The hospitality industry is an important subdivision of the commercial service sector. Modern hotel management, especially for large-scale multinational brands, adopts the transaction mode: owners provide funds and immovables, bear operating risks and benefits; operators are responsible for professional and branded operations and charge management service fees.
In recent years, affected by the overall economic environment, industry competition and, more recently, the covid-19 pandemic, disputes between owners and operators arising from hotel management agreements (HMAs) have been rising, and the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC) has administered a number of relevant hospitality cases.
Given this backdrop, what are the typical disputes in hospitality cases, and what are the benefits of resolving these through arbitration?
Disputes over mismanagement claimed by the hotel owners
In the author’s opinion, the BAC/BIAC’s experience suggests that hotel owners are most concerned about profit and loss. Weaker financial performance is the underlying cause of disputes, and charges of mismanagement just the external manifestation of this.
In real-life cases, mismanagement often lead owners to seek to terminate the contract. Once a contract is terminated, both parties will face the settlement of accounts and the loss of any expected benefits for many years, if not decades. They will also find themselves embroiled in disputes over fees related to brands, design, guidance and construction, as well as security deposits arising out of the contract.
The particularity of this kind of dispute requires both parties to pay close attention to the relationship between different contracts, the negotiation of contract details and the retention of communication documents. At the same time, it also requires the dispute resolution institution to have high professionalism and rich case-management experience.
In more complex arrangements, the hotel owner sometimes signs a general contract with the contractor and the contractor subcontracts the hotel management to a hotel operator, which increases the likelihood disputes. These kinds of disputes need to be handled carefully in order to avoid the frustration of multiparty arrangements. For example, in a case administered by the BAC/BIAC, the hotel owner wanted to terminate the contract with the contractor, and seek damages for the contractor’s mismanagement. However, the contractor argued that it was not involved in the hotel’s management, which was undertaken by another company not involved in the case. Any penalty sought by the owner should be paid by the actual operator, it said.
Although the arbitral tribunal recognised that the contractor had breached the contract based on the relativity of contracts, it maintained the validity of the contract and preserved the possibility of obtaining remedies for both parties in the future for other kinds of breach of contract behaviours based on the original intentions of the parties reflected by the contract period of more than 10 years, the possibility of remedying the respondent’s breach of contract by strengthening management, and the extent of impact on the achievement of the purpose of the contract. This way of handling reflects the value orientation of respecting the contract and dealing with it prudently.
Disputes over undue interference claimed by hotel operators
Hotel operators attach particular importance to their brands, their ecosystems, as well as geographic coverage and competition.
For example, in another case administered by BAC/BIAC, the hotel owner unilaterally requested to terminate the venture, and marketed the hotel under other brands without the consent of the operator. In response, the operator gradually removed the management team and cutthe hotel off from the group, requested the owner to terminate the relevant HMAs and compensate for the loss of pre-opening fees, anticipated management fees and the manager’s salary.
On the one hand, in accordance with contractual provisions, the arbitral tribunal terminated the relevant contracts to take into account the importance of the hotel brand inthe performance of the HMAs and because the hotel owner failed to inform the operator in a timely manner of the need to rectify its performance issues. . On the other hand, the tribunal also gave due consideration to the actual losses suffered by the operator and the work of the appointed hotel manager and other factors, reasonably allocated the management fees and other expenses. All of which highlighted the need for careful handling of subsequent liquidation in the case of deadlock in the performance of the HMAs.
As the above two examples show, from the perspective of legal relationships, HMAs may involve the overlapping of agency, technology consultation, technology service and intellectual property rights; from the perspective of practical operations, it may involve the brand style design in the preparatory period, building of construction projects, appointment and specific work of the hotel manager and management team in the process of the hotel operation, and even the resolution when operational obstacles arise.
Such disputes exhibit the characteristics of diversity, complexity, and the importance of hotel brand and reputation maintenance, which naturally correspond to the independence, professionalism and confidentiality of arbitration. With the above-mentioned factors, and arbitrators with expertise in commercial service, intellectual property and construction combined, arbitration can play a unique role in resolving HMA disputes, balancing interests and advancing co-operation between hotel owners, operators and other parties.
An Di is a case manager at the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC).
Gao Zhuang, a case manager at BAC/BIAC, also contributed to the article