HMA Bites: Power of Attorney

Welcome to HMA Bites! In each edition of Check-In we will take a concise look at an issue relating to hotel management agreements ("HMAs") and provide insight, tips and advice based on our experience in practice. In this edition, we will be taking a look at Power of Attorney.

“Power of attorney” (“POA”) is legal jargon that has entered the mainstream and most people will be familiar with it. But what exactly is a POA and how does it come up in hotel management agreements (“HMAs”)?

What is a POA?

A legal document in which a principal (“Principal”) grants a person (“Agent”) the authority to act on their behalf.

Why is a POA relevant to HMAs?

Under an HMA – the owner of a hotel (“Owner”) will grant authority to a hotel management company (“Manager”) to manage the hotel on its behalf.

However, there are situations where the authority to undertake certain actions in relation to the operation of the hotel is delegated to a specific individual. The main example is signing contracts on behalf of the Owner, for which authority is customarily given to a key individual within the hotel operation – usually the General Manager or the Finance Director ("Nominated Signatory") – rather than to the Manager entity as a whole.

But how exactly can the basis of the Nominated Signatory's authority to act and enter contracts in the Owner’s name be demonstrated? This is a question that the counterparty to the contract to be signed by the Nominated Signatory is particularly likely to want to resolve and get comfortable with.

The Nominated Signatory won’t be a director of the Owner (though they may be an employee), and sometimes they may be the employee of the Manager or even another company (such as a separate employment services company).

There are arguments under the laws of agency that the Nominated Signatory's authority can be derived (or inferred) from the Manager’s authority by virtue of the HMA. However, this strays into a technical (and somewhat uncertain) territory – and leaves open a risk that the contract signed by the Nominated Signatory may be challenged as invalid on grounds of insufficient signing authority; which could in turn make it unenforceable by the Owner, and expose the Nominated Signatory to personal liability towards the counterparty.

Additionally, if a counterparty asks for evidence of the Nominated Signatory's authority to sign, then responding by way of a technical agency argument is unlikely to instil confidence.

This is where a POA comes in – it addresses these issues by giving clear and express authority for the Nominated Signatory to act and enter contracts on an Owner’s behalf.

Does every HMA need a POA?

Hotel brands deal with POAs in different ways. Some attach their standard form POA as an exhibit to their HMAs, though this becoming less common. Typically brands rely on a standard catch-all clause in the HMA requiring the Owner to grant the Manager “all necessary authorisations” to perform their role. Other brands may not bother with POAs.

A “sister” document to the POA is a bank mandate authorisation, which is a document giving the designated individual(s) authority to deal with the hotel bank accounts held in the Owner’s name. These are usually in a special form required by the relevant bank.

What issues come up when drafting POAs?

An Owner will want a POA to place the same limitations on the Agent as are placed on the Manager’s authority under the HMA (for example, restrictions on the types and/or values of contracts that require Owner consent).

The problem is that these provisions of the HMA will be confidential. Moreover, they are usually complex and so cannot be easily inserted into the POA without undermining its practical purpose – i.e. a document that can be shown to and easily understood by counterparties to establish the Agent’s authority. For the same reason, it doesn’t really work to cross-refer to provisions of the HMA, as the counterparty won’t have sight of these and so could justifiably doubt whether they cut into the Agent’s authority.

Usually some balance of detail is struck. Alternatively, some Owners are relaxed about giving a wide POA, on the basis that if the Agent acted outside the Manager’s authority, the Owner would have recourse against the Manager directly under the HMA.

One term that Managers will always insist upon is an indemnity from the Owner to the Agent for any personal liability they incur as a result of the POA.