By Arif Ali, Alexander de Gramont, Érica Franzetti and Henry Defriez

Law360 (May 11, 2020, 4:55 PM EDT) --

Arif Ali

Alexander de Gramont

Érica Franzetti

Henry Defriez

The COVID-19 pandemic, and the travel restrictions imposed in response, are already having a severe impact on the hospitality industry. While hotel management agreements may be a primary source of disputes over the coming weeks and months, all participants in the hospitality industry may face difficulty in meeting their contractual obligations given the socioeconomic implications of the pandemic.

For example, weaker financial performance by operators, and a consequent failure to meet agreed budgets, may lead to disputes regarding whether certain contractual rights and obligations in HMAs have been triggered, such as obligations on owners to contribute capital; the right of owners to terminate the HMA or take over management of the hotel; and guarantees by which the operator underwrites an agreed return to the owner.

Similarly, in customer-supplier contacts, agreed deliveries may be deferred, contracted payments may be delayed, and transactions that should have closed may be abandoned. 

Industry participants will have to navigate these disputes at a time of reduced cash flows and major disruption to business operations. In this article, we explain how participants in the hospitality industry can use mediation and arbitration to navigate these disputes in a cost-efficient manner.

The Advantages of Arbitration and Mediation

When disputes arise (or preferably in advance), businesses should consider whether the contractually specified method for dispute resolution (which may have been agreed years ago in substantially different circumstances) is the best method for resolving a dispute in the current economic climate. In particular, if the relevant contracts provide for litigation, one should consider the benefits of a submission agreement by which the parties can instead agree to submit their disputes to arbitration.  

Arbitration proceedings are generally faster and less expensive than litigation, particularly considering that national courts will be experiencing a significant backlog in the coming months and years. Furthermore, the parties have control over the selection of the decision-maker and the procedure, which can result in a dispute resolution framework that is tailored to the specific characteristics of the dispute and the demands of the current crisis. 

In contrast, though national courts are showing some flexibility, such as a willingness to hold remote hearings, procedures in litigation are generally fixed and not subject to variation by the parties. In addition, parties can appoint arbitrators with experience in the hospitality sector and the applicable law, the proceedings can be kept private and confidential, and it is generally easier to enforce an arbitral award, compared to a national court judgment, in a foreign jurisdiction.

Businesses should also consider mediation, either as a prior step or alternative to arbitration. The chief advantage of mediation is that it is generally quicker and cheaper than both litigation and arbitration. Being less adversarial than those two methods of dispute resolution, mediation is also particularly well-suited to the preservation of an existing commercial relationship such as that between owner and operator, whether or not the mediation leads to a settlement. (Mediation is nonbinding, as opposed to arbitration, which is by definition binding on the parties.) 

While mediation is often perceived to be toothless because the mediator cannot impose a solution on the parties, it can be a valuable tool whether or not a settlement is reached. If no settlement is reached, mediation can still narrow the dispute so that, even if it proceeds to arbitration, the arbitration can be quicker and more cost-efficient. Conversely, if a settlement is agreed by the parties, it can be embodied in a binding contract.[1]  

How to Prepare a Submission Agreement

If parties wish to submit a dispute to arbitration or mediation despite the underlying contract providing for litigation, this can be done by way of a submission agreement. In order to ensure that a submission agreement is valid and enforceable, parties should:

• Comply with any modification requirements in the underlying contract;
  
  
• Confirm that the governing law of the submission agreement is the same as that of the underlying contract, unless there are good reasons for a change;
  
  
• Specify the rules of a particular arbitral institution, or, if the parties prefer the greater flexibility of an ad hoc arbitration, the agreement should provide for the arbitration to be conducted under the United Nations Commission on International Trade Law Arbitration Rules or an equivalent;
  
  
• Specify the number of arbitrators (one or three) and the language of the arbitration;
  
  
• Choose the "seat" of the arbitration (i.e., the jurisdiction whose arbitration law will govern the arbitration, even though the proceedings may be held elsewhere), which should be an arbitration-friendly jurisdiction that is a signatory to the New York Convention, the Panama Convention, or a similarly effective treaty providing for the enforcement of arbitral awards; and
  
  
• Ensure that the arbitration submission agreement is executed by an authorized representative with proof of the necessary legal or statutory authority to agree to arbitrate the dispute covered by the submission agreement.

How to Ensure an Arbitration Is Quick and Cost-Effective

Parties can take specific steps to ensure a quick and cost-effective resolution of the dispute.

As a first step, parties may modify or waive any contractually stipulated predispute steps, such as a defined period of good faith negotiations. Parties can also agree that a single arbitrator could be appointed rather than a panel of three, with the former often proceeding more quickly than the latter (although it is usually best to have three arbitrators for high-value, complex, or bet-the-company arbitrations). 

The length of the dispute can also be shortened by using any available expedited procedure in the applicable arbitration rules to shorten the time frame of the dispute, though the arbitration will still need to be carefully managed by the arbitrator(s) to ensure it finishes within the stipulated time frame (usually six months).[2] An even quicker resolution of the dispute may be possible by disposing of any spurious claims or defenses that are "manifestly without merit" or "manifestly outside the jurisdiction of the tribunal" through any summary judgment mechanisms in the applicable arbitration rules.[3]

In a similar vein, the parties may modify typical arbitration procedures in order to reduce the time and cost of the proceedings. For example, parties may agree to limit the number of legal submissions that they can make (one round of submissions might suffice rather than the two rounds that are normally used in international arbitration); fix page limits on written submissions; limit or dispense with document production; forgo any oral hearings in favor of a documents-only arbitration; dispense or limit the number of witnesses (fact or expert) and otherwise shorten the length of any oral hearings, including the time for cross-examination of witnesses and experts; and forgo post-hearing briefs. 

Further, while virtual hearings may be the only option for the near future given travel restrictions, they may still be used in the long term in order to reduce time and costs. Several arbitral organizations (including the International Chamber of Commerce, JAMS, the International Center for Dispute Resolution, and Delos) have issued guidance for deciding when a virtual hearing is optimal and practical tips for conducting such a hearing.[4] 

In short, virtual hearings may be particularly beneficial in low-value disputes, or those involving little or no witness testimony. In disputes involving several witnesses, participants in multiple time zones or a need for live interpretation, parties should consider whether a virtual hearing is desirable and, if so, attempt to narrow the issues addressed and witnesses presented at the hearing.

Parties and their counsel can also use innovative and well-targeted strategies to increase the chances of an early resolution of the dispute. For example, a claimant or respondent can reinforce the pressure on its opponent to settle through well-argued legal submissions that illuminate the risks it faces, as well as incisive document disclosure requests, the imposition of injunctions and freezing orders, and the careful selection of arbitrators and experts. 

Parties can also agree to bifurcate a case into discrete issues for determination (usually jurisdiction, merits and quantum), which can allow the parties to either dispose of the entire case at an early stage or narrow the issues in dispute and thus increase the chances of a settlement. Further, both sides may use interim relief procedures, including emergency arbitrators, to preserve the parties' underlying business and increase the chances of a negotiated settlement.[5]

Whether or not cash reserves are low, businesses may also consider the use of third-party funding, provided it is legal in the relevant jurisdictions. Third-party funding is a risk and cost mitigation tool increasingly used in international arbitration. When funding is obtained, the funder will typically assume the costs of the arbitration (or litigation) in return for a share of any damages awarded if the claim were to succeed, while it receives nothing if the claim fails.

In recent times, third-party funders have also started offering portfolio funding whereby a funder assumes the cost of all cases falling within agreed criteria (both as claimant or respondent), thus taking significant costs off the company's balance sheet while diversifying the risk of adverse decisions for the funder.[6]

Finally, businesses may also consider employing innovative means to limit the costs of legal representation, such as contingency fees, blended rates, fee estimates and fee caps, portfolio pricing, and using counsel with dedicated pricing specialists.

Conclusion

Like any economic crisis, the COVID-19 pandemic will lead to a rise in disputes at the same time that businesses have reduced cash flows and operational scope, and are in greater need than ever to preserve existing commercial relationships. In these circumstances, businesses should consider submitting their disputes to arbitration or mediation, as well as employing suitable techniques that allow for a quick and cost-effective resolution of the dispute.

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Arif Ali is a partner at Dechert LLP and co-chairman of the firm's international arbitration practice.

Alexander de Gramont is a partner at the firm.

Érica Franzetti is a partner at the firm.

Henry Defriez is an associate at the firm.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general informational purposes and is not intended to be and should not be taken as legal advice.

[1] A settlement achieved through mediation may also be enforceable (as if it were a local court judgment) pursuant to the UN Convention on International Settlement Agreements Resulting from Mediation (the Singapore Convention). At the time of writing, 52 countries have signed the Singapore Convention (including China, India, Iran, Israel, Malaysia, Nigeria, South Korea, Saudi Arabia, Turkey, Ukraine, USA, Uruguay and Venezuela), though only three have ratified it (Fiji, Qatar and Singapore). In some instances, such settlement may also be recorded in an arbitral award. For example, the Singapore International Arbitration Centre and Singapore International Mediation Centre offer an "Arb-Med-Arb" procedure which combines the benefits of both procedures. The dispute is commenced in arbitration, which is then paused to allow for mediation to take place. If a settlement is reached, this can be recorded in the form of an arbitral award, which will be enforceable under the New York Convention. If no settlement is reached, the dispute returns to arbitration. For more information on the Arb-Med-Arb procedure offered by SIAC and SIMC, see http://simc.com.sg/dispute-resolution/arb-med-arb/.

[2] For examples of expedited procedures, see HKIAC Administered Arbitration Rules (2018), Rule 42; SIAC Rules (2016), Rule 5; ICDR International Dispute Resolution Procedures (2014), Article E-1; CIETAC Arbitration Rules (2015), Article 56; SCC, Rules for Expedited Arbitrations (2017); ICC Arbitration Rules (2017), Appendix VI.

[3] For examples of summary dismissal procedures, see SIAC Rules (2016), Rule 29; SCC Arbitration Rules (2017), Article 39; and HKIAC Administered Arbitration Rules (2018), Article 43. Furthermore, it is generally accepted that it is within an arbitral tribunal's inherent power to dismiss a manifestly meritless claim at an early stage: see, for example, ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (2019), paragraph 74.

[4] See, for example, https://iccwbo.org/content/uploads/sites/3/2020/04/guidance-note-possible-measures-mitigating-effects-covid-19-english.pdf; https://go.adr.org/covid19.html; https://www.jamsadr.com/online#overview; https://delosdr.org/index.php/2020/03/12/checklist-on-holding-hearings-in-times-of-covid-19/; https://delosdr.org/index.php/2020/03/12/checklist-on-holding-hearings-in-times-of-covid-19/.

[5] Virtually all arbitral regimes allow the parties to seek interim relief.  For examples of emergency arbitrator procedures, see ICDR International Dispute Resolution Procedures (2014), Article 6, CIETAC Arbitration Rules (2015), Appendix III, HKIAC Administered Arbitration Rules (2018), Article 23, SIAC Rules (2016), Rule 30, ICC Rules of Arbitration (2017), Article 29; LCIA Arbitration Rules (2014), Article 9B, SCC Arbitration Rules (2017), Appendix II.

[6] Key arbitration markets in which third-party funding is legal include Australia, Canada, England and Wales, France, Germany, Hong Kong, Singapore, Sweden, Switzerland, and various U.S. states and territories.

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