "fiduciary duties." Operators need to be sure their practices are up to standard and possibly revise their management agreements. Owners need to assess their rights too, because publicly-held owners, pension advisors, and asset managers have a duty to their investors (or clients) to act prudently to maximize the value of the hotel investment. The Woodley Road case suggest that there may be practices requiring further examination. Jim Butler and Jeff Riffer are with Jeffer, Mangels, Butler & Marmaro LLP. | |
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