The International Hotel Law Review: India

Introduction

The hospitality industry in India has seen a significant uptick in the past decade, owing to an increasing interest in the country both as a tourist and a business destination of choice and also an increased spending in this sector. India has seen a large number of new hotels opening up not only in big cities, which have been traditional tourist hubs, but in smaller towns as well. However, due to the covid-19 pandemic, as in any other country, the hospitality sector in India too has suffered a huge set back on account of state and nation wide lockdowns imposed within the country, restrictions on domestic and international flights, travel and tourism.

In India, there is no single code that applies to this industry, and therefore, any person setting up or operating a hotel would have to ensure compliance with multiple intertwined legislations. Therefore, the purpose of this chapter is only to give a brief overview of the concerns that may be relevant to various stakeholders in the hospitality sector and, or to hoteliers in India. For ease of reference, we have divided this chapter into different sub-chapters wherein we have sought to address certain areas relevant to the hotel industry, which may be relevant for the readers.

Legal structures

Typically, we have seen three main legal structures that are used to set up and operate a hotel in India, namely, (1) hotel management or operation arrangements; (2) brand franchising; and (3) leasing. The structure that may be finally adopted by the parties may depend on various commercial and legal considerations, including nature of the asset, scope of services to be provided by each party, level of control sought to be exercised by each party, payment of royalty or fee for use of the brand, and tax considerations.

In the case of hotel management or operation arrangements, a direct relationship exists between the owner of a hotel and the operator (i.e., the hotel manager), whereby the owner of the property or hotel engages the operator to manage the business under the brand and operating procedures and systems of the operator that are generally coupled with technical services being provided by the operator, for a fee that is based on performance of the business in terms of profit share, room occupancy targets, amenity provisions and other sources of revenue. We have seen most large international brands operate under this model. The operator can either be an individual or an entity such as a company that is responsible for operating, managing, branding, marketing and performing other business-related services, while the ownership of the hotel or property and risks associated with such ownership and certain aspects of the business such as the employment of the staff, obtaining local licences and approvals, remain with the owner.

In the case of a franchise agreement, parties involved include a franchisor, who owns the hotel business and has established the brand's name, and a franchisee, who in lieu of a fee or royalty payable to the franchisor, is granted the right to establish a franchise using the intellectual property of the franchisor. Unlike a hotel management or operations arrangement wherein the operator manages the hotel but the liability for risks associated with the business is borne by the owner, in the case of a franchise agreement, all business risks involved in setting up and managing a franchise rest with the franchisee as long as the franchising agreement subsists. The franchisee is free to enter into third-party contracts for hiring an operator to manage the business. The relationship under a franchising agreement is thus limited to transfer of a right, by the franchisor in favour of the franchisee, to use his or her intellectual property, including in terms of any pre-existing operation methods and systems.

Lastly, in the case of a lease, the owner of the hotel property leases (i.e., grants control, possession or management) property to a lessee (who is a hotel operator) for a fixed term of years and rent, that may change over time as per the mutual understanding of the parties involved. The primary idea behind a lease is that there is a transfer of a right to enjoy the property for a consideration in addition to other rights and liabilities as may be mutually agreed upon by parties to a lease agreement; and that the hotel owner receives fixed periodic income without any business risk. While this model is not very prevalent in India, however in the recent past, certain 3-4 star hotels can be seen adopting such a model.

We have also seen that major operators in the Indian hotel industry outsource operations of spas and certain food and beverage outlets especially to well-established brands in that field. This is done for two primary reasons. One, outsourcing these operations not only enhances the quality of services that is provided to guests but also attracts additional walk-in customers to the hotel. Another commercial rationale could be a reduction in overhead costs and financial risks involved in running these operations, in terms of hiring costs for employees, maintenance requirements and so on.

Outsourcing of such operations may be done in different ways. One way is through a lease agreement, wherein the hotel management (owner, operator or franchisor, as the case may be) leases a space for establishments such as spas, food and beverage outlets, etc., for a particular term and an agreed upon rent. In agreements of this nature, the rent is often linked to the profits or revenues earned by such lessees. Another way to outsource such services, using existing legal structures, is through a franchise agreement wherein the hotel can capitalise on the brand and popularity of a chef or restaurant, while simultaneously exercising control over the daily operations of such an establishment.

Leases

The Indian hotel industry traditionally operates under two mainstream models (i.e.,
(1) leasehold model; and (2) asset light model). Such a leasehold arrangement is governed by various Indian laws particularly the Indian Contract Act 1872 (ICA) and the Transfer of Property Act 1882 (TPA). This model is usually adopted by private hoteliers, governmental authorities and real estate companies. The government authorities generally grant such leases for a longer term (i.e., up to a period of 50 years at a fixed premium and subject to an escalation as per the terms of their agreement), whereas private parties allow the terms of their lease agreements to be determined by factors such as revenue recognition, room occupancy targets achieved or range of amenities provided. Typically, the terms of lease agreements are negotiated between the parties. However, certain terms relating to representations and warranties provided in relation to title and ownership of property, procuring land and business-related approvals, indemnity and liquidated damages, dispute resolution, are fundamental to these agreements.

On the other hand, the asset-light model is preferred by most international hotel chains. Under this model, foreign operators enter into a hotel management agreement with the owners to operate and manage such hotels as per their own preferred standards. Recently, Indian markets have witnessed a pragmatic shift from a capital-intensive hotel industry to an asset-light approach that is being adopted by home-grown international hotel brands of India.

Intellectual property and branding

Intellectual property rights and branding (IP) is vital for the hotel sector as it is an essential asset that adds goodwill and value to a business and can be one of the prime drivers for attracting customers. It provides a brand with a face through instruments such as trademarks that come with their own exclusive rights. We have seen significant payments being made by owners or operating companies of hotel projects in India to owners of popular hotel brands for a right to use their brand and bask in the recognition that follows from being associated with such a brand. In the Indian context, there are two key issues concerning the domain of IP in the hotel sector.

Primarily, issues arise with respect to the usage of the same trademarks by different hotels, selling similar or different services. This becomes a matter of concern for two reasons: First, there is an obvious risk of deception and second, there is a risk of loss of goodwill of one's brand or harm to the reputation, through no fault of their own. To avoid this issue, it becomes imperative to conduct market research before using any trademark, whether registered or unregistered, to ascertain there are no trademarks already in existence and use by other players in the market. In this regard, there is a plethora of cases that guide the jurisprudence in India, some of which have been discussed below.

This issue was discussed in the case of M/s Thalappakattu Biriyani and Fast Food v. M/s Thalappakatti Ananda Vilas Biriyani Hotel & Another6 wherein Chennai Rawther Thalappakattu Biriyani Hotel (Rawther), a restaurant chain based in Chennai and established in 2005, adopted the same mark of a thalappakatti (turban) as established in 1957 by P. Nagaswamy Naidu (Naidu's). The owner of Naidu's used to wear a thalappakatti and thus was more fondly known as Thalappakatti Naidu, so much so that the turban became his signature and was synonymous to the biriyani sold by the establishment. The significance of this turban was so great that after the death of the owner in 1978, the hotel was renamed Thalappakatti Naidu Ananda Vilas Biriyani Hotel. Once Naidu's expanded to Chennai in 2005, it realised that Rawther was using the same mark that signified Naidu's product. Both parties applied for registration of the mark, Rawther before Naidu's, claiming prior use. The Madras High Court and the Intellectual Property Appellate Board were both of the opinion that Naidu's trademark was prior in use, based on the evidence of the wide reputation that Naidu's enjoyed. The same point of law was also debated in the case of Hotel Hilton International v. Hotel Hilltone Private Limited 7 that resulted in Hilton International losing exclusive right over the trademark 'Hilton' in India. The rationale behind this decision was that even though Hilton International was a brand established prior in time, Hilltone was able to prove use of the trademark since 1973 in India, whereas Hilton International had only entered the Indian market in 1995.

Second, issues relating to copyright infringement of musical works have also been a matter of concern in the industry, as playing music, organising live band performances, etc., are common practices for establishments within this sector. However, more often than not, proper licences are not obtained by hoteliers for use of musical works, resulting in copyright infringement of such musical works. One such example of copyright infringement is of the Novotel Hotel, Mumbai that was booked for copyright violation by the police in 2016, after they played Bollywood music without obtaining a public performance licence from Novex Communications, the authorised copyright holder of Zee Music, Shemaroo and Yash Raj Music.8

Beyond these issues, one of the most notable cases in the Indian hotel sector has been in terms of grant of an image trademark to the Indian Hotels Company Limited for its hotel Taj Mahal Palace in June 2017.9 This has put this hotel in Mumbai in the league of the very few buildings in the world such as the Eiffel Tower, Sydney House Opera, etc., that have also been granted an image trademark. This means that one has to seek permission from the Indian Hotels Company Limited for using the imagery of the Taj Mahal Palace hotel for any commercial purposes.

Data and hotel tech

In the wake of our ever-growing digital footprint, a discussion on data protection in the hotel industry becomes indispensable. Since online bookings and maintenance of personal databases by hotels is the norm today, the sector is fiercely susceptible to data breaches and cyber-attacks. This is exacerbated by the magnitude of sensitive personal data information (SPDI)10 collected by players in this industry. The vulnerable position of the customers in the industry can be understood from several instances of breach that have taken place in the past in India. In November 2018, the Starwood division of the world's biggest hotel chain, Marriott International, was hacked, compromising the sensitive records (including passport numbers and payment card details) of 500 million customers and affecting Indian hotels such as Le Meridian in Delhi, Westin in Mumbai, etc.11 Hyatt Hotels Corporation was also hit by malware, compromising information of payment card data of its customers between 13 August 2015 and 8 December 2015, affecting 90 per cent of its total Indian portfolio.12

The present legal framework concerning data protection in India comprises the Information Technology Act 2000 (IT Act) and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (IT Rules). The IT Rules provide guidelines on handling of personal information and SPDI, which would be applicable to certain guest data. Some of the important requirements include making available a privacy policy on the hotel website (which would, among other things, specify the purpose for which their information is collected), taking written consent of the guests regarding the purpose of usage of their SPDI, the intended recipients of the information, the name and address of the agency that is collecting the information or retaining the information. As per Rule 6, to disclose SPDI to any third party, prior permission has to be obtained from the guest, unless the same is sought by a government agency. Also, personal information can only be transferred to such entities (within or outside India) who maintain the same level of protection as provided under the IT Rules. Lastly, as per Rule 8, reasonable security practices and procedures (such as IS, ISO, IEC 27001 or others that are approved by the central government) as well as comprehensive documented information security programmes and policies, are to be implemented for handling personal information. Further, the IT Act requires body corporates who fail to implement reasonable security practices and procedures, which causes wrongful loss or wrongful gain, to pay compensation to the affected person.

Additionally, the government of India is currently in the process of overhauling the legal framework of data protection in India to create a more robust structure. In this regard, a Personal Data Protection Bill (Bill) was introduced in 2019 prescribing stricter rules for data protection. The Bill draws inspiration from the European Union General Data Protection Regulation. Under the Bill, the definition of SPDI has been expanded to include official identifier, religious or political beliefs, caste or tribe, genetic data, etc.13 Other stipulations identified under the Bill include – fair and reasonable processing, obtaining consent and explicit consent (as may be applicable) to process personal data, obtaining parental consent in case of children, data localisation requirements14 establishment of a data protection authority,15 establishment of transparency and accountability measures (such as having a privacy by design policy, implementing security standards, imposing higher compliance requirements on certain large data fiduciaries).16 The Bill further identifies significant monetary penalties for breach of certain provisions, some of which are to be calculated as a percentage of the worldwide turnover.

Franchising of hotels

The term 'franchising' is generally understood to mean a method for distribution of products or services, or both. Typically, a franchise arrangement involves at least two parties: (1) the franchisor, who establishes a brand's trademark or trade name and a business system; and (2) the franchisee, who upon payment of royalty or an initial fee, secures the right to use the franchisor's name and established business system. Technically, the contract binding the two parties is the 'franchise' but the term is often used to mean the actual business that the franchisee operates.17

In India, there exists no specific legislation regulating franchises, however, Section 88(a)(xi) of the Finance Act, 2005 has defined the term 'franchise' to mean:

an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified by the franchisor, whether or not a trademark, service mark, trade name or logo or any such symbol, as the case may be, is involved.

The absence of a franchise-specific statute should not, however, suggest that hotel franchising arrangements in India are loosely or arbitrarily governed, and they are typically governed by the terms of the franchise agreement as may be commercially agreed to among the parties.

Therefore, in the absence of a comprehensive set of regulations governing the franchise relationship in India, it is essential to encompass the fundamental terms – inter alia, disclosure norms and filings, duties and obligations of parties, initial franchisee fee and royalty, manner of payment, treatment of employees and labour, term and renewal of the franchise agreement, termination – within the franchise agreement.

Hotel management agreements

In the Indian context, there is a clear absence of any specific legal framework for governing hotel management agreements. However, these agreements are guided by general provisions under the ICA. These agreements govern the nature and relationship between the operator and the owner as well as set out their individual rights and liabilities. Typically, they consist of clauses relating to fiduciary duties of the operator towards the owner, instructions by the owner for running the establishment, method of payments, indemnity and vicarious liability of the owner for the actions of the operator. The ease of conducting business under these agreements makes them the most popular choice for large established owners or operators to operate in the Indian hotel industry. Some of the key clauses, in accordance with provisions of the ICA, have been discussed below.

i Operation of the hotel

Parties to a hotel management agreement mutually agree and set out the specific terms and conditions that govern decisions regarding matters of policy, operation, maintenance and functioning and supervision of the hotel or business by the operator. In this regard, it may be decided among the parties that the operator may have exclusive control and discretions over the operations of the hotel or business or may decide that directions, suggestions, guidance and advice given by the owner from time to time, shall also be honoured and implemented by the operator, as long as they are in promotion of the smooth and efficient running of the hotel or business. Some typical mechanisms whereby owners also have visibility of the operation is by way of involvement in the appointment of the key persons, periodic meetings with the operator and his team, annual plan or budget being subject to approval of the owners, etc.

ii Licences and permits

The responsibility to obtain all licences, permits, approvals from governing authorities within the target jurisdiction required in connection with the management and operation of the hotel is borne by one of the parties, as may be mutually agreed upon, depending on the commercial understanding arrived at between the parties.

iii Management or operation fees

Terms governing the quantum, structure and method of payment – including but not limited to fees payable to the operator by the owner for services rendered or of payment of royalty by the operator to the owner for use of the IP of the owner are found at the heart of such agreements.

iv Liability and indemnity

An owner of a hotel (as principal) is to indemnify the operator against consequences of all lawful acts done by the operator in exercise of the authority conferred upon him. As the operator acts wholly on behalf of the owner, the operator is entitled to be indemnified for all such liabilities incurred and losses suffered as contemplated when the agency was undertaken or expressly set out in the hotel management agreement. The indemnity extends only to lawful acts of the operator within the scope of its authority and that are done in good faith. However, any misconduct or acts done outside the scope of employment of such an operator, will disentitle him from any claims for indemnification against the owner. However, it must be kept in mind that an operator may contractually exclude or limit its liability for negligence if the exclusion or limitation is prominent and clearly set out in the contract.18

v Term, termination and dispute resolution

It is crucial to every commercial arrangement entered into by consenting parties to incorporate such commercially suitable terms governing the duration of the agreement, events of default committed by either party that may give rise to the right to terminate such an agreement, an organised mechanism for the amicable and efficient resolution of disputes or differences that may arise among the parties with respect to any right, duty, liability or costs as contemplated under a hotel management agreement.

Further, another unique model of a hotel management agreement is a 'white label' agreement whereby the owner enters into a management agreement with an operator to manage the hotel under the brand name of the operator, in the form of a franchise agreement as opposed to the operator managing the hotel under the brand name or IP of the owner.

In India, an arrangement of the aforesaid nature may be contemplated as part of a franchise agreement or a master hotel management agreement as opposed to being termed as a white label hotel management agreement. The terms and conditions of the contract entered into between the owner and the operator of a hotel would be commercially determined by the parties.

Financing

The hotel sector in India is traditionally a capital-intensive industry involving huge capital contribution from the promoters of a hotel operating in India or from financial institutions, or both. To raise capital, hotel companies adopt various methods such as the public issue route of getting listed on stock exchanges in India, entering into joint ventures, allowing private equity-based transactions, to name a few. Also, hotel companies may make a rights issue or undertake the sale of assets to finance their ongoing projects and fulfil capital expenditures. Further, with the introduction of the new insolvency law19 in India, various debt-trapped hotel companies have turned insolvent and are on the verge of bankruptcy. This has allowed cash rich investors to acquire such stale assets and undertake distressed acquisition transactions.

Typically, lenders in these cases, are secured by way of a mortgage of either the hotel property or any other asset provided by the borrower. In addition to the foregoing, we have seen instances of hypothecation of operating accounts of the borrower or project company and also shares of the operating company being pledged in favour of lenders. Therefore, in the event of a default, a lender typically has multiple remedies available to secure the debt.

Further, under certain circumstances, hotel operators, owners and lenders enter into a tripartite non-disturbance agreement whereby parties agree that in the case of default of loan facility availed by the owner, the operation of the hotel by the operator shall not be disturbed. However, lenders in some cases avoid entering into such agreements and undertaking additional encumbrances on their right in the case of a default.

Recently, Canada-based Brookfield Asset Management acquired, including without limitation four hotel properties, certain other managed properties and a parcel of land belonging to India's Leela Hotels as part of a debt restructuring transaction for a total consideration US$558 million approximately, making this transaction one of the largest distressed sales in the hotel sector in India.20

Employment law

There exists no specific legislation regulating labour and employment practices in the hotel sector in India. The same is regulated by several legislations such as the Shops and Establishments Act,21 the Contract Labour (Regulation and Abolition) Act 1970 and the Employees State Insurance Act 1948, etc., which are applicable to employees in other sectors as well. In some instances, we have seen that projects prefer to on-board a significant part of their labour force on a contract basis through third-party contractors, thereby significantly reducing their own compliance obligations under the labour legislations, while at the same time retaining the flexibility to freely adjust their own labour forces to respond to market signals.

Dispute resolution and management

With the evolution of the hotel sector and with foreign players entering the Indian market increasingly, resolution of disputes, arising out of hotel management or franchise agreements, is perceived to be of vital importance in India. It is pertinent to note that the form and manner of negotiations conducted between an operator and owner, including the law that governs the agreement and the agreed upon mechanism for dispute resolution form the foundation of a hotel management or franchise agreement. To this end, it is recommended that parties to such agreements are mindful and ensure insertion of certain key terms to eliminate the risks that either party may be exposed to. Further, since most new players in the Indian markets are foreign entities that have entered into agreements with Indian entities and arbitration provides these entities with the flexibility of choice of law, forums for dispute resolution, the seat and venue of arbitration, it has become a more popular choice.

Most commonly, the issues encountered by players in this industry concern termination of hotel management agreements. This happens usually due to failure of operators to perform the terms of the agreement in a timely and efficient manner, leading to a loss in faith and confidence by the owner. For example, in the case of International Hotels Group-India Private Limited v. Shiva Satya Hotels,22 Shiva Satya and International Hotels Group, India (IHG), entered into a management agreement for the construction of a hotel. Due to the alleged lack of any value addition and incompetency of the IHG, Shiva Satya suffered losses running in crores. As a result of this, they terminated the concerned management agreement, subsequent to which IHG filed for wrongful and premature termination of the said agreement. Eventually, Shiva Satya was allowed to either enter into management contracts with third parties or manage the hotel on its own.

Another example of such an issue can be seen in the case of Royal Orchid Hotels v. Ferdous Hotels Pvt. Ltd 23 wherein the operator claimed, (1) wrongful termination of contract, (2) an interim injunction to restrict the owner from entering into agreements with third parties, and (3) resolution of dispute between the parties by way of arbitration. The basis of these claims was that the termination was without cause and hence, wrongful in nature. This is because under the terms of the agreement, for a valid termination, certain conditions like a prior notice of 90 days had to be met. However, the owner claimed lawful termination basis failure of the operator to fulfil its duties to provide any specialised services, as had been negotiated in the agreement between the parties. Due to the losses suffered by the owner, the court ruled in their favour and allowed them to enter into third-party agreements to recover any losses suffered.

Beyond issues of termination, there are also disputes arising due to the non-performance of contractual obligations, failure of payment of operator fees, whereby parties seek dispute resolution instead of taking recourse before civil courts or resolution of disputes by expert determination.

Outlook

Though owning and operating hotels in India can be lucrative, the same is also fraught with risks due to the cultural and the legal peculiarities involved in doing business in India. Over the next couple of years, we expect renewed focus by the government on regulating the labour policies and data protection, in line with which we can also expect the hotel operators aligning their respective operations.

Footnotes

Footnotes

1 Hardeep Sachdeva is a senior partner and Priyamvada Shenoy is a partner at AZB & Partners.

2 Automatic Route means without requiring a prior permission from the foreign direct investment regulator nominated by the government in this regard (i.e., Department of Industrial Policy and Promotion).

33 Section 9, Income Tax Act 1961.

4 Union of India v. Azadi Bachao Andolan (2003) 132 Taxman 373(SC), delivered on 7 October 2003, before the Supreme Court of India, New Delhi.

5 A.A.R.No. 1010 of 2010, delivered on 24 May 2018, before the Authority for Advance Rulings, New Delhi.

6 OA/13/2011/TM/CH AND M.P.Nos. 32 & 180/2011 IN OA/13/2011/TM/CH OA/58/2010/TM/CH AND MP NOs. 324/2010, 129/2011 & 152 to 154/2012 IN OA/58/2010/TM/CH before the High Court of Madras and the Intellectual Property Appellate Board.

7 2005 (31) PTC 625 IPAB before the Intellectual Property Appellate Board.

8 'FIR against hotel for copyright violation of Bollywood songs', Express News Service, The Indian Express, 1 June 2016.

9 Trademark No. 3386351, certificate of registration received on 17 May 2017, Trade Mark registry, Mumbai (The certificate of registration. (Available at: http://ipindiaonline.gov.in/eregister/showdoc.aspx?document_no=WFlaW1xdKC8tLywrKytYWVpbXF0%3D).

10 Examples include financial information (bank account, credit card, etc.), biometrics, health-related information, etc.

11 'Marriott International discloses hack affecting 500 million Starwood guests', 30 November 2018, The Economic Times (link: https://economictimes.indiatimes.com/news/international/business/marriott-says-starwood-database-hacked/articleshow/66882799.cms?from=mdr).

12 'Hyatt's India properties hit by malware too', 18 January 2016, The Economic Times (available at: https://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/hyatts-india-properties-hit-by-
malware-too/articleshow/50618887.cms?from=mdr).

13 Section 3 of the Bill.

14 Chapters II to IV of the Bill.

15 Chapter IX of the Bill.

16 Chapters VI of the Bill.

17 International Franchise Associations, FAQs (available at: www.franchise.org/resourcectr/faq/q 1.asp).

18 Indian Airlines Corporation v. Madhuri Chowdhuri and Ors AIR (1965) Cal 252.

19 The Insolvency and Bankruptcy Code 2016.

20 After acquisition, Leela Looks Ahead', Jena Tesse Fox, Hotel Management (link:https://www.hotelmanagement.net/own/after-acquisition-leela-looks-ahead).

21 Hotels are included in definition of the term 'establishment' under relevant state shops and establishment acts.

22 In the High Court of Gujarat at Ahmedabad, 2014 GLH(1)357.

23 In the High Court of Madras, O.A. No. 134 of 2013.

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