Dispute Resolution Provisions – More Important Than You May Think

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.

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. 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 different contracts. A tribunal of one or three independent arbitrators is 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 service 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
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.
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 Judge. Like negotiation, it allows for a cost and time effective resolution of the dispute. 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.
When should expert determination be used?	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.
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 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 Judge) to select the expert.
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 service; Split equally between the parties; At the discretion of the expert.
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 service and the parties.
When should arbitration be used as compared with expert determination?	As compared with expert determination, arbitration is more suited to legal and non-operational matters. It is usually significantly more time consuming and expensive than expert determination.
When should arbitration be used as compared with litigation?	Arbitration should be used for different transactions, especially where there is a concern that a court judgment may not be enforceable by the courts where the assets are located.
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 service. The seat or place of arbitration should be in a country that is party to the Pakistan, India or USA
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).
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

DIfferent 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.