The effects of service charges on a travel agent's legal liability

Introduction

All of us have undertaken a journey, in order to participate in today's event. For most, no doubt, the journey was uneventful.

This paper has experienced a journey of its own. It has been a rather interesting and eventful one. Just as travel often changes the traveller, this paper's journey has been marked by a degree of transformation.

It has evolved from the time the initial precis was submitted, last July. This paper, then, is both a presentation in its own right and also a chronicle of its own evolution. This sounds far too metaphysical for the first thing in the morning.

Hopefully, both the paper and the journey will be self-explanatory.

Thesis

From the outset, it had been my opinion that there is no appreciable increase in the legal liability faced by a Travel Agency which imposes a service charge, when compared to one which does not.

Upon reflection and following the preparation involved in today's presentation, I still am of this opinion (with two minor exceptions) insofar as the consumer's purchase of travel services, per se, is concerned. However, I have come to appreciate that such a Travel Agency does face a daunting range of new and/or increased exposure, stemming from the service charge, if one broadens the scope of one's scrutiny, to look beyond the elements of the transaction itself.

This paper will explore, in turn, these two theories.

Definitions

Before doing so, however, it is essential that a few terms be defined, and concepts clarified.

In Canada, the term "service charge" and the term "service fee" are used interchangeably in travel industry circles. When used in conversation, both terms are elastic, and somewhat imprecise. As often is the case with seemingly interchangeable terms, distinctions are blurred, nuances lost and distinctions glossed over if one carelessly exchanges one term for the other. To look carefully at the details is to realize that clear definitions are required.

"Service Charges"

Thus, for purposes of this paper it would be preferable to use the allencompassing term "service charge" to refer generically to the various different types of levies imposed by a Travel Agency directly on a consumer of services (be they travel or other, corporate or leisure) either instead of or in addition to a supplier-stipulated commission payment.

Under the umbrella of this general term are three distinct types of levies. Unfortunately, the terms used in Canada to describe these three are confusing when compared to Mark Pestronk's description in his Travel Weekly columns. To the extent that I understand Mr. Pestronk's terms, the following will include, in parentheses, a sort of Table of Concordance between the two sets of definitions.

The three sub-categories of "Service Charges" are

This term is used to describe the additional levy imposed over and above the supplier's commission, to complement the Travel Agency's income on a transaction-by-transaction basis. Sometimes, it is referred to as a document fee, or administrative charge, or other such phrase. (Not surprisingly, Mark Pestronk uses the term "transaction fee" to describe this concept).

Most Travel Agencies that rely on Service Fees have a set list of services, and associated Fees, much like a restaurant's Menu, a hotel's Rack Rate or a local law association's Legal Tariff. One-off or occasional clients are charged the stipulated Service Fee.

Corporate clients or those that enjoy the leverage that is associated with volume often negotiate a reduction in, or even a waiver of, the applicable Service Fee, but the concept remains the same. It is designed to supplement, and not to replace, the supplier-sourced commission. It allows the Travel Agency to cover its costs and to make a profit on the transaction, where commission alone would not do so. Usually, it is calculated on the basis of either the client's historic travel patterns or its projected requirements, and can be revised periodically (say, every quarter) if necessary.

Service Fees seem to be the preferred alternative for Travel Agencies when dealing with consumers of leisure products, and smaller corporate accounts.

Larger corporate accounts are often accorded different treatment. In these cases, the Travel Agency will estimate its own costs to service the client over a specific time period, including both its direct (i.e. client-specific) and its indirect (i.e. general overhead) costs, add a profit component, and charge the client the resultant total. In return, the client receives the benefit of all of the commission derived from its travel purchases. This can, but does not necessarily have to, include overrides and CRS-generated revenues. Typically, Travel Agencies will want to exclude these other sources, for two reasons. The obvious one is self-interest. The other is the fact that overrides are affected by a series of unrelated factors, making it difficult to link them directly to a particular client's activity (This version seems most similar to what Mr. Pestronk's columns refer to as "cost plus management fee").

Like the Service Fee, the Transaction Fee involves an element of risk for the Travel Agent, for each requires the Agent to estimate its costs when setting the size of the Service Charge. To underestimate actual costs is to lose money.

There is little or no risk for a Travel Agent who is able to use this third type of Service Charge. It is essentially a true "Cost Plus" arrangement.

Like the Transaction Fee, it involves both a cost and a profit component. Unlike the Transaction Fee, the cost component is actual, not estimated. In other words, it is calculated on an after-the-fact basis, and is subject to the client's vetting, if necessary. This variety is less frequently used, for it works best in the rare cases where the Travel Agent's facilities and personnel devoted to the client are separate and identifiable. Such segregated costs can be tallied easily, and then it remains only to add a percentage of operational overhead expenses, and the profit component (This concept does not seem to have a direct counterpart in Mr. Pestronk's list. His third type of Service Charge is the "direct cost plus transaction fee" which has not surfaced to my knowledge in Canada. It seems to involve the recoupment of direct -- but not indirect -- costs plus a transaction fee (Pestronk terminology) or Service Fee (Canadian terminology) that is designed to capture both indirect costs and profits).

The key distinction among the three types of Service Charges is the extent of the Travel Agent's commercial risk. The levy for a particular service is typically lower where commercial risk is smaller (e.g. Management Fee) and higher where commercial risk is greater (e.g. Service Fee and Transaction Fee).

For reasons set forth below, I do not believe that the particular type of Service Charge affects the general conclusion set forth in the Thesis section above. Thus, while the three types involve different degrees of commercial risk, there is no discernable differences in the legal risk for the Travel Agency.

Context

It is also necessary, as a preliminary step, to confirm the factual context within which Service Charges have recently become relevant in the Canadian (and American) travel industry.

Traditionally, Travel Agencies derived their income principally, if not solely, from commissions. Source-deducted, after-the-fact overrides, or paid by post-travel cheque, these revenue streams provided the wherewithal, in general, to operate a retail office.

In this largely vanished world, the cost associated with a specific task, or transaction, was largely irrelevant. In the name of client service, a Travel Agency would take on an extra expense (e.g. courier charge, visa application cost, free upgrade, etc.) for a client, without direct reimbursement or extra payment, since the commission on some other task or transaction was sufficient, in the sum, to cover both. The one cross-subsidized the other. Unit costs were of little relevance.

The result was a business model that made little business sense. As noted by Dr. Robert Joselyn: "Agencies have attempted to make a reasonable profit by living off the commissions paid by suppliers for the services provided to them, with the hope that these commissions would be large enough to cover the costs of the services given away to the travel customer."

Something had to change, and it did. Led by scheduled airlines, various suppliers have in the mid-to-late-1990's reduced commission rates and capped commission payments. The Travel Agent's ability to cross-subsidize has largely been lost. The "extra" commission on one task or transaction was no longer available, to pay for the unreimbursed expense of the other.

As a result, unit costs, transactional expenses and incremental costs have become very relevant concepts indeed, for Travel Agency owners and managers.

To a large extent, Service Charges have filled the financial void created by commission caps and rate reductions. Howsoever calculated, they have become a principal (and in some cases almost the sole) revenue stream. In Canada, all of the significant retail chains levy Service Charges. So do many of the smaller operations. There are still some holdouts, but they are fewer and fewer every month, suffering no doubt the consequences of the decision not to resort to Service Charges.

In another context ("Survival Strategies for Travel Agencies" [1999] International Travel Law Journal 142) I have referred to the results of a recent ASTA survey of its members, the results of which have been cited in its Agency Management magazine. It indicated that three-quarters of the respondents levy service charges. A similar ratio would apply in Canada.

This contrasts starkly with a rough survey Travel Weekly published in its August 14, 1995 "Focus" supplement. This, of course, dates it only six months after the February 1995 announcement that commissions on US domestic flights would be capped. Canvassing "57 of the largest agencies in the US, plus a half dozen of the major consortiums and franchise organizations" it noted on page 10 that approximately 13% of the large retailers' corporate clients were affected by a Service Charge, prior to the commission cap announcement. On the leisure side, Trave Weekly notes at page 12 that: "charging fees to leisure clients, even by largely corporate travel agencies, was a relatively rare policy before commission caps. Of the 44 agencies that responded to our questions about their precap policies, 32 charged no fee at all and only four charged fees to more than 5% of their leisure clients."

Quite a change in five short years. In fact, one could even say four years, for according to the February 8, 1996 issue of Travel Weekly, only 27% of nearly 3400 ASTA agents surveyed were levying service charges.

This brief time span must be kept in mind, for it is an important part of the context. It must be acknowledged that Service Charges are of quite recent vintage. Even though most Travel Agencies now rely on them to a greater or lesser degree, there has been comparatively little time for a Service Charge to give rise to a consumer dispute, and catalyze a lawsuit that has worked its way through the court system to a judicial conclusion.

Thus, one is left largely to project and to predict, and not to analyze. It is with this factual background, and within this context, that one must proceed.

Service charges, per se

The advent of Service Charges, in and of themselves, has not increased the legal liability faced by a Travel Agent in Canada. In order to understand why this is so, one must review the traditional (i.e. pre-Service Charges) transactional model.

In the traditional model, there are three parties to the transaction.the supplier, the travel agent and the client. The interrelationships among them are best represented by a triangle: Supplier, Travel Agent Client

It represents graphically the three paired relationships involved in the typical sale of travel. Each of the three is a contract, with consideration flowing in each direction, in each pair.

Relationship #1 involves supplier and client. In it, the supplier provides the travel service in return for the passenger's payment of the appropriate fare, rate or fee. It is to this contractual relationship that the travel agency is often viewed as the legal agent (of the supplier, or the client, or both), and in which he can often avail himself of the Disclosed Principal defence, in the event that one of the two contracting parties alleges a breach by the other.

Relationship #2 involves the supplier and the travel agent. In it, the supplier pays a commission (and may provide co-op advertising or other benefits) to the retailer. In return, the retailer provides local representation of the supplier. Included in this package of services would be advertising, access to the agency's clientele, point of sale transactions, etc. Air carrier suppliers (through IATA or ARC) are the ones most likely to have this contractual relationship reduced to writing. Nevertheless, the contractual relationship exists, whether or not it is the subject of a written agreement, with respect to all traditional supplier/agency relationships.

Relationship #3 involves the travel agent and the customer. In it, the travel agent provides counsel and advice to the client, as well as a fair degree of added convenience in the form of communication costs avoided, time saved and so forth. In return, the passenger confers on this particular travel agent the opportunity to earn the supplier's commission. This is the consideration provided by the traveller.

She could have just as easily gone to the competitor across the street, and given to it the chance to earn the supplier's commission. Note that in this traditional model, there already is a contractual relationship between Travel Agent and client. It is not as though the introduction of a Service Charge creates for the first time a contractual nexus between the two. Recognizing this fact makes it easier to accept the conclusion that Service Charges per se do not cause a sea change in the Travel Agent/client relationship.

Whether or not the Canadian courts expressly adopted this traditional model, they certainly have acted on the basis of it. No doubt many American cases will also come to mind, to illustrate this point. Here are a pair of Canadian cases, pre-Service Charges, in which Travel Agents have been found liable in contract to a passenger. Both are more than twenty years old, which distances them considerably in time from the Service Charge-era atmosphere of today.

The key facts in Fuller et al v. Healey Transportation Ltd. (1978) 22 O.R. (2d) 118 are quickly summarized first family holiday in 31 years of marriage whole family to Disneyworld in Orlando, departing December 26 passengers and agency located approximately 2 1/2 hours away from Montreal and its two airports (Dorval and Mirabel) passengers arrived at Mirabel, looking for Eastern Airlines counter rush to Dorval, without success attempt via Toronto, without success return home, via Ottawa

The key question for the court was whether or not the defendant agency had properly directed the plaintiff family to Dorval. Hard evidence was sketchy on both sides, so it became a question of comparative credibility. The court found in favour of the passengers, concluding "...that there was a breach of contract between the defendant and the plaintiffs, and the defendant is liable for this breach of contract."

Nowhere in the judgment does the court define the terms of the contract between the Fullers and Healey Transportation. It did not even find as a fact that such a contract existed. The contractual relationship was so patently obvious that it did not require any judicial acknowledgement other than as to its breach, by the defendant. In other words, well before commission caps were a gleam in the eye of an airline accountant, and well before Service Charges were introduced, this court was very willing to find a contractual relationship (complete with contractual obligations owed by retailer to customer) between passenger and Travel Agent. So, too, was another Ontario court that same year.

In Volk v. Schreiber et al (1978) 18 O.R., (2d) 446 the plaintiff was again a traveller, and the defendant a Travel Agency. Summarizing the key facts, one finds: plaintiff booked a package tour which included motor coach travel from Afghanistan into India defendant advised that an Indian visa was not required, based on a reading of what the court called "the bible of his trade" the manual said, in effect, that a visa was required unless one stayed less than 28 days, unless one was a national of several named countries or unless one was arriving overland clearly, the counsellor got confused by the exceptions to the exclusion, or in the small print, and gave wrong advice

The court so found, ruling:"...that the defendant was in breach of his contractual obligations as the travel agent for the plaintiff and, accordingly...judgment should go for the plaintiff..."

Once again, the judgment did not build, step-by-step, from establishing the contract to concluding it was breached. Rather, it assumed the clear existence of a contractual nexus between Mrs. Volk and the Schreiber agency, then found that the latter had breached it the obligations that such a contract imposed.

Many more examples exist. Some use language that suggests a lack of judicial clarity as to whether the Travel Agent's liability sounds in contract or in negligence, but there is and always has been a clear propensity to hold the Travel Agent contractually accountable to the passenger, for its own errors, even in the absence of a Service Charge.

These various cases illustrate clearly that a Travel Agent can find itself liable in contract without there being a Service Charge levied. Indeed, it is hard to imagine the defendants' liability in these two sample cases being exacerbated if a Service Charge had been levied.

Hence, the observation that, by and large, the imposition of a Service Charge does not increase the Travel Agent's liability to the passenger, per se. Given this reality, a Travel Agency may as well impose a Service Charge, for it will help to defray the expense associated with the potential liability deriving from that relationship.

Two minor exceptions to this general rule need to be noted. Both involve fact situations at the extreme ends of the Principal/Agent spectrum.

The first exception involves the rare instance in which the classic principal/agent model applies with almost textbook perfection. For example, if a passenger asks the Travel Agent to effect a reservation for one on Flight 789 of ABC Airlines, leaving at noon on January 11 and returning on its Flight 987 at 9:00 a.m. on January 13. No counsel or advice is sought, or provided. It is simply a clerical process. If there is virtually no consideration from the Travel Agent to the passenger, (i.e. it is simply carrying out express clerical instructions and not providing any professional guidance) then the contractual obligation borne by the Travel Agent would be very small.

In this situation, the imposition of a Service Charge could well raise the bar significantly, exposing the Travel Agent to a degree of liability it might otherwise have avoided. (One must remember that the Disclosed Principal defence applies only to supplier-sourced problems. It does not insulate the Travel Agent from the consequences of its own mistakes.) If the area within which a Travel Agency can make a mistake is minimized (as in this example) then the benefit of that minimization can indeed be sacrificed if a Service Charge is levied.

This is due to the fact that some additional consideration would likely be found to have passed from the Travel Agent to the consumer in return for the Service Charge. After all, if the passenger could have gotten his ABC Airlines ticket without a Service Charge, and if he has in fact been asked to pay such a levy, then a Court will almost assuredly find that the retailer has taken on an additional, or a higher, duty to the consumer. The consideration flowing from the Travel Agent should be simply the convenience afforded the passenger who does not have to deal with the carrier directly. One suspects however that a court will find a higher substantive level of performance is required. The Travel Agency runs the risk of running afoul of that new standard, making this one of the instances in which the imposition of a Service Charge can augment a Travel Agent's liability.

The second exception arises at the other end of the spectrum, where there is no agency relationship at all. Where the Travel Agent buys irrevocably the travel services provided by a supplier, and then resells them to the passenger, the Travel Agent has taken on the mantle of principal, and is responsible for all aspects of the travel services. In this case, the Service Charge is blended into the retail price, but the fact it is hidden does not negate its existence. In fact, its existence will increase the Travel Agent's responsibility, and thus its potential liability.

Aside from these two (comparatively rare) exceptions, then, the general observation holds. The imposition of a Service Charge does not increase the Travel Agent's legal risk to the passenger, per se. Neither does it preclude the Disclosed Principal defence, for (except where the Travel Agent buys for resale) the existence and characteristics of Relationship #1 are not affected by the presence of a Service Charge.

In fact, a Service Charge may well improve the Travel Agent's legal position, vis-a-vis the traveller. It may do so for two reasons.

In the first place, in order to exact the Service Charge, a Travel Agent must articulate what it is for and how much it will be. Being obliged to do so has a beneficial by-product. At least in theory, it forces one to be clear. Compelled to set forth with precision what exactly it is that it is doing in order to earn the specified amount, the Travel Agency will each have a clearer understanding of the specifics of their contract. So, too, should the consumer. This will result in less confusion, and less risk of a conflict spawned by misunderstandings.

This benefit is to a certain extent theoretical. It will become practical only if the Travel Agent does indeed take the time to disclose the details. For reasons that will become apparent later, non-disclosure is not a real problem in the jurisdiction in which I practice, for disclosure is a statutory obligation. One suspects that in jurisdictions without such a regulation, the temptation to be lax about disclosing details may be greater, and so too the risks associated with it.

The second beneficial by-product is a specific instance of the first. If the Service Charge leads to the need for a written clarification of the services being charged for, it can also lead to a written disclaimer of liability. If a written agreement is necessitated by the Service Charge, one may as well take advantage of its existence, by using it to limit one's liability.

Naturally, an attempt to restrict liability must be clearly brought to the attention of the client. Another travel case from 1978 is still referred to as being pivotal in this area of the law. The particular ruling in Tilden Rent-A-Car Co. v. Clendenning (1978) 18 O.R. (2d) 601 went against the business that was trying to rely upon a pre-printed disclaimer clause, but the principle it established has often been relied upon, successfully, by other business which do meet the standard that Tilden set.

The facts in this case are not particularly unique. Essentially, the car rental company tried to rely upon some provisions of its standard car rental agreement. In order to determine if the clause should apply, the Ontario Court of Appeal had to define the onus on Tilden, in terms of its disclosure to the renter of its words of limitation. The Court defined the rule as follows: "...the party seeking to rely on such terms should not be able to do so in the absence of first having taken reasonable measures to draw such terms to the attention of the other party...."

The car company in Tilden had manifestly failed to meet this standard. But an informed Travel Agent, aware of the Tilden standard, can easily satisfy the onus of disclosure if it wishes to take the time to do so. The result can be a limitation (and even a waiver) of legal liability, despite the presence of a Service Charge.

In short, the relationship between passenger and Travel Agent matures when a Service Charge is levied. The need for clarity is one of the beneficial by-products of that maturing process. An astute Travel Agent can take advantage of this fact, by both defining and limiting its legal obligations to the passenger.

Looking specifically at the Travel Agent's liability to the passenger to whom it levies a Service Charge, and at that particular transaction per se the addition of a Service Charge does not create a new type of liability, nor does it appreciably increase any existing type of exposure; in fact, it can offer to the Travel Agent an opportunity to control the legal liability it already faces simply by entering into that transaction.

Widening the focus

Drawing back the focus from the specific transaction, however, one can be left with quite a different impression. Service Charges carry with them the seeds of potential liability in a number of collateral ways. Sometimes, the risk is largely commercial, and not purely legal, but this does not render the risk irrelevant. The balance of this paper will identify briefly a few examples.

It is trite law that a contract requires the meeting of the parties' minds. A Travel Agent that has decided to impose a Service Charge has only gone half way to being able, legally, to charge it. In order to finish the task, it must be certain that the client has concurred, and that it can if necessary prove that this is so.

This task will be relatively simple in the case of a Management Fee or Transaction Fee, where there should be a clear paper trail. Even still, there can be a challenge to getting clear evidence of client concurrence. Written agreements are advised. In the case of a Service Fee, clear disclosure (on in-office signs, on invoices, orally, etc.) is mandatory.

One must expect a Court to be very pro-consumer in its orientation if faced with a case in which the client professes not to have been informed about the specifics of a Service Charge. Credit card companies will certainly reverse such a charge in the face of a client complaint. The solution lies in avoiding entirely the allegation of non-disclosure. If the charge is reasonable, there is no commercial reason to hide or even to soft-peddle the existence or the amount. And there is every legal reason to err on the side of caution in terms of full disclosure.

When the first round of caps and cuts affected Canadian Travel Agents, I had an opportunity to see first-hand how one of our firm's clients dealt with the issue. The owner convened a series of meetings involving his major corporate clients, perhaps five or six at a time. He led them through the issue with the assistance of a Powerpoint presentation, explained the impact upon his company, laid out several options, and invited comments.

Silently, I sat in on one meeting, in order to observe. The reaction convinced me of the merit of full disclosure of the details of Service Charges and the reasons behind them. Fairly quickly and without dissent, the group was clamouring for the imposition of a Service Fee, rather than have to face the alternatives.

Subsequently, this owner has moved many of these same companies to a Transaction Fee or a Management Fee relationship. By and large, he has done so without dissent. Much of his success in both the commercial and the legal way in which he implemented Service Charges stems from the way in which he avoided leaving his clients uninformed. A counterpart who is less successful at this will likely face increased risks.

While recognizing that this point is quite jurisdiction-specific, it is still a point worth noting. In the preceding paragraph, the risk of non-disclosure lay in the inability to prove civilly the legal entitlement to the Service Charge. The jeopardy was limited to the amount of the disputed levy.

In the Province of Ontario, however, there is an additional risk associated with non-disclosure. It is a quasi-criminal offence. The Travel Industry Act, RSO 1990, c. T.19, as am. governs the trade in Canada's most populous province. In 1993, well before Service Charges were considered to be anything but an occasional event, regulations were passed pursuant to the authority of this statute. Section 32 of Ontario Regulation 806/93 as am. Reads as follows:

"A travel agent who charges a service charge or non-refundable fee for counselling with respect to travel services shall inform the customer of the existence of the charge or fee before counselling or selling travel services to the customer."

A breach of this regulation exposes one to prosecution under section 25 of the Act itself. Upon conviction, an individual faces a maximum fine of CDN$25,000 and/or imprisonment of up to one year, and a corporate entity faces a fine of up to CDN$100,000. To my knowledge, no conviction has been sought under this section, but its existence and the severity of the potential punishment is a very real collateral risk faced by Ontario Travel Agents who opt for Service Charges.

Even if a customer has been fully informed to the legal standard required by common law or by statute, he may still expect more of the Travel Agent in a practical sense than the agent is officially obliged to provide. The client's thought process would be much like this:

"I could have gotten this ticket from a machine, or by calling some disembodied voice in another jurisdiction, or over the Web. Instead, I dealt with you. You charged me fee for something I could have gotten in these other ways without having to pay that fee. Now, I have a problem with the supplier. Don't talk to me about disclaimer clauses and limited obligations. I paid for 'something extra' and you had better give me that 'something extra' by solving my problem."

This amounts to an increase in accountability, moreso than an increase in liability. But as accountability is only a small step away from liability, it is a reality that cannot be ignored. It amounts to an increased risk that is faced by every Travel Agent who opts for a Service Charge, even if the counsellor handles the actual transaction perfectly from the point of view of legal compliance.

It is, in short, another of the collateral risks that seem to be associated with the imposition of Service Charges.

As the types and the amounts of Service Charges proliferate, they start to attract the same problems that one associates with the multiplicity of air fares.

Just as an airline sales person or a travel counsellor can become confused by the myriad of fare types and applicability rules, so too can the counsellor who is processing a transaction that is subject to a Service Charge, especially if it is a Service Fee. She can apply one client's regime to another client. Human error can creep into the process.

In this way, one client can learn of the different treatment that it is being accorded, when contrasted with another client. If the former is being treated less advantageously than the latter, the result could be much like the traveller who discovers that she paid more for a seat on an aircraft than did the seatmate beside her.

Such comparisons, and the animosity that they can spawn, can also arise if a staff member at the latter client moves to the former, and advises of the different scale of levies. Legally, there may well be a legitimate and totally defensible reason for the different treatment. But practically speaking, it is human nature to want the better deal and also to take offence if one feels taken advantage of, even if the feeling is groundless. This is another of the collateral risks associated with Service Charges.

Suppliers are humans, too. They too can take offence at a real or perceived slight. It is not uncommon (and quite legal) for a Travel Agency to levy a higher Service Fee on the product of Tour Operator X than is the case with Tour Operator Y, where the latter is a preferred supplier. The intent is to drive the consumer toward the preferred supplier.

It is possible for Tour Operator X to un-appoint such an Agency, in retaliation. Perhaps the loss of that product line will be inconsequential. But just as easily it could represent a loss that will be felt. Once more, this is a collateral risk that should be taken into account.

The risk takes on a legal aspect if the Travel Agency is part of a consortium of independent outlets, all or most of which engage in the practice of imposing different levels of Service Charges in support of the consortium-wide selection of a preferred supplier. A victimized and vituperative tour operator could allege that such a widespread practice is a conspiracy, or otherwise contrary to the rules of fair competition. Both Canada and the United States have laws against anti-competitive activity. Business people in both jurisdictions try to stay as far away as

possible from such laws, for the costs and implications of entanglement are great. Simply put, the risk is rarely worth the reward.

The same can be said of attempts by competing Travel Agents to try to agree upon the level of Service Fees in their area. The allure of the idea is understandable, but the risk of violating Canada's Competition Act or its American counterpart is simply too great to justify.

Usually, one buys insurance in order to minimize a risk. Errors and Omissions insurance is a vehicle used by some Travel Agencies for dealing with the commercial risks inherent in the operation of a retail business.

Most such policies are underwritten on the basis that the Insured is a commission-earning agent in the traditional sense of the word. The wording of such policies may well restrict its applicability to such situations.

Put another way, a Travel Agent that ventures into the field of Service Charges may unwittingly take itself outside the ambit of its insurance coverage. Much will depend on the definitions in the individual policy. A Travel Agency that fails to review the wording of its policy of Errors and Omissions coverage may find it has, without realizing it, taken on another of those collateral risks associated with a Service Charge policy.

Canadian Travel Agents must also consider a trio of other collateral risks, that are not necessarily relevant to its American counterpart.

First, federal Canadian law prohibits the rebating of commissions on international scheduled air transportation. In recent memory, the law has been honoured more in the breach than the observance, but it still exists. To the extent that a Transaction Fee or a Management Fee entails just that (i.e. the rebate of commission on a scheduled international flight), it is a technical violation of Canadian law.

Second, there is to be considered the parallel rule in the IATA Resolutions, to the same effect. By signing the Passenger Sales Agency Agreement, an appointed agency agrees contractually to abide by IATA's raft of rules. Section 14.2 of Resolution 804 obliges the appointed agent to sell a carrier's scheduled international tickets: "...in strict compliance with the fares, rules and conditions applicable to the sale, as published in the Member's tariffs......". The agent's failure to do so can jeopardize the appointment.

With respect to domestic and transborder traffic, the Air Transport Association of Canada imposes upon its appointees a similar limitation, also in section 14.2.

Third, there is the need to comply with Canada's Goods and Services Tax rules. This value-added tax was implemented in the early 1990's. Its impact on some of the idiosyncratic types of transactions in the travel industry is still evolving. Consolidators in particular have encountered difficulties in dealing with Revenue Canada.

Service Charges offer another area of potential problem, given the inherent set-offs involved in the Management Fee and the Transaction Fee. Revenue Canada views as two separate transactions the agency-to-client transfer of the commission and the client-to-agency payment for the agency's expertise and management. Each attracts the 7% GST. To set one off against the other, and to treat the difference between the two as being the only taxable transaction, is to violate the law. Once again, even if the transaction itself is handled properly as between Travel Agent and client, there is a legal risk in the event that the GST rules are not observed appropriately.

The final set of collateral risks arises on the sale of an agency. Specifically, it involves a sale in which there is a price reduction clause.

Most agency sales include such a clause. It effects a reduction in the agreed-upon sale price if the business's post-closing performance does not attain a certain specified level. Historically, that level has been defined in terms of "commission revenue". Should "commission revenue" in the year after closing amount to, say, 91% of "commission revenue" in the last fiscal year pre-closing for which figures are available, then the price of the agency will drop by 9%, to reflect the fact that sales dropped by that percentage.

Now, the relevant term has to change, and so too should the definition itself. An agency's revenue stream will now likely include more than just "commission". It will include "Service Charges" as well. A buyer or a seller can suffer significantly if this fact is ignored.

The same is true where the buyer and the seller follow different Service Charge policies. Consider, for example, a situation where the vendor will suffer if the Agency's revenue drops in the year after closing. It could be that it will indeed drop if the purchaser: eliminates (or reduces) the Service Charge policy that had been followed, thereby curtailing revenue, orimposes (or increases) Service Charges, thereby driving away clients and the revenue they represent.

Both buyer and seller MUST look even more closely than ever before at thedefinitions and the clauses that effect the price reduction part of the typical sale. If not, either one or the other will have to bear another of the collateral legal risks referred to above (In a related vein, the buyer of a non-Service Charge agency should consider negotiating a term of the agreement by which the vendor is obliged to effecta specified set of Service Fees, prior to closing. This has the dual benefit of having the vendor -- who, after all, has the connection with the clientele -- introduce the fees, and having both parties understand the rules under which the game will be played during the post-closing price adjustment period.)

Until all Travel Agents implement Service Charges, the process of buying an Agency will be very much like the World Series, where one team is used

to having a Designated Hitter and the other is not. Care will have to be taken to avoid confusion.

Conclusion

This brings us to the end of today's journey. As is always the case when travel is involved, the process was enlightening for me. I now look forward to returning to my seat, to be taken on other journeys, by today's other speakers.