Stakeholders in the hotel industry enter into a dizzying array of agreements, ranging from purchase-and-sale agreements to loan agreements to joint-venture agreements to hotel-management agreements. These agreements—many of which exceed 40 (single-spaced) pages—are difficult enough for lawyers to plow through, let alone the business teams that need to understand their terms.
Given the length and denseness of these agreements, it is tempting to gloss over the so-called “boilerplate” provisions often tucked at the end of an agreement, relying on the lawyers to get them right. However, important issues can lurk in these boilerplate provisions, some of which can have a significant impact on the parties’ rights and obligations. These issues include the following:
- Governing law: It is hard to imagine an issue more appropriately left to the lawyers than which state’s law will govern the agreement. There is a tendency to think the choice of governing law will not make a difference to the meaning or to the interpretation of the agreement. While that may be true in some instances, in other instances governing law can substantially affect the resolution of a dispute over contract terms. For example, New York is known for having a well-developed body of business law, while Delaware law is known as the most sophisticated in the country in matters of corporate law. Relevant to the hotel industry in particular, Maryland has adopted a law that eliminates common-law agency principles in the relationship between hotel owners and operators, which has important implications for the hotel management agreements.
- Dispute resolution: To parties working hard together to get a deal done, a breakdown in their relationship in the future can seem an unlikely prospect. No matter how unlikely, however, parties need to think through a mechanism for resolving disputes, especially in long-term agreements such as hotel management agreements that often last for decades. Should disputes be resolved in court? By a jury? By arbitration? Traditional arbitration or baseball arbitration? How many arbitrators? Should mediation be required first? Should the location of the dispute resolution process be specified in the agreement or left to the parties to hash out when a dispute arises?
- Successors and assigns: Agreements often provide they are binding upon and ensure to the benefit of the parties’ respective successors and assigns. Is that the actual intent of the parties? Are there limitations on assignment? Does an assigning party remain liable under the contract after assignment? All of these issues need to be clearly analyzed and documented in the agreement.
- Prevailing party attorneys’ fees: Many litigators advocate prevailing party attorneys’ fees provisions, which compel the “losing” party in a dispute to pay the legal fees and expenses of the “winning” party. The theory is such provisions deter litigation by increasing the stakes for the losing party. Each party must determine whether a prevailing party attorneys’ fees provision is appropriate in the context of a particular agreement. In addition, parties should consider whether to define the requirements to be considered a “prevailing party.” For example, is a party that seeks millions of dollars in damages but is awarded $1 the “prevailing party” for purposes of allocating responsibility for legal fees?
- Waivers: Waivers of important rights are often drafted in ALL CAPS. While the ALL CAPS presentation is intended to draw attention to these provisions, they often are glazed over and generally overlooked. In a purchase-and-sale agreement, waivers might serve to limit a seller’s obligations toward the purchaser or to limit a purchaser’s remedies in the event of a default by the seller. In a joint-venture agreement, waivers might have the effect of eliminating fiduciary or other duties of one venturer toward another. In a hotel management agreement, waivers might preclude a hotel operator from seeking recourse against the owner beyond its ownership interest in the hotel. All these waivers must be drafted carefully, with appropriate limiting carve outs and exclusions and must be understood by the principals. As a rule of thumb, contracting parties should be particularly wary of waivers that go on for more than one page.
- Court jurisdiction: “Consent to jurisdiction” provisions, which evidence each party’s consent to the jurisdiction of a specified court or courts (e.g., California state courts), raise a number of issues. Is the jurisdiction provision mandatory (litigation must be brought in that jurisdiction) or permissive (litigation may be brought in that jurisdiction or another jurisdiction)? Is the jurisdiction convenient, in terms of parties’ places of business and the location of the hotel? Could there be an unfair “home court advantage” for one party in a particular jurisdiction? Do the courts in the specified jurisdiction resolve cases efficiently?
- Third-party rights: A standard boilerplate “third-party rights” provision states there are no “third-party beneficiaries” to the agreement. Is that accurate? Are there any third parties who should have the right to enforce the terms of an agreement—such as an affiliate of a party that is intended to receive indemnification protection under the agreement?
Reading and understanding boilerplate provisions—especially those in ALL CAPS—can be tedious at best. No matter how tedious, however, getting the boilerplate right is essential to securing the rights and obligations the parties expect the agreement to create. Parties who do not read the boilerplate risk litigating a dispute in a court across the country from their home office, only to learn that they thought that they had were waived away, could mean they are on the hook for paying their adversary’s legal fees or worse.
Teresa K. Goebel is a partner in the San Francisco office of Goodwin Procter LLP. She focuses her practice on the representation of hotel operators and investors in a variety of matters relating to the acquisition, development, financing, management and sale of hotel, resort and fractional ownership properties around the world.
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