Introduction

Contractual provisions by their very nature have the potential to create tension between the contracting parties. In the case of hotel management agreements the contracting parties are the owner and the operator.

A well drafted hotel management agreement should not only contain dispute resolution provisions but care should be taken to ensure that the right kind of provision is available to resolve any given dispute. These provisions are often multi-tiered working through different methods for resolving disputes, such as negotiations, mediation then arbitration.

Baker McKenzie, being a global law firm, acts for hotel owners and a broad cross-section of both domestic and international hotel operators in many jurisdictions globally. Our long term involvement advising our clients in this industry has enabled us to gain a perspective and make some observations on the correct approach to resolving disputes.

Since we are based in Australia, we have focused on the Australian approach to dispute resolution clauses in cross-border contracts. However, the good news is that we have 17 offices in Asia Pacific and many more around the world to answer any jurisdictional specific questions that may arise from the discussion below.

Further the views expressed in this newsletter are solely those of the authors and the authors alone. Other Baker McKenzie partners and other lawyers across the world practising in this area may have different views. We welcome this diversity of view and perspective it brings to a topic which, to our knowledge, receives scant consideration in a commentary sense. We trust that you the reader find this newsletter informative and thought provoking. Please do not hesitate to contact us if you wish to comment upon any aspect of this newsletter or provide your own insights and views to the matters discussed.

In this newsletter, we will focus on the more common forms of dispute resolution provisions:

  • Senior executive good faith negotiation
  • Mediation
  • Expert Determination
  • Arbitration
  • Court proceedings

Let's begin by describing what we mean by each of these terms.

Senior Executive good faith negotiations

If a dispute arises then such a provision generally requires the parties to refer the matter to negotiations by senior executives. Usually the executives are very senior and do not have day to day involvement in the operation of the hotel. The advantage of such a provision is that it allows two senior executives to dispassionately seek to resolve the issue. Such executives would be keen to resolve the dispute rather than fail to do so with the result that the matter usually escalates to one of the external arm's length approaches discussed below.

Mediation

The parties agree to appoint an independent third party to assist with the negotiations of the dispute in order to reach an agreement. A third party mediator can have confidential discussions with each party and assist them in finding a resolution of the issues in dispute. Mediation is a cost and time effective approach to resolving issues that may assist with preserving long term relationships. Cross-border mediation may be encouraged by the new Singapore Mediation Convention which is intended to assist parties in enforcing agreements entered into during mediation.

Expert Determination

The dispute would be referred to a specified expert who would have the power to make a determination of the issues in dispute that is final and binding on the parties. The expert must be independent of both parties. The expert may be appointed by the parties' agreement or by a third party, such as the Australia Disputes Centre (ADC). The parties can specify the procedural rules that the expert must follow or leave it up to the expert to determine or specify the rules that the expert deems appropriate.

Arbitration

Arbitration is the most common method for resolving disputes under cross-border contracts. The key benefit of arbitration is that the award (the arbitral tribunal's decision) can be enforced in 160 countries under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Arbitration is usually administered by an arbitral institution, such as the International Chamber of Commerce (ICC) or the Singapore International Arbitration Centre (SIAC), under their arbitration rules. A tribunal of one or three independent arbitrators are appointed. The seat or place of arbitration is agreed by the parties and is usually a neutral venue. Arbitrations are usually confidential. The award is final and binding with limited grounds for challenge in the courts (procedural grounds or public policy only).

Court proceedings

Most jurisdictions allow for referral to court proceedings if either specified in the hotel management agreement or under the general law of the jurisdiction. Note, however, that it may be difficult to enforce a court judgment unless there is an agreement or reciprocal arrangements between the country where the judgment was issued and the country where enforcement is sought. 

We set out below what we consider to be the key issues around these dispute settlement alternatives.

The Issue
Commentary
1. When should senior executive good faith negotiations
be used?

For any dispute. Either party can elect to escalate if not satisfied by previous negotiations. This alternative is usually very cost and time effective and allows the dispute to be worked out as between the parties.

2. When should mediation
be used?

For any dispute. Either party may suggest that a mediator be appointed. This process may be a step included in the dispute resolution clause. The mediator may be appointed by agreement of the parties or by a third party, such as the ADC. Like negotiation, it allows for a cost and time effective resolution of the dispute.

3. When should expert determination be used?

Opinions are divided as to what issues should be referred to experts. Generally, issues are referred to experts when the matter in question requires the application of technical knowledge (e.g hotel operational issues) as opposed to legal knowledge (e.g whether there has been a breach of the management agreement by one of the parties). We suggest legal issues be referred to arbitration or litigation.

This alternative is considered to be relatively time efficient (i.e. taking a matter of weeks to go from initiation of the formal procedure to resolution) and relatively cost efficient. It is also private and confidential. The potential disadvantage is the approach of the expert is not as detailed as an arbitral tribunal or a court.

In many instances a management agreement will contain a dispute settlement mechanism which refers all disputes to arbitration except for those provisions which are specifically selected to be referred to expert determination. In such instances it is important to ensure that all provisions where expert determination should be used to settle disputes are identified and that these disputes are carefully carved out of the arbitration clause. Time taken in undertaking this exercise can be well spent should a dispute arise.

4. How should the expert be selected?
There are various ways this can be dealt with. Some common approaches are:
  • The party initiating the procedure proposes three (3) potential experts and the other party must select one (1);
  • The above mentioned procedure but the class of potential experts is specified (e.g identified major international accounting firms and hotel/real estate brokerage firms);
  • Each party proposes an expert and those two experts choose a third expert who decides the dispute;
  • If the parties are unable to agree then either party is entitled to approach a third party (such as the ADC) to select the expert.
5. Who should pay the expert's costs?

There are various ways this can be dealt with. Some common approaches are:-

  • Always an operating cost of the hotel;
  • Split equally between the parties;
  • At the discretion of the expert.
6. Where should the expert
be located?

It is generally considered that the more important task is to choose the right person to be an expert so location becomes a secondary consideration. All things being equal the expert should be located in a convenient place in comparison to the location of the hotel and the parties.

7. When should arbitration
be used as compared
with expert determination?

As compared with expert determination, arbitration is more suited to legal and non-operationalmatters. It is usually significantly more time consuming and expensive than expert determination.

8. When should arbitration
be used as compared
with litigation?

Arbitration should be used for cross border transactions, especially where there is a concern that a court judgment may not be enforceable by the courts where the assets are located. An arbitral award may be enforced in 160 countries under the New York Convention.

9. Where should the
arbitrator(s) be located?

Arbitration is usually conducted in a neutral jurisdiction, i.e. not in the location of the parties or the hotel. The seat or place of arbitration should be in a country that is party to the New York Convention, such as Singapore, Hong Kong or Sydney. The arbitration legislation should be modern and the courts should take an arbitration friendly approach.

10. How timely is arbitration?

Arbitrations are usually conducted within 12-18 months of commencement of the process. Expedited arbitrations may be shorter (sometimes 6-9 months).

11. How does arbitration
compare to court
proceedings?

Arbitration is confidential. It is also a flexible process which can be adapted to suit the requirements of the particular dispute. For example, the procedural timetable may be adapted to address issues of disclosure early on if required. It may also require parties to file submissions and witness and expert evidence at once.

Summary and Conclusion 

Hotel management agreements are complex long term legal documents. It is inevitable that in certain circumstances disputes will arise and care needs to be taken to ensure that the agreement contains the right dispute settlement alternative for any given provision. Failure to give proper consideration to this issue at the time that the agreements are being negotiated could potentially lead to substantial additional complexity and needless expense should a dispute arise.

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