Hotel Dispute Lawyer: What’s best for hospitality contract dispute clauses? Arbitration, court litigation, or judicial reference in hotel management and franchise agreements?

17 January 2024

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Critical considerations for hospitality litigation, arbitration &
alternate dispute resolution clauses in hotel contracts

Hotel Management Agreements & Franchise Agreements

by

Mark S. Adams, Hotel Dispute Lawyer
Partner & Senior Member
JMBM’s Global Hospitality Group®

Mark S. Adams is an experienced trial lawyer, partner, and senior member of JMBM’s Global Hospitality Group®. In his more than 14 years with the Firm, Mark has created an international reputation as a Hotel Dispute Lawyer, handling litigation, arbitration, jury trials, and alternate dispute resolution in hundreds of matters affecting hotels, resorts, restaurants, and other hospitality properties. But not every matter should, or does, end up in litigation. Mark also provides pre-litigation strategic advice to avoid litigation and optimize a client’s position for settlement where possible.

What is the difference between “Litigation” and “Dispute Resolution”?

In many circles, the term “litigation” refers to the process that starts with the filing of a lawsuit in the traditional court system and includes all that follows until a final resolution. This more restrictive definition does not include arbitration or other alternative dispute mechanisms.

In other circles, however, “litigation” has a much broader meaning which includes the first definition of court litigation. This second meaning includes all methods of dispute resolution and refers to the entire progression of a dispute from reviewing and advising on pre-contract drafting, through the first disagreement, preparing correspondence, and on to negotiations to amicably resolve issues. It also encompasses all related matters in the dispute from notice of default, strategic positioning for a lawsuit or other action, and engaging in dispute resolution by any procedure such as filing and then prosecuting or defending a lawsuit, arbitration, mediation, or judicial reference (see below).

We generally use “litigation” in the second, broadest meaning of all stages of any dispute and any type of dispute resolution process. In this article, we will specifically name a particular means of dispute resolution where it may provide greater clarity.

Dispute arbitration compared to court trials and judicial reference

Binding arbitration is the dispute resolution mechanism embodied in most hospitality contracts, particularly hotel management or operating agreements and hotel franchise agreements. The choice of binding arbitration may have profound effects on the process and outcome of the dispute. As a result, many parties opt out of arbitration, or attempt to opt out of it. The Pros and Cons of arbitration vs. court trials are summarized below:

Arbitration:

Pros:  Almost always a faster resolution, typically private and confidential proceedings, parties can choose arbitrators, avoids jury trials of complex business issues and the potential for runaway verdicts. Arbitration is favored by strong public policy behind the Federal Arbitration Act and most state arbitration statutes.

Cons:  Extremely limited appeal options, if any, less formal discovery, potential for biased arbitrators (e.g., frequent flyer customers), binding decisions, now offers little savings in cost – can be outrageously expensive. Without mutual agreement, a dispute can only be forced into arbitration when the parties have signed a binding arbitration agreement before the dispute arises, or, the parties sign such an agreement for the particular dispute after it arises.

Court Trials:

 Pros: Adherence to legal procedures, comprehensive discovery, public record, right to appeal.

 Cons: Lengthy process, high discovery costs, less control over timing, potential for complex rules and delays, jury trial waivers may not be enforceable in many jurisdictions (such as California) except when arbitration or judicial reference is provided.

Judicial Reference (or “Reference”) – A better alternative dispute resolution process with the best of both arbitration and court litigation?

Although it is less well known than arbitration or traditional court litigation, in states like California, there is another process that offers the best of both worlds. Many of our most experienced litigation attorneys believe that judicial reference deserves thoughtful consideration for hospitality contractual provisions for the dispute resolution process.

This judicial reference is so important that a more robust treatment of it is provided in a dedicated article on Judicial Reference. See Judicial Reference Basics and Judicial Reference Advanced.

For now, let’s just say that the California Constitution and settled judicial precedent make it a reliable way to avoid jury trials (overcoming California’s general policy of voiding jury trial waivers). The procedure effectively uses private arbitration (usually with retired judges), while preserving the right to appeal. Because the parties must pay the fees of the judge, it is sometimes called private judging or rent-a-judge.

Should mediation be mandatory in arbitration and other dispute resolution clauses?

Mandatory mediation in contractual arbitration has both supporters and critics. Supporters argue it promotes efficiency and resolution, while critics emphasize the importance of party autonomy, and that the process is not productive until the parties have dropped most of the emotion triggered by the dispute and are ready to be pragmatic.

The choice depends on factors like the nature of the contracts and the legal relationships between the parties. In most hospitality contract litigation, there will be a time when the case is ripe for mediation. The parties can voluntarily agree to submit to mediation at any time in a dispute (even without a mediation clause). Our preference is to work toward an early mandatory mediation that the parties agree to. Although it rarely results in a quick settlement, it gets the parties talking, provides an independent party’s assessment of the strengths and weaknesses of each case, and it usually also provides a better refinement of the issues.

Getting qualified arbitrators (without bias)

The parties generally include in their arbitration provisions the minimum qualifications for the arbitrator. Those often require as much as 10 years of experience in the hotel industry, among other things. These criteria are a built-in bias in favor of the brands and operators because the 10 years of experience usually come from having worked for and been indoctrinated by the brands.

Practically speaking, these experience requirements are often self-defeating because the parties cannot find an available arbitrator with those experience criteria. In that case, the parties have to modify their requirements (with a dispute pending). That inevitably creates excusable delay in getting the matter arbitrated.

And then there is the Frequent Flyer problem mentioned above. Most experienced arbitrators are professional arbitrators. Serving as an arbitrator is their full-time job, or represents a substantial source of income. Despite integrity and the best intentions, this makes arbitrators reluctant to find against or award significant damages against their best customers who will be back with more disputes for the arbitrator to handle and support their livelihood.

Cost and timing of arbitration

So long as the parties can select an arbitrator relatively quickly, the timing of the arbitration is somewhat left to the needs of the parties and the availability of the Arbitrator to try the case. In general, the time for completing an arbitration is far less than for a traditional court trial procedure.

For many decades, arbitration advocates claimed that arbitration is much less expensive than litigation in court. That may have been true at some point in decades past, but is not so valid in current times. Arbitration is expensive. In some cases, very expensive. For example, the initial filing fee is typically a fixed amount (such as $5,000), but some arbitration providers charge a percentage of the amount in dispute. The initial filing fee is just the beginning. Typically, the arbitrator(s) will require a significant advance against their anticipated fees and will require interim refreshment of their retainers. After that, there are substantial charges for each task, such as status conferences, procedural orders, discovery motions, evidentiary hearings, and so on. A $3 million dispute could easily cost $100,000 in arbitration costs. These arbitration costs do not include each party’s legal fees, and possible liability to the prevailing party to pay all costs.

Who does arbitration favor?

Arbitration always favors the winner. In general, sloppy cases based on flimsy evidence may succeed in arbitration because the rules of evidence are more lax. There is also the tendency of arbitrators to “split the baby” between the parties’ claims so that each party gets something but not necessarily what they deserve. We have observed that most arbitration awards fall somewhere in the middle based on the law that the arbitrator chooses to follow, and based on the amount of damages. We rarely see a blow-away, one-sided award in an arbitration.

For more information about Hospitality Dispute Resolution, you can find below some links to selected articles by Mark S. Adams:

Why Judicial Reference is better than Arbitration for resolving Hotel Management Agreements & Hotel Franchise Agreements. Advanced Analysis of Judicial Reference features.

The better way to resolve hotel contract disputes: Judicial Reference or Arbitration? 

What’s best for hospitality contract dispute clauses? Arbitration, court litigation, or judicial reference in hotel management and franchise agreements?

Should New York law govern your hospitality contract? How about Texas, California or Florida law?

Meet Mark S. Adams, Hotel Dispute Lawyer – Hospitality Litigation, Arbitration & Dispute Resolution

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Disclosing Mandatory Resort Fees – What Hoteliers Need to Know

Force Majeure – Contract provisions and governing law are important

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JMBM’s Global Hospitality Group® announces 5th edition of The HMA & Franchise Agreement Handbook

Hotel Lawyer on HMAs: “The shrinking terms of hotel management agreements”

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This is Jim Butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators, and investors. This advice covers critical hotel issues such as hotel purchase, sale, development, financing, franchise, management, ADA, and IP matters. We also have compelling experience in hotel litigation, union avoidance and union negotiations, and cybersecurity & data privacy.

JMBM’s Global Hospitality Group® has been involved in more than $125 billion of hotel transactions and more than 4,700 hotel properties located around the globe. Contact me at +1-310-201-3526 or jbutler@jmbm.com to discuss how we can help.

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