Dispute resolution clauses are often the most carefully considered in any agreement negotiations. Hotel management agreements (HMAs) are no exception. Given the complexity of the relationship between the owner and the manager and the subject matter of HMAs, the manner in which differences can be resolved go a long way in fostering or souring relationships between the parties.
The standard approach in HMAs across various hotel operators is to have a two pronged approach - have disputes resolved either by arbitration or by determination by an expert in the hospitality sector. The applicability of these two forums depends on the kinds of disputes and sometimes, even the values involved.
It seems intuitive that certain disputes be determined by experts and not by arbitrators, given that the legalistic process of arbitration as well as the technical acumen of the arbitrators may be unsuitable for technical matters that require specialized knowledge and quick resolution. These disputes typically relate to budgeting, brand standards and safety measures. Delays in resolving such issues could have serious repercussions on the development or operation of the hotel. It is not uncommon for HMAs to provide that such expert resolution is final and binding . For good measure, language to the effect that ‘the decision of the expert shall not be capable of appeal or other challenge’ is also included.
The question then arises is that to what extent can the determination of an expert be binding, given the current law of the land.
Agreements in restraint of legal proceedings are unenforceable under Indian law. Legal proceedings recognized are litigation and alternate dispute resolution methods provided under the Indian Arbitration and Conciliation Act, 1996 (Arbitration Act). Under the Arbitration Act, the jurisdiction of courts are ousted where an arbitration agreement is signed except in certain limited circumstances.
In light of this, it appears that despite providing that expert determination will be binding, a party aggrieved by the expert’s decision may move either the courts or the arbitrators post such determination.
However, an alternative view wherein the expert is seen as an arbitrator also prevails. In such cases, challenges to the expert’s decision would lie to the courts to the limited extent provided in the Arbitration Act as in the case of an arbitration.
Which view would prevail i.e. whether expert determination is subject to arbitral review or whether the expert determination is itself in the nature of arbitration is dependent on the language of the contracts. Where dispute resolution clauses include both expert determination and arbitration, which exclude the operation of each other, parties might end up in court failing clarity in the terms.
It therefore becomes necessary to understand the distinction between an expert determination and arbitration.
In this context, it would be useful to examine the Supreme Court’s views on the essential ingredients of an arbitration clause. Two important ingredients are – (i) that the agreement between the parties must contemplate that substantive rights of parties will be determined by arbitrators and that the arbitrators will determine the rights of the parties in an impartial and judicial manner, owing an equal obligation of fairness towards both sides, and (ii) that the agreement of the parties to refer their disputes to the decision of the Tribunal must be intended to be enforceable in law. In a recent decision, the Supreme Court ultimately established that in an agreement what is required is clear demarcation of the role of the expert and that of an arbitrator(s). If the expert determination clause provides that all disputes are to be resolved by the expert appointed such a provision could function as an arbitration agreement between the parties. However, if the arbitration provision states that all but certain disputes are to be referred to arbitration for resolution, and those certain disputes are to be referred to an expert, the decision of the expert will be just that, and such an expert will not be an arbitrator. Experts in arbitration law have also considered this issue at length. The tests highlighted are the (1) existence of disputes as against intention to avoid future disputes; (2) the tribunal or forum so chosen is intended to act judicially after taking into account relevant evidence before it and the submissions made by the parties before it; and (3) the decision is intended to bind the parties. It is the intent of the parties and not the nomenclature used by that determine this issue.
Accordingly, in HMAs where arbitration is clearly excluded, expert determination takes the form of a quasi arbitral decision and parties could be free to move the courts challenging the determination. Further, a party may also jump the gun and refer a dispute earmarked for expert determination to arbitration. It therefore becomes vital that the intent of the parties be clearly spelled out and safeguards against such a situation be included in HMAs.
As may now be apparent, dispute resolution provisions including both expert determination and arbitration may lead to some amount of confusion as to the role of both, the finality of the decision and the rights of parties. Not only should the intent of the parties in this regard be clearly discussed prior to execution, but also be clearly captured in the HMA to give it effect.
Disclaimer: This article was first published in the September 2014 issue of the Hospitality Biz magazine. It has been authored by Aakanksha Joshi, who is an Associate Partner and Tarini Menezes, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at email@example.com or firstname.lastname@example.org for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.