Last month, the United States District Court for the Southern District of Florida denied an injunction requested by Fairmont Hotels & Resorts, which would have compelled the owner of the Turnberry Isle Hotel & Resort, Turnberry Associates, to reinstate Fairmont as the resort’s manager after Turnberry had abruptly expelled Fairmont from the resort this summer. The events leading up to this case were dramatic (OK, not quite as dramatic as the photo above, but it did get your attention), and the court’s opinion is instructive on the relationship between an owner and an independent manager of a hotel—at least under a management agreement that defines their relationship as an agency. Fairmont may have obtained a very different result if its management agreement with Turnberry had disavowed agency and established an independent contractor relationship between
Although the parties to the case are actually subsidiaries of Fairmont and Turnberry, and the actual name of the case is FHR TB, LLC v. TB Isle Resort, LP (Case No. 11-23115), commentators have used the name “Fairmont v. Turnberry” to refer to the case and its parties, and I will use that name here.
Events Leading to Fairmont v. Turnberry
Until this August, Fairmont had operated the resort, located in Aventura, Florida, as the Fairmont Turnberry Isle Hotel & Resort. Fairmont operated the resort as Turnberry’s agent, under a hotel management agreement with Turnberry. On Sunday August 28, Turnberry engaged in what the court later described as “a bold, surprise takeover” of the resort. Accompanied by security guards (who Fairmont alleged were armed), Turnberry representatives arrived unannounced at the hotel that morning, demanded to see the hotel’s senior managers, informed them that they were immediately terminated and escorted them off the premises. Turnberry then disabled the resort’s reservation system and website, removed all references to Fairmont from the resort, and began operating the resort as the Turnberry Isle Miami.
Later the same day, Turnberry sent a letter to Fairmont stating that it was immediately terminating the hotel management agreement. The letter also took the position that because Fairmont had managed the resort as Turnberry’s agent, Turnberry had an “absolute right and power to revoke the agency.” The letter alleged generally that Fairmont was “incapable of running the property” and that the resort had therefore “sustained millions of dollars in operational losses.” It did not provide any more specific grounds under the management agreement for termination, and ignored a requirement that Fairmont be given advance notice and an opportunity to cure any default before the management agreement could be terminated. As paraphrased by the court, “the business strategy of Turnberry . . . c[ould] fairly be described as follows: ‘Yes, we’re violating the notice and cure provisions of the [hotel management agreement], but we have the power to do this whenever we want because the agency is revocable, so go ahead and sue us if you don’t like it.’”
That is precisely what Fairmont did. The day after the takeover, Fairmont filed a complaint in the U.S. District Court for the Southern District of Florida and moved for a preliminary injunction to be reinstated as the manager of the resort. As summarized by the court, “Fairmont contend[ed] that Turnberry perpetrated what was essentially a business coup d’état and argue[d] that a preliminary injunction [was] required to restore the status quo and to protect hotel management companies from being victimized by similar tactics.”
The Court’s Decision
While acknowledging that Fairmont almost certainly had a significant claim against Turnberry for money damages arising from breach of the hotel management agreement, the court denied Fairmont the injunction it sought. In a 71-page opinion, the court explained four reasons for its refusal to order that Fairmont be reinstated as manager of the resort.
As the first rationale for its decision, the court emphasized that Fairmont’s relationship with Turnberry was that of an agent to a principal, and relied on an “ancient and well-settled” common law doctrine that “an agency relationship is revocable at will by the principal.” The court explained, “The reason for the rule is that it is deemed contrary to public policy for a principal to have an agent forced upon him against his will. . . . [C]ourts wish to avoid the friction and social costs which result when the parties are reunited in a relationship that has already failed, especially when the services involve mutual confidence and the exercise of discretionary authority.”
The court then explored an exception to the above doctrine: An agency relationship is not revocable at will by the principal “when the agency is coupled with an interest in the subject of the agency.” The court explained, “The reason for the exception is when an agent has its own interest in the subject matter of the agency, the agent’s work is, in part, to protect its own interest in the property it is managing—which means the agency is not only for the benefit of the principal, but also the agent.” Fairmont made several arguments that its agency in this case was coupled with such an interest, all of which the court rejected. Fairmont first noted that the management agreement expressly stated that the parties’ agency relationship was “coupled with an interest.” The court dismissed this language as a hollow and inaccurate recitation, stating, “Words alone are not enough to establish an agency coupled with an interest.” The court also noted that the same management agreement also “explicitly provided that Fairmont [was] acting solely on behalf of Turnberry and not on its own behalf.” Next, Fairmont argued that an interest was present because the management agreement gave Fairmont rights of first offer and first refusal to purchase the hotel. The court held that these rights were not sufficient because “[i]n order to render an agency irrevocable, the agent’s interest in the property must be ‘vested,’ not contingent.” The court explained that “a right of first refusal, like an option, is not a vested interest,” and that, moreover, a right of first refusal “does not even ripen into an option until the happening of a contingency.” Fairmont also argued that an interest could be found in its contractual right of possession and quiet enjoyment of the hotel. However, Fairmont conceded that these rights were grounded in a license—not a lease. The court therefore rejected Fairmont’s argument, noting that a license, unlike a lease, does not convey an interest in land and that a license may also be revoked at will by a property owner.
The court also based its denial of the preliminary injunction on the possibility that Fairmont was seeking “a mandatory injunction,” which would have required Turnberry to take an affirmative act, as opposed to a “prohibitory” injunction ordering a defendant to refrain from some action to preserve a status quo. Turnberry had argued that the injunction requested was mandatory, while Fairmont had argued that it was prohibitory. The court stated that it did not need to resolve this issue. However, other language in its opinion strongly suggests that the court was more swayed by Turnberry’s argument on this point. It noted that “seeking a mandatory injunction . . . creates an even greater hurdle for the party seeking the extraordinary remedy of injunctive relief” than seeking a prohibitory one. The court continued,
Basically, Fairmont wants this Court to require Turnberry, the owner of the hotel/spa/resort, to be saddled with an entity it no longer wants as a business partner reinstated as manager and operator of the resort. The notion of requiring a property owner to be forcibly partnered with an operator it does not want to manage its property is inherently problematic . . .
This portion of the court’s opinion begs the question of whether Fairmont would have been better off if it had refused to cede control of the hotel when Turnberry arrived on the scene, and if Fairmont had filed a petition for an injunction that would more arguably have been “prohibitory,” to preserve a status quo of Fairmont managing the hotel. (Public policy would arguably prefer that the identity of the management company in place at the time such a motion is filed not dictate the outcome of the motion, lest security guards of overzealous owners and managers have incentive to engage in physical confrontation to determine the status quo.)
The court stated that the most important reason for its denying Fairmont a preliminary injunction was that Fairmont’s injury from its ouster by Turnberry was not “irreparable” and could be adequately remedied at law. For example, Fairmont failed to persuade the court that the takeover would cause undue confusion of guests. The court noted that individual guests were notified of the change upon arrival, that customers who had booked future group events had been notified in writing, that Fairmont logos had been removed from the property, that a press release had been issued explaining the change, and that the hotel had begun operating under a new name, with a new website. The court also rejected Fairmont’s arguments that that the takeover would impair Fairmont’s reputation with its guests and other stakeholders. The court noted that Fairmont had presented no evidence of any damage to its reputation and that this property represented only a small percentage of Fairmont’s system. Perhaps most importantly, the court noted that the hotel management agreement contained a liquidated damages clause for wrongful termination, setting forth a formula that the court believed made damages calculable with reasonable accuracy, especially if reference were made to the parties’ course of dealings. (The law on this point is also ancient: If money can make a plaintiff whole, a court will not resort to injunctive relief against the defendant.)
4. The hotel management agreement was deemed a personal service contract, which is not enforceable by specific performance.
As a fourth and final reason for its denial of Fairmont’s petition for a preliminary injunction, the court concluded that this relief would “clash head on with the well-established rule that personal service contracts are not specifically enforceable.” Relying on two precedents, the court stated definitively that “[h]otel management agreements are personal service contracts.” It refused to enforce language in the parties’ management agreement that purported to authorize specific enforcement of that agreement, effectively holding that this language was rendered unenforceable by common law.
Looking Forward
Under the court’s decision in Fairmont v. Turnberry, Fairmont has been free to pursue, and has continued pursuing, a substantial claim against Turnberry for money damages. (The court referred the case to mediation on November 17.) However, because of this decision, Fairmont has not regained management of the hotel.
Most of the court’s opinion in Fairmont v. Turnberry was premised on the relationship between Turnberry and Fairmont being that of a principal and an agent. Although many hotel management agreements define this relationship as agency, many others disavow agency, and take strides to structure the relationship as one between independent contractors. There is case law to support this distinction. (See, e.g., Lopez v. Rosewood Real Estate Equities, 1999 WL 562709 (Tex.App. 1999) (affirming an independent contractor relationship between the owner and manager of a hotel spa, and noting that a party asserting an agency relationship has the burden to prove its existence).
The court’s decision in Fairmont v. Turnberry may have been different if the parties’ relationship under the management agreement had been carefully defined as that of independent contractors. (This is not certain. The court may have reached the same decision based on its conclusion that the management agreement was a personal service agreement not subject to specific enforcement. A personal service agreement can be made between independent contractors.) In any event, it will not be surprising if, in the wake of Fairmont v. Turnberry, more management companies explore independent contractor relationships as options to agencies under hotel management agreements. If they do, these companies should be aware that it will likely not be sufficient to merely insert into a management agreement a hollow recitation of an independent contractor relationship and disclaimer of agency. In the same Lopez opinion that I cite immediately above, the court stated, “When a contract provides for an independent contractor relationship, as opposed to an agency relationship, evidence must be produced to show that despite the contractual terms, the true relationship between the parties gave the principal a right of control.” How much of “a right of control” must an owner have to preserve an independent contractor relationship and avoid a de facto agency? That issue will have to await another article.