Why are so many hotel projects ending up in litigation?

Nobody could fail to be moved by the shocking images and footage from the New Orleans Hard Rock Hotel. An 18-story, 350 key new hotel was under construction close to the city’s French Quarter when the upper floors of the building collapsed on 12 October 2019. The accident killed three workers and about 30 others were injured.

The cause of the collapse is under investigation and it will be some time before the reasons for the accident are known. The eleven lawsuits filed over the last few weeks provide an insight as to what may have gone wrong. The claims include allegations that structural props were inadequate to support the upper floors of the building and that insufficient time was allowed for the concrete to cure. The claims raise issues to be established during later stages of the litigation.

Building failures of the type seen in New Orleans remain a rare occurrence but regrettably there are other examples.  The Harmon Hotel in Las Vegas was due to open in 2009 but its opening was suspended for years. The hotel was subsequently demolished on public safety grounds as an investigation identified insufficient coordination between the installation of the steelwork and the placement of the concrete, with some steelwork having been moved without the approval of the structural engineer.

It is too early to tell whether there is any connection between the issues raised in Las Vegas and the events in New Orleans. Whatever the causes, there are steps that all hotel owners can take to minimise risks with their projects:

Avoid making cost or time savings during the design stage. Compressing the design programme can be tempting but often result in later problems. These include insufficient coordination between consultants and contractors. Additional costs can also be incurred though consultants producing conservative tender documentation with additional factors of safety embedded in their designs;

There can be no substitute for a well scoped tender package. Tendering with insufficient design information is unlikely to result in a robust contract price. Contractors may have to qualify their returns with provisional sums if the tender pack is inadequate or the works may have to be remeasured against a bill of quantities.  In some cases, tenderers who offered the lowest price to win a job may seek to recoup their margin by exploiting missing or incomplete information;

Avoid making changes once construction works start on site. Late changes remain one of the main causes for cost delays and overruns. Sometimes developers do not want to commit to a brand from the outset but want to decide on a best fit as the works progress or when an operator is engaged. Commencing without a worked-up design will be costly. Instead, consider from the outset what type of hotel is to be delivered, whether a brand is to be used and any requirements of the operator;

Invest in ensuring that what is built reflects the design. Engaging a clerk of works can prevent problems from occurring and reduce the risk of later delays;

Ensure the correct paperwork is in place. Many hotel disputes arise from payment related issues. These cases almost always concern a paying party’s failure to serve in time the notices required to dispute an application for payment. Failure to serve a valid pay less notice means full liability to pay the sum claimed, not the amount due. The courts adopt a pay-now-argue later approach; and

Ensure the contract terms are clear. In a recent case a dispute arose because interim valuations were replaced by milestone payments linked to completion of work stages, such as the sign-off for a prototype room, completion of snagging items and completion of bedroom units. The parties did not make clear what sign-off meant and the Court of Appeal had to decide the point (namely that it should be given its ordinary meaning). The case is a reminder that building contracts must make clear what payments became due and when.

The events in New Orleans and Las Vegas are extreme examples of what can go wrong when building a hotel. Whilst it is never possible to guarantee that problems will not occur, construction risks can be mitigated.

Preparation is key to a successful hotel project and to avoid disputes. Late changes can arise for a variety of reasons, including for concepts that do not work and competitive market conditions. The cost and time risk of later problems can be reduced by investing more time and effort at the outset to prevent them arising. This requires greater forethought, the early involvement of the operator and more in-depth consideration of market demands and trends.

By Barry Hembling, a partner in the construction team at Watson Farley & Williams LLP