Contract certainty key to avoiding complex legal issues

Vendor and subcontractor agreements can present their own unique set of problems.

If an owner imposes a certain vendor or subcontractor on its management company, it can be difficult for attorneys to sort out liability in the event of a negligent act or accident involving that third party, especially if there are questions as to the subcontractor's or vendor's suitability for the job.

“In those cases, you may have a management company arguing that their hands were tied because the owner wanted his brother-in-law's company to run the hotel restaurant or the nightclub,” said Lance Ewing, Chartis Inc.'s industry practice leader for hospitality and leisure in Memphis, Tenn.

Similarly, experts said, some management companies have been known to partner with familiar vendors or subcontractors at above-market rates in exchange for rebates, which could not only be interpreted as a breach of their fiduciary duty to the owner but could lead to derivative liability exposure for claims against the third party or its employees.

To simplify complex legal tangles—if not avoid them altogether—experts recommend that owners and management companies invest in contract certainty above all else, for the management agreement itself and the insurance policies designed to support it.