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Crying out for clarity? Med Hotels, and the latest on agency in the travel industry…

Crying out for clarity? Medhotels, and the latest on agency in the travel industry

It sometimes seems that travel law has, in recent years, transmuted into agency law. The reasons are obvious. There are just so many advantages to companies who can lay claim to agency status. For example:-

  1. Avoiding TOMS VAT
  2. Avoiding the cost of bonding (subject to the agent not having sold a Flight-Plus under the ATOL Regulations 2012)
  3. Above all, avoiding the cost and risks of liability, when things go wrong – whether quality complaints, or injuries suffered by customers whilst using the services booked.

(Note, in respect of point 3 above, that even if acting as agent, there remains the possibility of liability – and all the other duties imposed under the Package Travel Regulations – if a combination of services is sold at an inclusive price).

It is in the first of these areas, that of TOMS VAT, where there has been much recent activity in the courts, especially in the recent Court of Appeal decision in the Medhotels case.

It has always been said that agency is a question of fact, not law. The case law demonstrates the importance of looking at the reality of the transaction. In International Life Leisure v Revenue and Customs Commissioners (vat19649) 2006, the appellant (“ILL”) contended that they were mere agents when selling hotels and apartments. But it was held that the contract terms meant that the consumer was buying from ILL as principals; the accommodation owner was not identified as the principal on the contract documentation, and there was no obligation on the consumer to pay the owner; further, ILL accepted responsibility for the quality of the accommodation and was entitled to make changes to the accommodation booked. There were other provisions too eg cancellation charges by ILL, and the right for ILL to mark up the owner’s price. In the circumstances, although the word agency was used, the plain facts were found to be that ILL acted as principal.

In the High Court, in the case of Secret Hotels2 Limited (formerly Med Hotels Limited) v Commissioners for Her Majesty’s Revenue and Customs [2011] UKUT 308 (TCC) (usually called the Med Hotels case), a different result was achieved.

The First-Tier Tribunal (Tax Chamber) (“FTT”) in 2010 had originally  found that in its sale of accommodation, Med Hotels (“Med”) was acting as principal; this, despite the fact that Med had made it pretty clear in its contract with consumers that it claimed agency status. and it relied inter alia on the following points:-

–         The contract with the hotel imposed many duties on the hotel, but Med were only required to deal accurately with bookings + relay money.

–         Med imposed cancellation charges on consumers where their contracts with hotels had no such requirements.

–         If the hotel could not provide the accommodation, Med agreed to try to find alternatives.

–         Med provided ‘reps’ in resort to look after consumers, there being no obligation imposed by the hotel to do so. The contract between Med and ground handlers for these services referred to consumers as Med customers.

–         Med dealt with customer complaints, sometimes paid compensation and recharged the hotel for it, despite the hotel contract having no provisions which permitted this. Sometimes Med gave out discount vouchers, redeemable against any hotel which they featured.

–         Above all, Med defined their commission as being the difference between the hotel’s price to them and their price to consumers. This was held to be inconsistent with agency, especially as it was said that the hotel would not even know how much Med charged, and therefore how much the hotel should declare (if it were the principal) for VAT purposes.

 

On appeal to the High Court (Upper Tax Tribunal, strictly), there was a very different result indeed. Morgan J held:-

–         In construing a contract, whilst one looks at all of its provisions and the relevant background, “The court cannot be influenced, when construing a written agreement, by material which would not have been available to the parties when they entered into that agreement”. [Para 88]

–         This means that in construing the contract with consumers, it is immaterial what the contract with hotels or ground handlers etc may say, as consumers would not have seen these.

–         The contract with consumers said: “ Medhotels.com act as booking agents on behalf of all the hotels, apartments and villas featured on this website……Once the contract is made, the accommodation provider is responsible to you to provide what you have booked and you are responsible to pay for it”. There were other terms reinforcing this.

–         “In the absence of an allegation that the written agreements were shams……I do not see that I am able to disregard the effect of the written agreements”. [Para 128]

–         Whilst there is a difference between supplying as agent, and supplying by resale, none of the surrounding circumstances in this case were inconsistent with agency. The judge analysed previous cases in which the calculation of a commission by way of a mark-up was held to be a permissible feature of agency. Providing reps, and paying compensation, were held to be entirely consistent with Med’s “protecting its own economic interest in the arrangements” [Para 128].

–         The hotels could see what price Med was charging by looking at Med’s website, where the prices were available to be viewed by them . [Para 18].

–         The correct approach is ordinary English common law construction; nothing in VAT law is relevant or requires a different result. [Para 114]. There was nothing economically unreal about agency in this case.[Para 112].

–         “Finally, it [The FTT] seems to have regarded anything which could be argued to be inconsistent with an agency relationship as far more weighty than the many matters which pointed unambiguously towards an agency relationship.” [Para 133].

 

Medhotels – Court of Appeal

Now let’s see the reasons why the Court of Appeal (at [2012] EWCA Civ 1571) held that Medhotels (then owned by Lastminute.com) were in fact acting as principals (not agents) and were therefore liable for TOMS VAT (and by implication, potentially liable for errors and negligence by hotel staff):-

–          Medhotels dealt with holidaymakers in its own name (Note: it is far from clear whether this  (“acting in its own name” ) is sufficient to damn Medhotels on its own or whether one needs to read it to mean “in its own name, and not as mere intermediaries”; after all, EVERY agent does some things in its own name. I understand that ABTA is seeking clarification on this point).

–          Medhotels provided reps in resort

–          Medhotels offered alternative hotels if the original hotel became unavailable

–          Medhotels itself dealt with complaints and granted compensation/vouchers

–          Medhotels received deposits and other monies into its own account.

–          Medhotels set the price itself, reacting to market conditions, and  treating as its commission the difference between the hotel’s net price, and the price it obtained from consumers (which price the hotel was said to be unaware of).

So basically, the Court of Appeal have reinstated the decision of the First Taxt Tribunal, but with slightly different emphases as to the grounds.

 

But why have Medhotels (and many other similar companies) become so successful? After all, it is perfectly possible for consumers to telephone or email an overseas hotel or apartment block, and make a booking direct (or via the hotel’s website), and indeed some do that.  But I venture to suggest that the reason many consumers like the Medhotels model is that it offers them the following:-

–          An English language service, dealing with an English company in its name, involving payment being made to a ‘nice, safe’ English entity.

–          An opportunity to compare prices, and be sure the price is competitive, reflecting an ever changing market

–          If the hotel overbooks or becomes unavailable, a warning  about that in advance, together with a wide range of alternative options

–          Someone in resort to look after them, and ensure they get what they bargained for.

–          Easy access to compensation, or possibly a voucher to spend on a wide range of accommodation in future.

I believe that consumers readily understand that Medhotels act as agents for the hotel (etc), and indeed they are clearly told this anyway, in paperwork which is very clearly written.  But this Agency Plus model gives consumers so much comfort and support – surely a good thing!

 

So the very factors which make this model attractive are the ones which make it (probably) too expensive to operate! Is this in the public interest?

And then there is Flight-Plus. Just when the CAA is  embarking on widespread advertising and education of consumers, the whole viability of Flight-Plus is called into question by the Medhotels decision. Yes, the ATOL Certificate makes agency status clear – but so did Medhotels. The ATOL Regulations require Flight-Plus arrangers to offer alternatives and to compensate in some situations, and to look after consumers in various ways; how safe is the apparent assurance by a (cash-strapped)  HMRC that offering Flight-Plus won’t (on its own) make the Arranger liable for TOMS VAT? And that’s without thinking about the effect of the Titshall v Qwerty Travel decision, where a court held that Qwerty were liable for accidents as a package organiser, because the consumer thought he was buying what looked like a package.

The other unintended consequence is likely to be an accelerated trend for Bedbanks to move offshore – hardly a benefit for the Treasury – in fact a real own goal!

Traditional package organisers will be pleased by the Medhotels decision as it reduces the competitiveness of rival models. All others will be wishing success to Lastminute.com in their attempts to appeal to the Supreme Court – and supporting those attempts.

by Stephen Mason, Travel Law Quarterly

 

 

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