United States: New York Court Says Hotel Management Agreement Is Not A Personal Services Contract Under Maryland Law

On April 9, 2018, the New York Supreme Court of New York County found that Maryland law may provide protection for hotel managers facing termination on personal services grounds. In IHG Management (Maryland) LLC vs. West 44th Street Hotel LLC, No. 655914/2017, Doc. No. 114 (N.Y. Sup. Ct. 2018), the plaintiff hotel operator argued that the defendant hotel owner could not terminate the parties' Hotel Management Agreement (the HMA). The operator sought specific performance of the contract, which would allow it to continue operating the hotel, and a permanent injunction preventing the owner from terminating the contract. The owner filed a motion to dismiss. Applying Maryland law, the court found that the operator may be entitled to specific performance, but it is not entitled to a permanent injunction.

Beginning with the claim for specific performance, the owner argued the HMA was a personal services contract for which specific performance was not an available remedy. In support, it relied on Marriott International, Inc. v. Eden Roc, LLLP, 962 N.Y.S.2d 111 (N.Y. Sup. Ct. 2013), a seminal case finding that a hotel management contract was a personal services contract under New York law, and that it was therefore exempt from injunctive relief. The operator countered that the HMA was not a personal services contract because the owner retained substantial control over the manner and method of operations. The court agreed:

• First, distinguishing the HMA from the one in Eden Roc, the court concluded that hotel management contracts must be reviewed individually to determine whether they are personal services contracts.¹ Relevant factors include whether the operator has full discretion to manage the owner's assets, contract terms contemplating that another party could perform the operator's duties, and whether the agreement purports to be terminable at will.² On the facts before it, the court found the HMA was not a personal services contract under Eden Roc.
• Second, the court concluded that under Maryland law, hotel operators are entitled to specific performance—meaning they can petition courts to allow them to continue to operate hotels even over the owner's objection. Under Section 23-101(c) of the Maryland Annotated Code—a statute that hotel management companies lobbied for to protect them against owners seeking to exercise termination rights—the HMA is an "operating agreement" that may be enforced via specific performance.³ The court found that the statute "removes all ambiguity from interpretation as to whether a hotel management agreement may be specifically performed. The Maryland legislature has said yes."⁴ Thus, the statute "coincides with the plain reading of the HMA."⁵

Turning to the operator's claim for a permanent injunction, the court rejected the operator's argument that termination of the HMA would cause irreparable reputational harm.⁶ It additionally agreed with the owner's contention that a permanent injunction would impermissibly re-write the HMA to eliminate the owner's bargained-for right to terminate the contract in an event of default.⁷ The court did, however, issue a preliminary injunction enjoining the owner from terminating the HMA until the action has been resolved. ⁸

Though the decision remains subject to appeal, it confirms the need for owners to better understand the factual circumstances that give rise to personal services contracts, and the rights and limitations arising out of such a relationship. Importantly, this decision is the first to apply Maryland's pro-operator statute, and illustrates why owners should avoid contracts that require the application of Maryland law.

Footnotes

1. Op. at 3-6.

2. Id.

3. Op. at 2-3.

4. Id.  at 3.

5. Id.  at 6.

6. Op. at 7-8.

7. Id.  at 9.

8. Doc. No. 113.

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