Hospitality + Leisure Trend Watch January 23, 2019

Drafting Arbitration Clauses in Hotel Management Contracts Tips from the Cauldron of Litigation

Most hotel management agreements have an arbitration clause. After handling dozens of trials and arbitrations, here are some issues that we think should be addressed in a management agreement, but which often are not even considered, or are addressed with form language without consideration of the consequences.

Arbitration as Exclusive Remedy

Most agreements should provide that arbitration is the exclusive remedy for all disputes arising out of, or relating to, the agreement with one exception: a motion in federal or state court (depending upon diversity jurisdiction) to seek injunctive relief “in aid of arbitration.” That kind of injunction or motion can be used to prevent a “Midnight Raid” or other self-help measures that would undermine the efficacy of an arbitrator’s exclusive right to determine an issue, in particular, the right to terminate the agreement.

Note that the parties may waive an agreement to arbitrate. If one party sues in court and the other party responds substantively (by answering or engaging in discovery), the court may subsequently determine that the agreement to arbitrate had been waived.

Prevailing Party Fees

We recommend inclusion of a provision entitling the prevailing party to recover its fees and costs from the non-prevailing party. A general prevailing party attorney’s fee provision, however, will likely not entitle the party that prevails on a motion to compel arbitration or in aid of arbitration to attorney’s fees on that motion itself. The agreement should have a separate provision providing for an award of attorneys’ fees and costs to the prevailing party on any (i) motion for injunctive relief in aid of arbitration, or (ii) a motion to compel arbitration.

Mandatory Conditions Precedent to Filing any Arbitration Claim

Agreements often specify actions that must be taken before any arbitration claim is filed, e.g., meeting between executives, with enough specificity to make such meeting meaningful; mediation if meeting does not resolve the dispute; and finally, arbitration. These provisions are often passed by as the dispute heats up and one party is anxious to get into the fight. 

The agreement should provide that the actions preliminary to filing any arbitration claim are mandatory and cannot be waived, absent express consent.

Limitations

Statutes of limitations that would apply in court to bar claims do not necessarily apply in arbitration. Under California law, in cases where the arbitration clause does not address the issue, a “reasonable time” (up to the arbitrator) is implied. In New York, the application of statute of limitations periods extends to arbitrations.

The agreement should provide that all statutes of limitations apply as they would to actions filed in court. The agreement should also provide that engaging in actions to satisfy the mandatory conditions precedent to commencement of arbitration satisfy the initiation of an action requirement for purposes of complying with the statute of limitations.

Forum, Rules and Applicable Law

We recommend that the agreement specify JAMS as the arbitral forum. In our experience, JAMS is superior to the American Arbitration Association (AAA) as an administrator of complex arbitrations. We have also made agreements with adversaries to have AAA arbitrations administered by JAMS after the dispute has commenced. JAMS’ panel of arbitrators is strong, with many of the panelists being retired judges. We also prefer JAMS’ rules. Our default is the JAMS Comprehensive Arbitration Rules & Procedures. The agreement can provide for either limited or expansive discovery. We do not recommend that the agreement specify rules relating to discovery before it is known what the claims are and what evidence is necessary to advance or defend the claims.

The agreement should specify the city in which the arbitration will be heard.

The scope of arbitration is a matter of agreement between the parties. This means that the agreement can specify not only the governing state law, but also that the powers of the arbitrator can be limited. For example, the agreement can provide that the arbitrator has no power to act “ex aequo et bono” (Latin for "according to the right and good" or "from equity and conscience") — the power of arbitrators to dispense with consideration of the law but consider solely what they deem fair and equitable in the case at hand. The agreement can also specify that the arbitrator is without authority to ignore or alter the terms of the underlying contract, including specifically under common-law principles of agency to ignore the parties’ agreement regarding termination of a hotel management agreement. We recommend that the arbitration provisions in hotel management agreements provide, at a minimum, that the arbitrator is without power to ignore or change the terms of the underlying agreement.

One ground for overturning an arbitration award under the Federal Arbitration Act and most state laws is that the arbitrator exceeded his or her powers. As for appeals, the grounds for appeal under the Federal Arbitration Act may not be expanded by the parties. Some state courts, such as those in California, allow the parties to provide for appellate review. And if the agreement provides that California law governs, the expanded review will be given even in federal court. 

Arbitrators and Arbitrator Selection

The JAMS default position is a single arbitrator, unless the parties agree otherwise. We generally recommend a three-person panel in order to avoid the possibility of an eccentric decision. 

All arbitrators should be neutral, and each candidate should serve disclosures on all parties showing all interactions with the parties, their counsel, and counsel’s law firms. The agreement can specify that the arbitrators must meet certain qualifications, e.g., retired judge, industry experience, years in practice (for lawyer-arbitrators).

We have found that it is often possible to agree with opposing counsel on a method for choosing arbitrators, and to reach agreement with a simple exchange of suggested arbitrators. Any agreement on an arbitrator should be subject to a review of the selected arbitrator’s disclosures.

In vetting potential arbitrators, we look for the following essential qualities: temperament (no prima donnas), intelligence, fairness, diligence, and willingness to decide on the merits (no splitting the baby).

Award and Enforcement

The agreement should specify that the arbitrator must issue a reasoned award. The default JAMS rule requires that the award be issued within 30 calendar days from the close of the hearing.

The JAMS default rule is that judgment upon an award must be brought in any court having jurisdiction of the matter. We suggest that the agreement provide that any motion to confirm or vacate the award must be brought in the state or federal courts of the city where the arbitration hearing occurred.

JAMS rules provide that arbitrations are confidential, except as necessary to confirm or challenge an award. If the award contains confidential information, a party moving to confirm or challenge an award should apply to have the confidential material filed under seal. In discovery, the confidentiality agreement should provide that a party seeking to file confidential information in court will seek to do so under seal.

An unconfirmed arbitration award will have collateral estoppel effect on subsequent litigation between the same parties or their privies.