Q: After 9/11, lots of tour operators and even a few cruise lines went out of business after canceling all future trips and failing to make refunds. Our agency sells a lot of cruises and tours. Under what circumstances could we be liable for our clients' losses? What can we start doing now to protect our clients' money and prevent us from being held liable?
A: I expect that many tour operators will go out of business in the next year.
Many of them will spend all their money before shutting down, leaving nothing for refunds.
On the other hand, the cruise industry is much more concentrated than it was in 2001, and it is unlikely that those companies will collapse. Therefore, I would not worry about the cruise lines as much as the tour operators.
By "tour operators," I mean the entire gamut of operators that retail agencies deal with, including wholesalers, consolidators, public charter operators, land operators and package sellers, as well as sellers of escorted tours. All these businesses are inherently risky, as they require the operator to assume inventory of some kind.
The basic principle of law is that agencies and their agents are not liable for the defaults of operators, including their failure to operate or make refunds.
The same is true in every principal/agency relationship, including those in real estate and insurance.
In all such relationships, as long as the agency discloses the identity of the principal (i.e., the operator) before the sale is closed, the agency cannot be held liable for anything the principal does or fails to do. To the extent that a judge holds the agency liable anyway, the judge is making a legal mistake that can be overturned on appeal.
So the first thing you need to do is to be sure to disclose the identity of the tour operator at the time you make the sale. Add the name to the itinerary that you produce and send to the client, and make clear that the named operator is providing the service.
Even better, add the name to the bottom of a signed disclaimer that says you are not liable for the operator's acts or omissions. This step is especially important when you use a consolidator, as clients often have no idea that such a middleman is involved.
Agencies, of course, are liable for their own negligence or breaches of contract. For example, it would be negligent not to warn a client of the potential insolvency of an operator when articles about its possible financial problems have appeared in the trade press.
Therefore, be sure to stay informed and tell clients what you have read. Conversely, if nothing about the now-defunct operator appeared in the trade press before you sold the trip, it follows that you cannot be successfully sued for negligence for failing to disclose an operator's financial problems.
Although aggressive plaintiffs' lawyers might allege you have a duty to investigate the finances of each and every supplier you recommend or sell, such an assertion is ridiculous, and there are no precedents to that effect, anyway.
In my next column, I will cover other steps you can take to prevent liability for operator defaults.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email Pestronk at mark@pestronk.com.
