Managing Hotel Disputes - A Roadmap to Resolution?

The economic downturn has resulted in a sharp increase in hotel disputes, with Agreements and Leases being taken out of the bottom draw, sometimes for the first time since they were signed, and carefully read by the parties. Often they find that the agreed dispute mechanisms are inappropriate in practice and a different approach is needed.

This increase in disputes also allows parties to look again at the best mechanisms for resolving disputes in new Hotel Agreements and Leases, and learning these lessons; bespoke mechanisms should be chosen for different types of disputes.

Dealing with disputes may also be outside the core competency of some or all of your business people, so you should involve experts in dispute resolution, and do so early on. They can utilise their expertise to identify the best strategy to resolve the dispute prior to the implementation of one of the dispute resolution mechanisms. This may include suggesting options which are outside the dispute mechanism specified in the Agreement or Lease as both parties may recognise that a novel mechanism is the best way to resolve a dispute.

There are a variety of options we recommend to resolve disputes. Each have their advantages and disadvantages, but the following summary seeks to identify some of the key points relating to hotel disputes:

• Early Neutral Evaluation (ENV)
  ENV is a confidential and preliminary assessment of facts, evidence or legal merits. This type of non-binding evaluation is designed to serve as a basis for well-informed negotiations by reference to a “heads up” assessment as to the likely formal outcome of the dispute. The parties appoint an independent person who provides a non-binding evaluation on the merits of the issues specified by them. Although it is non-binding, the evaluation provides a neutral assessment of relative positions and guidance that usually assists the parties to form a well-developed understanding of the respective strengths and weaknesses of their argument. It may be particularly helpful in hotel disputes, where a potentially long-running relationship between the owner and operator is at risk, to utilise ENV to try and “nip the dispute in the bud” before a divisive expert determination or piece of litigation/arbitration ensues.
• Mediation
  Mediation is a process whereby a neutral person assists the parties to achieve a negotiated settlement. The process is confidential and, helpfully in terms of encouraging open discussions, nothing said in the mediation is admissible in legal proceedings. Of course, however, any settlement is binding on the parties in the event that it is put into writing and signed by authorised representatives. This may be a useful mechanism even if there has been an unsuccessful meeting of representatives because, in many cases, a mediator can use their position of neutrality to defuse contentious issues that have arisen in the context of previous discussions.
• Enforcing contractual rights: Inspection of documents
  Once a dispute arises, it is often a good strategy for the disaffected party to re-evaluate its negotiating position and try to exert pressure on the other party by reviewing the underlying documents. One way to do this is to enforce contractual rights such as the right to inspect documents and financial records. This is an often-overlooked mechanism but is an effective way to bring pressure to bear as well as help bring about a re-evaluation of the agreement or lease and align the parties’ interests more closely, which, in turn, may help to prevent future disputes.
• Expert Determination
  Typically, expert determination is best suited to technical disputes where there is little dispute as to the underlying facts, but rather the outcome that should flow from that factual position. This form of dispute resolution is a popular one in the hotel industry for certain kind of disputes and can provide an effective way to remedy disputes in relation to, for example, budgets, standards and costs. One disadvantage, however, is the potentially more cumbersome enforcement of decisions if the other party is based overseas, albeit that experience suggests this tends to be more of a theoretical rather than practical problem; i.e. although a party based outside the UK could seek to “play games” in relation to enforcement, this is rarely a commercially sensible approach given that there will often be an ongoing contractual relationship.
• Litigation or Arbitration
  Parties often face the choice of whether to agree to an arbitration or litigation mechanism in the relevant contract. There are pros and cons associated with both options. To use one example, a party may wish to opt for the litigation option because it will serve as a more efficient mechanism where there are more than two parties in a dispute or there is the possibility of urgent relief being required in the space of hours or days (i.e. rather than seeking urgent relief under the relevant arbitral rules which may take slightly longer to obtain). Conversely, it is arguable that arbitral proceedings may have the advantage in terms of cost in the context of a fast-moving negotiation against the threat of proceedings. Although it is certainly the case that a full-blown arbitration can be as expensive as court proceedings, it is often the case that the costs are not as “front-loaded” as is the requirement in civil litigation. Given, therefore, that the lion’s share of cases settle, and many settle shortly after the commencement of proceedings, the overall cost expenditure of arbitration may be less because the preparatory work required to commence the arbitral proceedings may, in certain types of disputes, not be as extensive as is required for litigation.

Our View

These Options, particularly ENV and mediation, can be used to resolve disputes even where the Agreement does not provide for their use as well advised parties, seeking to resolve a dispute, can see the advantage of embracing an alternative mechanism to resolve a dispute through the most appropriate process. In new Agreements and Leases, it is often the case that operational type disputes are best resolved through the use of ENV, Mediation or Expert Determination, and sometimes two or more of those options can be used on a staged basis; e.g. mediation followed by expert determination. On the other hand, litigation / arbitration are, generally speaking, best left for disputes outside these "technical" operational issues where the cause of the friction goes to the heart of the contractual relationship.

Unsurprisingly, we subscribe to the "prevention is better than the cure" approach of recommending that our clients give a great deal of thought to the appropriate dispute resolution mechanisms for each category of potential disagreement. However, whatever the position may be under the relevant contract, we work closely with our clients to formulate dispute avoidance strategies when an issue arises so that they have, if at all possible, attempted to implement a pre-emptive strategy designed to avoid the heavy costs of set-piece litigation/arbitration/expert determination and, should that fail, having positioned themselves as best they can for the formal process.

Lawyers Richard Bursby, Shane Gleghorn

This article also appeared in the Legal Hub on 23 July 2010