Legal disputes can be expensive, uncertain, bad for morale and a drain on management time that would be more profitably spent on running the business. Although, there is little that can be done to avoid legal disputes altogether, a well-drafted dispute resolution agreement can go a long way to ensuring that they are dealt with swiftly and cost effectively. The need for such clauses is particularly strong in a sector such as the hotel industry, which is increasingly international and in which the parties will, however bitter the battle, often wish (or need) to have an ongoing commercial relationship. What elements, therefore, should an effective dispute agreement contain and what methods are available for resolving disputes?
Choice of law
No commercial agreement should be without an express choice of law clause. Most jurisdictions recognise the right of the parties to choose the law to govern their contractual relations. That need not be the same as the law of the country where the parties are domiciled or where the hotel is. Certain mandatory rules of law, however, may apply; for example in relation to the constitution of companies or real property rights, even where the parties have chosen a different law. If no choice is made there is a real risk that the court will end up applying a law that neither party had intended. Although much will depend on the parties' respective bargaining power, parties may compromise by agreeing to apply the law of a neutral third party country.
Choice of jurisdiction
The dispute clause should also specify the country in which any proceedings are to take place. The chosen jurisdiction should have an acceptable legal system and, importantly, should be one whose judgments or awards will be enforceable in the country where the other party is domiciled. A judgment that cannot be enforced is of little value. While the English courts frequently hear disputes governed by a foreign law, it will usually make sense for the country whose law is chosen also to be the place where proceedings are to take place.
Choice of method
National courts
While court proceedings can have certain advantages e.g. the availability of interim procedures, provisional orders and document disclosure, the formalities of a trial also have certain disadvantages:
- they can be lengthy and expensive
- they take place in public
- they encourage an adversarial attitude that is damaging to business relations
- they require the parties to submit to the jurisdiction of a national court, which may make choosing an acceptable venue difficult
- they focus on legal rights not on commercial solutions
- the disclosure obligation can be burdensome.
Arbitration
Arbitration proceedings share many of the characteristics of court proceedings, but have certain advantages in that:
- they take place in private
- they are largely independent of the courts of the country in which they take place
- they offer the opportunity for the parties to choose arbitrators with industry experience
- they can be quick and cost-effective, though a lot will depend on the calibre and availability of the individual arbitrators. However, arbitrators are often reluctant to adopt summary procedures, which can be frustrating for a claimant with a strong case.
- as a general rule arbitral awards are more readily enforceable internationally than court judgments.
An arbitration agreement should usually incorporate the rules of one of the leading organisations such as the ICC or the London Court of International Arbitration. It should nominate the place of the proceedings and whether the tribunal is to consist of one or three arbitrators.
Expert determination
For disputes of a technical nature, e.g. pricing or quality control, it can be highly effective to refer them to an expert for determination. The expert has a role similar to that of an arbitrator, but will generally be appointed because of his specific expertise. His powers do not derive from any rules or statute, but exclusively from the parties' agreement. A short time frame for the proceedings is usually agreed. The procedure is not suitable where a hearing and oral witness evidence is desirable. Nor is it usually appropriate where substantial legal rights and claims for damages are in issue. Decisions may be difficult to enforce internationally as the judgment creditor will need to start fresh legal proceedings in the country of enforcement and the outcome of these may be uncertain.
Mediation
Mediation has been one of the great legal success stories in recent years in helping to keep disputes out of the courts. Mediation is low-risk (no decision is imposed on the parties), confidential, low cost, speedy and has a strong track record of success. It aims to:
- help save the parties the expense, delay, stress and diversion of executive time of bringing their case to a hearing
- avoid aggression
- avoid delay in achieving an outcome
- help preserve existing commercial relationships and market reputation
- provide a wider range of settlement solutions than those offered by litigation.
It is not however suitable for all cases, for example:
- where urgent injunctive relief is required
- where the determination of an important point of law is called for
- where it is important for one of the parties to be seen publicly to be taking a tough stance, e.g. where there is a risk of copycat speculative claims
- where the parties are already undertaking effective negotiations.
The English court, however, is placing an increasing emphasis on the need for parties to attempt to resolve their disputes by mediation. The court has also been prepared to penalise parties unreasonably refusing to participate in mediation in the way the court ultimately deals with the costs of the proceedings.
Escalation clauses
Mediation should not be specified as the sole means of resolving disputes but can be written in to the Agreement as one of a range of options. Agreements may provide for the parties to seek initially to resolve any disputes by negotiation at operational level, failing which they may be referred to senior management or Board level. If agreement is not reached through direct negotiations, the parties may then be required to invoke the help of a third party mediator. Only if that fails will either party be at liberty to commence arbitration or court proceedings.
Conclusion
The benefit of including negotiation and mediation provisions into the contract is that they force the parties to address these procedures before launching into battle. There is no guarantee of success, and sometimes swift recourse to court will be called for, but having a dispute resolution procedure in the contract at least enables the parties to propose mediation without fear of being the first to blink. Almost invariably, a resolution of a dispute that the parties have agreed between themselves at an early stage will be preferable to a decision imposed by a court after a lengthy, expensive and uncertain fight, and that must be something that is worth trying for.
For more information on our hotels group or to access our response to the Government Hotel REIT proposal click on http://www.cms-lawnow.com/area-of-law/real-estate.
If you would like to find out more about how dispute resolution issues impact upon the hotel industry please contact the following partner from our CMS International Hotel Group:
Charles Spragge, Litigation partner
T +44 (0)20 7367 2525
F +44 (0)20 7367 2000
charles.spragge@cms-cmck.com
