Almost every commercial contract contains an indemnity clause, pursuant to which a defaulting party is obliged to “hold harmless” the non-defaulting party. In short, if one party is injured monetarily by the default or wrongdoing of the other party, the defaulting or wrongdoing party must make the other party whole. This normally includes covering attorneys’ fees and other costs associated with enforcing the claim.
For 20 years, starting in 1984, I was general counsel of Hyatt International Corp., which during my tenure was the international arm of the Hyatt Group. During most of this 20-year period I also headed the Hyatt International development department.
For various reasons, which I hope to explore in this and future contributed pieces, dealing with the indemnity clause was one of the thorniest “non-commercial” issues that I confronted. Although the term (duration) of the contract, fee structure, termination rights and the like were usually the main areas of contention between the owner and the operator, negotiations often almost broke down when the indemnity provisions came up for debate, particularly in sophisticated jurisdictions where contractual obligations were more readily enforceable – and thus more problematic for the obligor.
This is so because indemnity provisions are especially sensitive in relation to an agreement for a hotel management company to operate a hotel on behalf of the hotel’s owner. Although some hotel management companies own some or even all of their managed hotels, in most cases management and ownership are completely separate. Management companies like Marriott International, Hyatt and Hilton operate hotels that in most cases are owned by an unrelated entity.
It is usual for all hotel employees to be the employees of the owner, and not of the management company – even the general manager and the executive team assigned to the hotel by the management company. This is partly because all operating expenses, including salaries and wages, are paid from the revenue of the hotel – revenue that belongs to the owner, not the management company. In addition, management companies wish to avoid setting up a “Permanent Establishment” in the country in question, thereby triggering additional taxes. Plus, of course, the management company wants to put as much distance as possible between a negligent employee and the management company.
So, since all of the hotel employees are the employees of the owner, and not the management company, the management company ideally wants to be absolved from all responsibility for injuries to hotel guests, fraud by hotel employees, or other damage that may be caused by the negligence or misconduct of a hotel employee. But even on a superficial examination this makes minimal sense, and this is why the indemnity clause, in my experience, was often the subject of heated discussion. The underlying issues will be further explored in the next installment.
Contributed by Michael Evanoff, Marlborough Hospitality Services, Singapore