By: Jeffer, Mangels, Butler & Marmaro LLP 

October, 1996 

JMBM has been at the forefront of hotel management issues for a long time. Several years ago, Jim Butler and Peter Benudiz published a seminal article based upon the Firm’s active international hotel practice and their belief that the Woolley and Marriott cases had forever changed the landscape of hotel management relationships. Now that the Hyatt case has resoundingly confirmed their beliefs on the importance of these doctrines, JMBM reaffirms its basic advice to clients:

• Woolley, Marriott and Hyatt are of profound, permanent, international importance to virtually every management agreement written.
• The fundamental common-law principles of agency forged in bygone centuries, but only recently applied to the hotel industry, raise monumental issues and opportunities.
• Owners should not rashly terminate existing agreements in a knee-jerk reaction to reaffirmed potential power for doing so. That would be a serious mistake.
• Owners should neither assume that their long-term, “no-cut” contracts are invulnerable any longer, nor that they can or should be terminated automatically.
• Interest parties should conduct a Management Agreement Audit™ - a technique pioneered and perfected by JMBM.
• The Management Agreement Audit™ is a neutral diagnostic tool that knowledgeable experts experienced in its use should apply in a thorough and unbiased fashion to advise clients on the practicalities of the situation

The liability of an owner for devastating damages for wrongful use of the Woolley, Marriott and Hyatt cases emphasizes the critical need for The Management Agreement Audit™. Owners should act only after they are fully informed of all relevant facts. Operators should also use this tool to assure their compliance with all their obligations. All parties should act dispassionately and reasonably. 

In the Hyatt case, the Third Circuit adopted the holdings of Woolley and Marriott, suggesting that the entire federal judiciary may follow the principles first laid down in the California cases. 

Hoping to improve performance and boost sagging profits, the owner of a resort hotel in the U.S. Virgin Islands asked Hyatt to manage the hotel. Because of the inherent risks in placing its trade name and reputation behind the enterprise, along with substantial start-up cost, Hyatt required full managerial and operational control of the hotel. In return for a lower than usual front-end fixed management fee, Hyatt accepted a larger back-end share of profits that were to be recovered over the long term of the management agreement. 

To further protect its interest, Hyatt negotiated an agreement that purported to be non-terminable except for poor performance by Hyatt. The owner also obtained a subordination, non-disturbance and attornment agreement from the owner’s lender that preserved Hyatt’s right to continue to manage the hotel even after a foreclosure or default by the owner, so long as Hyatt itself was not then in default under the management agreement. 

Shortly after entering into the management and other related agreements, the owner defaulted on its loan and the hotel was subsequently foreclosed on. The new owner promptly notified Hyatt that the management agreement was terminated. A second letter was sent to Hyatt asserting Hyatt was in wrongful possession of the hotel and demanded that it surrender possession to the new owner. 

In the ensuing litigation, Hyatt raised arguments similar to those raised and rejected by California state courts in Woolley and Marriott. Hyatt argued that the management agreement it entered into with the original owner created an agency coupled with an interest, and therefore it could not be summarily revoked. The Hyatt Court disagreed and found that the management agreement created only an ordinary agency relationship terminable at will by the principal (but, as noted below, did not deal with the issue of damages for wrongful termination by the owner). 

Under the common law rules of agency, as a general rule, the principal has the power to revoke the agency at will. The only exception to this rule is when the agency is coupled with and interest. 

The Third Circuit rejected all of Hyatt’s argument that its management agreement created an irrevocable agency coupled with an interest. The Court said, an “indispensable feature of a power given as security is that the agent have a proprietary interest in the ‘res’ or subject matter of the agency independent of agency relationship itself.” Following the reasoning of Woolley and Marriott the Court adopted a very narrow view of what constitutes “an interest” for purposes of creating an irrevocable agency. 

The compensation due Hyatt as manager, the benefit to its reputation, and an enhanced presence in the Caribbean were not enough. The court found that these items are “ordinary incidents” of an agency relationship and standing alone do not support an inference that the agreements were entered into for the benefit of Hyatt as opposed to the benefit of the owner.