Gut check: tortious interference/unfair competition

Gut check: tortious interference/unfair competition

I regularly get calls from hotel owners and management companies who are in hot pursuit of a deal to buy or assume management of a hotel that is currently being operated by a competing flag that the buyer doesn?t want or the seller/owner thinks he can do better without. What I often hear is “they called me first, so I don?t need to worry about any interference claims from the existing manager, right?” Wrong!

Regardless of who initiated them, any discussions about finding a way to terminate a management contract with a hotel owner who doesn?t have that right, or who has the right to terminate but has not made up its mind whether it wants to do so, potentially exposes the buyer or competing management company to an unfair competition claim (as it is commonly known in Europe) or a tortious interference claim (as it is commonly known in the United States).

Although the specific elements of an unfair competition or a tortious interference claim vary from country to country — and in the U.S., from state to state — generally it involves one party (the potential buyer) intentionally interfering with the existing contractual relationship of two other parties (the existing hotel owner and the existing hotel manager).  Typically the owner says he has the contractual right to terminate the manager, or has already given the manager notice that it is being terminated.  So with the desire to lock up the opportunity, what is an eager owner or would-be manager to do? I tell my clients that a quick way to “gut check” the situation is to ask the existing owner to indemnify you for any claims that arise out the discussions. However, my suddenly unhappy client often responds, “I don?t think he?ll like that and I really don?t want to lose this deal!” 

“Just ask,” I respond. Why? Because, in my experience, the conversation with an owner that has the contractual right to dump the existing manager is very different than the conversation with the owner who doesn?t. The owner who has the right to terminate the contract often knows that because it has that right, there is no risk of an unfair competition/tortious interference claim – in the end, the owner may refuse to provide the indemnity, but he?ll usually be very forthcoming about the his rights to terminate existing management and willing to articulate other objections to the indemnity. 

The owner whose position vis-?-vis the management agreement is less certain won?t want to even have a discussion about indemnity, will absolutely refuse to provide one for reasons that aren?t all that clear and will often try to steer the conversation to other issues, glossing over direct questions about its rights to terminate the management contract.

It?s still best to try and get the indemnity (and to exercise extreme care if the owner won?t give one), but whether or not you get it, the nature of that conversation can tell you a lot about what’s really going on with the management contract and whether you really want to risk the potential liability if what the owner isn?t being totally honest with you as to all of the facts.  Bottom line–be careful, as the brands take this issue very seriously, and so should you!