Mark Pestronk
Mark Pestronk

Q: Most tour operators have provided future travel credits (FTCs) to the prospective participants whose tours were canceled, postponed or rescheduled due to the pandemic. Do you think that the operators will be able to honor all these credits? If not, could travel agencies be liable for recommending that clients accept FTCs?

A: Many tour operators lack the money to pay suppliers the amounts that will be needed for future trips. As a result, there is a gap between the operators' promises to FTC holders, on the one hand, and the operators' ability to fulfill their promises, on the other.

In some cases, suppliers have already been paid, but in my experience, many have not. Instead, operators have spent client deposits on current operations in their struggle to remain in business.

My experience comes from reviewing the financial plight of tour operators that are candidates for acquisitions. Generally, the smaller the tour operator, the less cash it has on hand to fulfill its FTC commitments.

Except in California, Washington and Hawaii, U.S. laws do not require operators to hold client deposits in trust until they pay suppliers. Even in California and Washington, operators may avoid trust-account requirements by posting a surety bond. Finally, even when the funds are supposed to be held in trust, violations are not unusual.

Compounding the problem is that, to induce a participant to accept an FTC, many operators adopted the cruise lines' tactic of a credit equal to 110% or even 125% of the amount paid. So those operators will need to subsidize upgraded trips with money that they just don't have.

Another aspect of this problem involves local suppliers, such as destination management companies (DMCs). Even if they have already been paid, it is questionable whether they will be able to stay in business long enough to provide the services already paid for. The DMCs may well have already spent the money trying to stay afloat themselves.

As a result of this FTC crisis, I predict a wave of bankruptcies, closures and acquisitions in the tour operator industry. If a client's FTC never gets honored, could a retailer be held responsible for a refund?

Agencies and advisors are liable only for their own negligent acts or omissions. A disgruntled client could conceivably allege that it was negligent for an advisor to recommend an FTC instead of a refund without investigating whether the operator could make good on the FTC promise. Such an argument assumes that a refund had been offered as an option, which it usually was not, and that a retailer can somehow investigate the finances of an operator, which is impossible in practice.

So I don't see how a disgruntled client could prevail, but it is always best to deter such claims in the first place.

That's why, for the past year, I have been adding a clause to my disclaimers stating that the agency has no liability for recommending an FTC. You can find sample disclaimers at www.pestronk.com/resources

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