5 October 2012
Over the past few years, there has been an increasing number of lawsuits in the United States where hotel owners have resorted to ousting their operators in the middle of the night. Examples include the attempted midnight takeover of the Four Seasons Residence Club Aviara in 2009 and the successful midnight takeovers of the Waikiki Edition and the Fairmont Turnberry Resort in 2011. The owner attempted to oust their operator without notice, relying on their common law right as "principal" to revoke the appointment of their agent (hotel operator). It is worth noting that in such cases, the owner is typically facing a potentially very substantial damages claim for wrongful termination. However, this may be scant consolation for an operator who thought that they had a robust 20-to-30-year term contract. This article explores the issue of "agency termination" in Hong Kong and other common law jurisdictions in Asia whilst briefly looking at the issue under PRC law.
The authority of an agent, even if given for consideration, is generally revocable under common law. In short, a principal can terminate the agency relationship at any time. This is no different in Hong Kong and some other Asian common law jurisdictions even though considerable compensation may of course be payable in such circumstances depending on the drafting of the contract. Accordingly it follows that hotel owners as principals are generally entitled to terminate management agreements at will. However, this principle does not apply where the agency is “coupled with an interest”, i.e. where the authority of the agent is accompanied by an interest or a security over the subject matter to be dealt with under the authority and the authority is granted for the purpose of securing some benefit for the agent.
"Agency coupled with an interest"
In the context of management agreements, various important interests of operators are secured by the agreement. The clearest example of this interest would be where an operator also has an equity stake in the hotel owning company. Other examples might include loans to an owner or pre-emption rights over the hotel or the shares in the hotel owning company although these have not been proven in the courts and in the US have even been rejected on occasion (eg the operator's first right to acquire the hotel was considered not to qualify in the Turnberry case).
Unfortunately, there is limited case law in Hong Kong or other common law jurisdictions in this area. In one case in 1972 a Hong Kong court found that a hotel operator had a “licence coupled with an interest” in the hotel premises and granted an interim injunction. This would seem to support the fact that an operator can have a “coupled interest”. However regrettably the court did not elaborate on how it had come to such a conclusion. In several other similar cases elsewhere in the region, whilst the courts have been sympathetic to the operator's contractual rights and ordered interim injunctions, the termination of agency issue does not appear to have been raised – perhaps because the owners were attempting to avoid the possibility of a large damages claim by arguing that the operators were in breach. Accordingly, it is unclear whether a typical management agreement would contain anything sufficient to satisfy the criteria for an “agency coupled with an interest” in Hong Kong and other similar common law jurisdictions in the region.
Difficulties with enforcement
Even if an agency relationship is found to be “coupled with an interest”, which would render the authority irrevocable, this does not necessarily mean that the operator will be able to enforce its rights. An operator would need to get the courts to grant an injunction restraining the owner from terminating the management agreement. Various considerations are taken into account by the courts when deciding whether or not to grant injunctions, including in particular the extent of supervision required from the courts to ensure compliance with the injunction.
In these circumstances, courts are generally more willing to grant interim injunctions than "permanent" injunctions as less supervision is required for an interim injunction. An interim injunction is typically a “prohibitory injunction” and is used to maintain the status quo of the parties until full trial or arbitration. It typically lasts for a relatively short period of time. Obtaining an interim injunction also assures that the owner would have minimal positive obligations to perform during the injunction period On the other hand, a permanent injunction would require that the owner specifically performs certain obligations for an increased period of time, requiring constant supervision of the court. This is particularly the case in what the US courts have called "contracts for personal services". In addition the courts are inclined not to award an injunction where they perceive damages as an adequate remedy.
It can be argued that the courts should be less concerned about the need to supervise the performance of the owner of its obligations as: (i) a management agreement may be distinguished from a typical contract for personal services as it is a commercial arrangement between two independent companies; and (ii) although the owner would need to perform obligations intermittently throughout the term of the management agreement, it is not required to perform obligations on a continuous or daily basis. Earlier this year the Queensland court was prepared to award Hyatt an interim injunction against the owner of the Hyatt Coolum Resort which was seeking to terminate the management agreement with its operator. However, the Hyatt case was settled in March (as a result of which Hyatt is no longer the operator of the Resort) and this argument remains untested outside interlocutory proceedings. However, there is still a high risk that any application for permanent injunctions preventing owners from terminating management agreements will be hard to sustain.
As for the position under PRC law, Article 410 of the Contract Law of the PRC provides that both principal and agent may dissolve an entrustment contract (i.e. the PRC equivalent of an agency contract) at any time. Wrongful termination would only entitle the other party to receive compensation. However, the use of the word "may" in Article 410 suggests that it may be possible for parties to contract out of the Article, provided that there is an unambiguous and valid clause in the contract excluding the effects of Article 410.
Similar enforcement issues arise as in common law jurisdictions. In practice, even though parties may contract out of Article 410, where a party purports to terminate the management agreement otherwise than in accordance with the termination provisions contained in the agreement, whether the other party will be able to enforce the contract will be dependent on the enforcement mechanisms available. Article 110 of the Contract Law of the PRC provides that a party may request that a non-performing party perform its contractual obligations. If it should refuse to do so, the other party may apply to the Court to enforce the contract. However, if the contract is seen as one for personal services, a request cannot be made under Article 110. In such circumstances, the operator will be left with no remedy other than monetary compensation.
The way forward
Whilst Asia is on the whole much less litigious than the US, it is a concern for operators in the region that this trend of owners implementing a strategy to terminate management agreements at will in the US may spread. In view of this and the uncertainty of the application and protection of the principle of “agency coupled with an interest” in the context of management agreements in Hong Kong and elsewhere in Asia, it is critical for operators to consider how best to ensure their interests are protected. At the very least they should ensure that they are entitled to appropriate damages in carefully drafted hotel agreements.