Hotel Management Agreements Are Affected by the New California Supreme Court Case: Damages Limitations for Intentional Wrongdoing are Now Invalid

California Supreme Court made a significant decision on April 24, 2020. New England Country Foods, LLC. VanLaw Food Products, Inc.Clarifying that parties may not use contractual clauses to limit their liability for intentionally wrongdoing.

Under Civil Code section 1668, any attempt to restrict damages for willful injury — including breaches of fiduciary duty — is invalid as a matter of public policy, even between sophisticated commercial parties.

The decision has particular significance for Hotel Owners and Management companies, as their relationship is often one of both contractual obligations and fiduciary duty. The decision forces Owners and managers to rethink how they draft the limitation of liability clauses in hotel management agreements (“HMAs”) and their litigation strategy when disputes arise.

California Supreme Court decision impacts hotel management agreements: Damages limits for intentional wrongdoing are now invalid

 Owner–Manager Relationships and Fiduciary Duties

Hotel Managers are obligated to perform fiduciary duty to Owners in California, and many other jurisdictions. This is on top of the contractual obligations they have. Fiduciary duties arise by operation of the law and despite disclaimers made in agreements.

• The Manager oversees the property and financial affairs of the Owner.
• The Manager represents the Owner in dealings between third parties.
• The Manager is given discretionary authority by the Owner to run the hotel.

(Prickett v. Bonnier Corporation (2020) 55 Cal.App.5th 891, 901; Woolley V. Embassy Suites, Inc. (1991) 227 Cal.App.3d 1520; Pacific Landmark Hotel, Ltd. (1993) 19 Cal.App.4th 615, modified, 19 Cal.App.4th 1552 (1993); Marriott Intern., Inc. v. Eden Roc, LLLP (N.Y. App. Div. 2013) 104 A.D.3d 583; FHR TB, LLC v. TB Isle Resort, LP. (S.D. Fla. 2011) 865 F.Supp.2d 1172.

Thus, even where the Management Agreement is carefully drafted, the law likely imposes independent fiduciary duties that cannot be waived by contract — including duties of loyalty, care, and disclosure.

Hotel Management Agreements with Damage Limitation Typical Language

Some hotel management contracts limit their liability to a wide range of situations, including:

Limitation of Liability Clause

“Notwithstanding the provisions of this Agreement that may be contrary, the Manager shall not have any liability to Owner in respect of any consequential, indirect or incidental damages (including business interruption or loss of profit) arising or relating to the performance or failure of Manager to perform under this Agreement.

This clause is designed to limit the Manager’s exposure to damage arising from operational missteps and disputes. However, following the Supreme Court’s recent decision, these clauses will not be enforced as they cannot shield the manager from damages due to misconduct, or breaches of fiduciary responsibility.

When a breach of contract may also be a breach of fiduciary duty

The difference between breaching a contract and breaching fiduciary duties is crucial. If a Manager simply fails to meet operational standards — e.g., slow responses, minor budget overruns — the Owner’s remedy may be confined to contract damages, and typical damages limitations would apply; however, where the Manager’s conduct includes:

• Self-dealing (g., Favoring affiliates (directing business to related entities)
• Bad Faith (g., Prioritizing short-term gain to boost incentive fee at Owner’s expense).
• Gross mismanagement and concealmentOr
• Violations of the Owner’s instructions or interests,

The Owner may allege breach of fiduciary duty — an independent tort — triggering full tort remedies. Limitation of liability clauses are likely to be invalid in such cases under Civil. Code, § 1668, as interpreted by New England Country Foods.

The most important takeaways for hotel owners and managers

Hotel Management Agreements and their Implications

• Contract drafting must evolve. HMAs are now required to carefully distinguish between contractual limitations and carve outs for intentional misconduct or breach of fiduciary duties.
• Litigation strategies are changing. Owners will assert more claims for fiduciary breaches to seek damages that go beyond traditional contract remedies.
• Risk assessments change. Managers should be aware that limitations in contracts will not protect managers from being sued for fiduciary violations or other intentional misconduct.

Other Jurisdictions Adhere to Similar Rules

Then, New England Country Foods This decision, which interprets California law directly, is in line with the treatment of contractual attempts by many other jurisdictions to limit liability for intentional misconduct. Courts in the United States generally refuse to enforce waivers or damage caps for intentional, willful or wanton torts regardless of the contract.

Example:

• New York The courts will not enforce restrictions on intentional misconduct (C.C. Metals, Inc. (1980) 50 N.Y.2d 657).
• Colorado Limitation clauses are invalidated for willful and wilful conduct.S. Fire Ins. Co. v. Sonitrol Management Corp. (Colo. App. 2008) 192 P.3d 543).
• Nebraska The courts have ruled that gross negligence or intentional wrongdoing is not covered by the contractual cap.New Light Co., Inc. V. Wells Fargo Alarm Services, Division Baker Protective Services, Inc. (1994) 247 Neb. 57).
• Georgia Courts bar limitations of Liability for Willful Indulgence as against Public Policy (Peck v. Rollins Protective Services, Inc. (Ga. Ct. App. 1988) 189 Ga.App. 381).

The same principle applies to Owners and Managers who operate outside California: Contractual limitations of liability do not provide protection against claims for willful misconduct, gross negligent or breach of fiduciary duties. Owners and management companies across the nation should review their contracts to ensure liability protections align with this well-established trend in public policy.

The conclusion of the article is:

California Supreme Court decision New England Country Foods The public policy prohibits private parties to shield themselves from liability, even when they have negotiated sophisticated contracts, such as hotel management agreements. Hotel owners can challenge limitations of liability clauses when Managers act in bad faith or violate fiduciary duty. Management Companies should be aware that contractual protections are not always sufficient to shield them from all liability, especially when the conduct of their employees crosses over into deliberate misconduct. Careful contract drafting, operational discipline, and litigation planning are more important than ever under California law — and increasingly, under national trends as well.

Mark specializes in commercial litigation, particularly contracts, corporate and partnerships disputes, as well hospitality disputes. Mark has litigated on behalf of hotel and vacation resort owners to terminate long-term hotel management contracts, franchise agreements and fiduciary issues. Mark has extensive trial experience, including in complex multi-party litigations and class actions. He has tried many cases in state courts and federal courts as well as domestic, international, and arbitral arbitrations. Mark is a frequent writer and speaker about trial practice. Mark’s victories in court have been covered by Forbes, Reuters and other publications. In the same year, he obtained two of California’s 50 biggest jury verdicts.

Mark has given or defended more than 1,000 depositions across North America and Europe. The Wall Street Journal cited him as an authority on noncompete agreements. Mark can provide more information. 949.623.7230 You can also find out more about markadams@jmbm.com.

The original version of this article appeared on JMBM.