Dispute resolution is a key discussion point, all too often overlooked in complex, long-term hotel management agreements (HMAs). The same applies to the prevailing language clause, and French investors should pay particular attention to such issues when negotiating with international hotel operators[i].
These seemingly standard clauses, drafted by hotel operators and included at the end of the HMA, should be carefully examined from the outset of the negotiations (i.e. at the LOI or TS stage).
Which contractual clause should be used to determine jurisdiction in the hotel management agreement?
First, it should be remembered that hotel management agreements are generally subject to ordinary law (civil or commercial courts in France) or to courts of arbitration. Some consider the prohibitive, even crippling, cost a major drawback of arbitration, and indeed, this can act as a strong deterrent, causing claimants to throw in the towel. However, the costs incurred depend primarily on the complexity and duration of the dispute.
We have seen this first hand with French civil or commercial courts (ordinary courts) in several cases involving disputes over hotel management agreements. The judges hearing these cases do not always have the necessary degree of specialisation to deal with complex disputes involving hotel management contracts. Proceedings can overlap, creating a high degree of judicial uncertainty, and when these proceedings go on and on, they can disrupt hotel business operations. Moreover, in France, civil and commercial courts have no jurisdiction to deal with disputes involving contracts drawn up in a language other than French.
Encourage recourse to arbitration in the hotel management agreement:
When potential disputes involve technical and complex issues, as is often the case in hotel management agreements (which may also be drafted in a language other than French), recourse to arbitration is key, for various reasons:
- Arbitration is a simpler, more flexible legal mechanism than are proceedings before an ordinary court.
- Arbitration awards can be enforced more widely and more easily than can an ordinary court judgement.
- Arbitration allows the parties to avoid being subject to the national courts of the opposing party.
- The parties can choose one arbitrator or more, with recognised technical expertise and hotel industry knowledge.
- Arbitration offers greater confidentiality and discretion than do proceedings before an ordinary court (which may see multiple appeals).
When drafting the arbitration clause, the applicable procedural rules, the procedures for appointing the arbitrators and their number, and the seat of arbitration should be specified. Cities such as Paris, Geneva and London are often chosen in this respect, as French, Swiss and English law are favourable to international arbitration.
Choose simplified arbitration procedures:
To facilitate recourse to arbitration, several arbitration institutions, including the ICC International Court of Arbitration in Paris, have introduced a simplified arbitration procedure in their international arbitration rules, the aim being to reduce the length and cost of low value disputes (up to USD 3 million).
So that a verdict can be reached within six months, the procedure should be entrusted to a sole arbitrator, meaning that fees can come in at least 20% lower than for standard arbitration. This also makes it possible to minimise, in particular, requests for the production of documents, the length and scope of written submissions, the hearing of witnesses and experts, and the holding of the hearing.
The Paris Chamber of Commerce’s rules of arbitration provide that the parties to a contract, particularly in the context of a hotel management agreement, may expressly agree to recourse to the simplified arbitration procedure, regardless of dispute value.
In any event, include an expert determination clause in the hotel management agreement:
In addition to the jurisdiction clause, we would also recommend that the HMA systematically include an expert determination clause. In particular, this clause details the procedure for appointing the expert, the conditions for recourse, the deadline for receiving the expert’s decision and the mechanism for paying the expert’s fees.
The appointment of an expert in the management contract means that issues can be settled quickly, in accordance with standard hotel market practice. Such issues may include, for example, hotel construction or renovation work, the determination of the annual budget, the need for work to be carried out on the hotel, and the party responsible for this work, or the achievement of Performance Test results.
Including a simple and inexpensive expert appraisal mechanism in the HMA has the benefit of encouraging the rapid resolution of most issues, without disrupting the day-to-day running of the hotel, and is in the best interests of both parties. The agreement thus offers two procedural layers for dealing with disputes between the owner and operator.
International hotel operators very often impose an arbitration clause (and English as the contract’s language) on local investors, while accepting local governing law for dispute management. Investors should thus pay particular attention to including an appropriate, specially drafted expert determination clause in the hotel management agreement.
[i] See our previous articles on this subject [i] Contrat de management hôtelier en France : version anglaise /version française … la controverse and – Hotel management agreements in France and the controversy surrounding the French versus English version
Christopher Boinet
FR – IE Paris – Avocats
In Extenso Avocats
