Hospitality + Leisure Trend Watch January 29, 2018

When Any Old Reservation Won’t Do

Summary
Contract amendments and restatements are a constant reality in the hospitality industry. Given the long-term nature of most hospitality agreements, some circumstance — a change in status for one or both parties, a product refresh, changed financial arrangements, settlement of a dispute, or an evolving competitive market — is likely to arise requiring amendment to an existing contract or the execution of a new agreement. Business and legal teams will negotiate extensively to craft terms that address the subject of the specific amendment. Yet, for all this focus on the terms of the amendment, parties often fail to consider the effect the amendment might have on collateral issues and may end up unintentionally waiving existing rights.

Do You Have a Reservation?

Generally speaking, a claim or legal right is waived when a party either explicitly communicates its intent to give up the claim or right or acts in a way so inconsistent with preserving the claim or right as to impliedly communicate the same message. Conduct meeting this waiver standard is particularly common — when parties are not careful — in the context of a contract amendment. 

Sophisticated players know this. It is why boilerplate language reserving claims came to exist in the first place, the view being that it is better to include a general reservation of rights than to impliedly (and accidentally) waive something without it. But parties cannot safely rely on such boilerplate provisions. Without a full inquiry into existing and potential future claims that either party may bring, a claim or right may be waived unintentionally. For example, consider an amendment where a hotel manager agrees to reduce its fee and the parties include merely a general (and generic) reservation of unrelated claims, i.e., claims unrelated to payment of fees. The hotel manager certainly has by virtue of the amendment waived the right to sue for payment of the original fee going forward. But importantly, if the hotel manager one day realizes an accounting error, or perhaps something less innocent, led to underpayment of fees predating the amendment, that claim may also have been impliedly waived. A carefully constructed reservation clause could preserve the right to such undiscovered claims.

What Else Is in the MiniBar?

What practitioners often overlook in the amendment process, however, is the need for reservation language that preserves even rights and potential claims unrelated to the subject of the amendment. For example, a general reservation of rights clause in an amendment may not preserve claims for misrepresentation or fraud in connection with the underlying agreement that is being amended. In some jurisdictions, where parties to an existing agreement negotiate a new deal and secure some benefit from the new deal, claims that the original deal was the product of a fraud or misrepresentation will be waived. This particular “waiver” doctrine, often known as equitable estoppel, arises from concepts of fair dealing and equity, unlike more commonly considered forms of waiver. As discussed above, traditional waiver occurs when a party communicates its intent to give up certain claims, either explicitly or by its conduct. With equitable estoppel, however, such intent does not need to be communicated or even exist. If a party has knowledge of the basis for a fraud or misrepresentation claim relating to an underlying contract, even if that party has not yet realized a claim may exist, and agrees to an amendment to the underlying contract that benefits that same party, then preexisting fraud claims may be waived by virtue of the amendment. Thus, although waiver typically requires clear intent, or at least conduct that can only be interpreted as an expression of clear intent, equitable estoppel applies regardless of purpose. Essentially, in jurisdictions that apply the doctrine of equitable estoppel, the mere act of signing a contract amendment, restatement, or some other subsequent agreement that confers a benefit on a party may suffice to waive a claim by that party that the original agreement arose from fraud.

An Available Upgrade.

The good news is that awareness and careful consideration of these issues can avoid or at least limit the problem. When parties fully consider potential claims, reservation clauses can be carefully drafted to significantly mitigate the risk of unintentional waiver or estoppel. Parties must consider what rights and obligations are changing, and how that might affect claims for related past and future misconduct. The slightest hint that the underlying contract may have been signed based on a misunderstanding or miscommunication (potential signs of a misrepresentation or fraud) must be fully investigated before new documents are signed. And if a party has any idea that it may later wish to assert claim for fraudulent inducement of a prior agreement, that claim should be explicitly reserved at the very least1.  At the same time, parties must carefully scrutinize any reservation language requested by the other side to understand what claims the adverse party is considering. Although these requirements add another wrinkle to an already complex process, the alternative may be decidedly less pleasant, whether in the form of a late-discovered claim that cannot be brought or defending against claims thought resolved on the heels of a seemingly successful negotiation.

1 Although courts have not directly addressed whether fraudulent inducement claims may be explicitly reserved (so far only general reservations of claims have been considered, and found wanting), courts’ focus on unfairness and surprise implies that explicit waiver might suffice. Notice of the potential for a fraudulent inducement claim undercuts the fraudster’s ability to argue either point.