Q: As if dealing all day with refunds and future credits weren't enough, now I am worried about something else. Based on my memory of 9/11 and the Great Recession, I have no doubt that some suppliers that promised future credits are going to go out of business before all my clients have taken their rebooked trips. If a supplier ceases operation before a rebooked trip can take place or a future credit can be used, could my agency be liable for the cost of a future trip? Also, in a bankruptcy case where the supplier kept operating in Chapter 11, would the supplier have to honor the future credit?
A: The general rule is that an agency is not liable for a supplier's breach of contract such as failure to honor a promised credit. Nor is an agency liable for the supplier's cessation of operations.
That's why, when I hear that clients tell agencies, "I am going to sue you because my contract was with you, not the supplier," I have to explain that a travel agency is just the sales agent for the supplier and is not liable for the supplier's acts. The client's only legal remedy is against the supplier.
However, there is an exception to the general rule: If your travel advisor selected or recommended a supplier whose financial troubles had been reported in the trade press, your agency could be held liable for negligent selection of the supplier. Note that the advisor would have had to select or recommend the supplier; if the client decided on his own, the exception would not apply.
Note also that the advisor must have had a reason to know about the supplier's financial troubles because they were reported in the trade press and not the general media. If they were widely reported in the media -- as was the case a decade ago with the major U.S. airlines -- then the exception would not apply.
So, to avoid liability for refunds and the cost of alternate arrangements, make sure that your advisors read the trade press and avoid selecting or recommending suppliers that have been the subject of articles that would make you wonder if they are going to survive.
Another key step to protect your agency is to have clients agree to the terms and conditions in a disclaimer stating that your agency is not responsible for supplier defaults. Samples of such disclaimers can be found here.
If the supplier files for bankruptcy, it can "reject" all contracts calling for future performance such as credits for future trips. A bankrupt company has these powers regardless of whether it ceases operations (Chapter 7) or continues to operate (Chapter 11).
Such a rejection could make the client blame you for having recommended the credit rather than a refund, if a refund had been available. So, if a supplier is offering both refund and credit options, make sure that you recommend credits only if you have no reason to know of the supplier's financial trouble.