Holiday Claims – Accidents Abroad Next Year "A Real Concern"

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Holiday Claims specialist solicitors Simpson Millar LLP are concerned that tour operators are putting profits before the safety of their customers.

This week Thomas Cook announced it aims to put the squeeze on accommodation suppliers in 2010 by capitalising on its strength as the 2nd largest operator in Europe.

Announcing its full-year results last week, Thomas Cook chief executive Manny Fontenla-Novoa said one of the main goals for 2010 was to cut accommodation costs by 5-7%.

Fontenla-Novoa said the operator was looking at a series of initiatives to increase revenue, profits and margins – "These include centralising accommodation purchasing in order to leverage the scale of our group buying power in mainstream travel," he said.

Pushing down hotel costs will be one of the main tasks for Pete Constanti in a newly-created role of Chief Executive for Group Destination Management.

This announcement ironically coincided with the lesser reported Medhotels VAT test case centering upon Thomas Cook’s bed bank company - during which Agents were accused of caring only about low prices rather than health and safety liability.

The claim was made at a VAT tribunal at which the bed bank was appealing against an £11 million bill from Revenue and Customs.

Medhotels initially set itself up as an agent but adopted principal status in 2007 after the deaths of two children in Corfu in 2006, after which agents said they wanted to deal with suppliers that accepted the liability of being a principal.

Adopting principal status involves extra costs and liabilities and the tribunal was told that: "Agents were saying one thing to the world and another when it came to pricing. Travel agents did not care whether you could be sued as a principal; they were really only interested in low prices."

After a change of policy Medhotels reverted back to being an agent in June 2008 before being bought by Thomas Cook from lastminute.com owners Sabre in January 2009.

Nick Harris, Head of Travel Law at Simpson Millar Solicitors is concerned that squeezing accommodation suppliers could seriously compromise safety at hotels and other accommodation abroad and lead to an increase in avoidable tragedies.

Harris said "If hotels and other accommodation suppliers are forced to accept price reductions whilst already operating at low margins they will have to find means of cutting back to survive difficult, fiercely competitive and seasonal trading conditions."

"It is inevitable that a proportion of accommodation suppliers will run into financial difficulties having just scraped through a recession. Corners will be cut in terms of ensuring basic health and safety – for example carrying out necessary repairs – replacing old and worn fixtures and fittings - may be put back.”

Harris believes there is a solution that would go some way to redressing this position: "If Thomas Cook and others promoting 'dynamic packaging' are on one hand saying they want to squeeze accommodation suppliers and on the other saying they are concerned for their customers safety then a reasonable way forward would be for them to adopt principal status in the bed banks area of their businesses – a form of self-regulation that giving consumers confidence and ensuring a pro-active responsibility on those organising holidays to make certain that holiday accommodation is safe."

"There is a dangerous state of affairs brewing whilst regulation in the travel sector is unsatisfactory and the issue of who is an agent and who is the principal is in a state of flux – I fear it will take tragic incidents to highlight this."

"If resources which could be placed into improving health and safety are taken away from accommodation providers through aggressive price cutting then accident numbers will increase as will the potential for holiday claims involving corporate manslaughter."

"Every year dozens of UK holiday makers are killed abroad – if it happens that a single death or serious injury occurred directly or indirectly through neglect then those responsible for placing profits above safety may find themselves being held accountable."

"I am not suggesting that Thomas Cook or others taking a similar stance would place their customers at risk but by encouraging consumers to book directly with hotels where the holiday organiser then has no responsibility and simultaneously squeezing the hotels on price simply does not bode well for the consumer."

"I am also not at all convinced that those acting as bed banks are necessarily free from liabilities and I foresee challenges on this point."

"It is inconsistent with the principles of agency that an entity claiming to act as an agent can dictate to its principal the price it will essentially pay for services and be free to set the profit margin it will operate at ‘and’ be at liberty to charge cancellation fees it does not then pass on to the claimed principal. "

"In my opinion setting a purchasing price (whilst alluring that it is not an allocation cost) and then setting a profit margin which it can increase, decrease and discount at will and charging cancellation fees which are pocketed is more consistent with the business of a principal contracting party."

There is hope for consumers on the horizon though. Plans have been put out for consultation by the European Commission. The Commission is consulting on extending the cover provided by original Package Travel Directive – on information, liability for sub-standard services and protection for insolvency - to the next generation of 'dynamic packages' - where consumers make up their own packages, often online, through one website or different partner websites.

Through feedback the Commission will listen to stakeholders on possible ways to address the main problems present in the Package Directive.

The consultation is open until 7 February 2010. The Commission will then review the feedback before considering specific solutions aiming to present a proposal during autumn 2010. It will be left to the European Parliament and the Council to see how fast the new proposal can be voted into law.

The driving reason behind this overhaul is that when the Package Travel Directive was adopted in 1990, a package holiday was the most common sort of holiday in Europe. Pre-defined packages, usually including a flight and a hotel, were typically sold by travel agents in the high street at an inclusive price.

However the last two decades has seen rapid changes. The advent of the internet has made it possible for consumers to make reservations online directly from tour operators, travel agencies/retailers, air carriers, cruise lines and hotels themselves. Nowadays, 56% of EU citizens organize holidays themselves, rather than purchase traditional packages.

As a result of mainly developments in the way holidays are offered for sale, the number of consumers who are protected under the Package Travel Directive when going on holiday has fallen sharply. In the UK it is estimated that less than 50% of passengers on leisure flights are protected under the Package Directive, compared to 98% in 1997.

The Directive has become outdated and no longer provides sufficient protection for today's holiday maker. It also fails to provide legal certainty for businesses. This leads to disadvantages and harm to consumers and onerous and oppressive issues for businesses. Often whether or not a holiday falls within the definition of package holiday is decided on a case-by-case basis - the legal position being very uncertain.

The Package Travel Directive (Council Directive 90/314/EEC) covers pre-arranged holiday packages. A 'Package' holiday combines a minimum of 2 of the following: (1) transport, (2) accommodation, and/or (3) other tourist services not ancillary to transport or accommodation and accounting for a significant proportion of the package.

The holiday is a 'Package' providing at least 2 of the mentioned elements are sold at an 'inclusive price' and the service covers more than 24 hours or includes an overnight stay.

The significance of whether a holiday falls within the definition of a 'Package' is that if the holiday is regulated then the organiser is liable if the contract is improperly performed. Importantly - consumers are entitled to compensation from the organiser if the contract is not performed properly.

By contrast, a 'dynamic package' is when 2 or more services for a holiday (eg flights and accommodation) are bought at the same time but from different suppliers or even the same supplier according to the consumer's specific needs.

For example, a flight booked with Monarch Airlines and then accommodation through Medhotels. The consumer effectively enters into one contract for flights and another for accommodation.

The problem with dynamic packages is that if the different services are subject to separate contracts and separate payments to different companies the package is unlikely to be covered by the Package Travel Directive. Whether a 'dynamic package' falls under the Directive is now very often determined on a case-by-case basis leading to complex judicial interpretation. This has led to problems which has created immense difficulties for both businesses and consumers.

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