Question 1: What Is The Parties' Legal Relationship?

The first question that hotel owners and operators should ask is, "What is the parties' legal relationship under the management agreement?" Since the seminal decision in Woolley v. Embassy Suites, Inc., 278 Cal. Rptr. 719 (Cal Ct. App. 1991), courts have routinely agreed that the hotel operator is an agent of the hotel owner. As an agent, the operator has common law fiduciary duties, including a duty of loyalty that bars it from competing with the owner. It is no surprise, therefore, that courts frequently view a contractual territorial restriction as imposing a fiduciary duty of loyalty on the management company.

Because the relationship between the owner and operator is defined by their contract, the parties are free to bargain away some or all fiduciary duties that the operator may normally owe the owner, including the duty of loyalty. It can be expected, therefore, that management and hotel companies will continue to seek contracts with owners that contain "no-agency" and "no-fiduciary" disclaimers. However, it is not enough to simply purport to waive or disclaim all agency obligations, or to put another label on the operator (e.g., "independent contractor"). Disclaimers will not be effective unless ...