Litigation & Legal Archives - Cayuga Hospitality Consultants

Oct 25

Sexual Harassment in the Restaurant Industry: Pervasive and Preventable

This past year has seen a flood of allegations and admissions of sexual harassment in the restaurant industry. It’s been clear to many that incidents of this nature have been occurring for a very long time in a wide variety of ways. A spark was needed to bring the issue into the spotlight and the calling out of high profile industry leaders became that catalyst. This article will examine why restaurants have more sexual harassment claims than any other comparable industry and ways in which operators can prevent and manage harassment in their own operations.

Why Sexual Harassment in the Restaurant Industry is Widespread and Preventative Measures

Culture Created by Owners and Management

A respectful work culture begins with the vision and effective implementation of ownership’s goals. The culture in which the work and results get done needs to matter. Staff needs to be more than just interchangeable and replaceable pieces and whose growth and well being are considered part of the restaurant’s success. Ownership that is committed to the genuine development of its staff and reinforces that through daily activities and feedback can create a culture that contributes to a respectful work environment that does not tolerate sexual harassment.

Poor Hiring Decisions

Restaurant owners and management often make very poor hiring decisions. They’re not clear what they’re looking for. Prospective employee attitude needs to be a critical factor in the hiring process. Skills can be taught; character is usually already in place. Leadership needs to learn how to screen for the type of character that will contribute to a positive and respectful work culture.

Power Dynamic of Men and Women

Sexual harassment in the restaurant industry is just as much about power as it is about sex. According to a 2012 study by S. Representative Donna Edwards and other advocacy organizations, 71% of servers are women with male managers. A 2014 report from Restaurant Opportunities Center United estimates as many as 90% of women in the industry have experienced some type of sexual harassment. Abuse of that power position can be pervasive if managers are not clear on the boundaries and ownership allows for it.

Staff Hours Together and Influence of Alcohol and Drugs

Staff is often together 12 + hours a day and abuse of alcohol and drugs is a common condition among restaurant employees. Add on late nights and you have a potential recipe for unwanted sexual behavior. It’s up to management to diffuse the mix of these ingredients by smarter scheduling practices and awareness to minimize alcohol and drug use.

“The Customer is Always Right”

The customer is always right is wrong. There are some abusive customers who cross the line and no employee should be subject to that behavior. Staff needs to have ownership back them when customers get out of line. As an owner, you have the right to refuse service to customers who disrespect your staff.

The Impact of Tipping

The dynamic of needing to get tips for survival income often puts servers in compromising situations. They put up with poor behavior so as not to jeopardize a tip. Some restaurants have tried a no tipping policy, mostly without much success to this point. There are a variety of other issues that are also impacted by tipping including the discrepancy between front and back of the house pay. There needs to be continued work on developing a pay model that works for both the employees and ownership. In the meantime, restaurants can support tipped employees by encouraging them not to put up with abusive customer behavior for the sake of a good tip and enforcing specific guidelines for customer behavior.

Some Other Strategies to Prevent Sexual Harassment in the Restaurant Industry

Develop Written Guidelines

Management needs to have in place written policies that make clear what constitutes sexual harassment. Consequences also need to be spelled out. These guidelines should be gone over with staff and be reinforced especially whenever an incident occurs.

Managers and Staff Training

Ownership should provide extensive training for both management and staff. This would include bystander intervention training so everyone understands that allowing sexual harassment to go on in front of you makes you part of the problem.

Have an Open Door Policy for Staff

A culture of approachability, where staff can feel no hesitation in presenting issues to management, leads to a healthier work environment. Employees need to feel safe in telling the truth about sexual harassment without fear or believing it won’t matter to say anything.

Zero Tolerance for Harassment

Incidents need to be taken seriously with zero tolerance for unwanted sexual behavior. Act fairly and tackle all such issues immediately and openly so staff understands the policy. Keep a written record of all incidents and make it a point to understand the legal issues connected to sexual harassment.

Create Opportunity for Women Leadership

Make efforts to create opportunity for women to take on leadership roles and encourage their active participation in decision making.

The events of the past year surrounding sexual harassment have created an awareness and call to action that will not be reversed or buried. Smart restaurant operators should take the time to revisit the culture they’ve created and realize that they need to be proactive in welcoming a way of doing business that no longer tolerates old accepted practices. Restaurant success can be a multi-dimensional vision that incorporates a solid financial model with exceptional food, service, and atmosphere as well as a respectful work culture that honors the staff that contributes to that vision.

About the Author:

Alan is a 30-year operator of high volume restaurants, in which he has managed all facets of the business. His experience and expertise have led him to develop a well-regarded expert witness practice. In his consulting practice, he has worked with many clients to create and establish their concepts. In addition, Alan has worked on assignments to develop food products for market such as protein bars, cookies, and brownies. He has also directed 7 EPA grants to train operators in Green sustainable practices. He has created an extensive network of industry professional who he works with on a regular basis. Throughout his career, Alan has supported the success of entrepreneurs through executive coaching and training. For the past 10 years, Alan also has taught at the Institute for Culinary Education in NYC and at NYIT where he has taught all aspects of the restaurant business. His students have opened fast casual restaurants, cafes, bakeries, and fine dining operations.

May 31

Hotel Management Agreements – Agency Relationships

In 1991, a California court, applying California law in a hotel management agreement dispute, in the Woolley – Embassy Suites case (Woolley v. Embassy Suites, Inc. 227 Cal. App. 3d 1520) sent a startling message to hotels. At the time, those of us who follow these kinds of cases thought the holding was a one-off, quirky decision that is not likely to be followed and may be overturned in subsequent decisions.

It held that a hotel management agreement is not only a commercial contract that sets out the rights and obligations of the parties, but it also gives rise to an agency relationship. In that relationship, the management company is the agent and the hotel owning company is the principal. As such, under common law agency principles, the court held:

a) The owner has the power but maybe not the contractual right to terminate the agency relationship at any time, although it may face a contractual monetary damage claim if the management agreement was wrongfully terminated;

b) Once terminated, a court lacks authority to re-instate via equitable relief; e.g., an injunction ordering the owner to reinstate the management company the hotel management agreement because of its characteristics as a personal services contract;

c) The agency would not be terminable if it is “coupled with an interest”; e.g., the management company did not have a “present property interest” in the Embassy Suites hotel, but was just providing a service for a fee.

Then came another California case in 1993 with a similar holding: Pacific Landmark Hotel, Ltd. versus Marriott Hotels, Inc. that also extended to hotel management agreements the common law agency principle that the agent; i.e., the management company, owes to the principle; i.e., the owning company, a fiduciary duty that at law is likely to be a much higher standard of care, akin to what a guardian owes a child. This standard of care is not what one would find or even expect to find among the terms of a commercial contract such as a hotel management agreement.

At this point, these holdings seemed idiosyncratic to California law where “cutting edge” legal concepts are spawned, but many do not survive or spread. But this was not the fate of the agency analysis of hotel management agreements. Instead the concept expanded to other states whose laws govern hotel manager/owner contracts. The cases are too many and too nuanced for analysis in this article. But notably, New York law, that governs many hotel management agreements and other commercial contracts, also came to include the principle that hotel management agreements are revocable agency appointments. E.g., the Federal District Court holding in the “Turnberry Case” – FRR TB, LLC versus TB Isle Resort, LP – where New York law governed the hotel management agreement, although the Fairmont resort was in Florida.

So, without detailing all the intervening cases, about which much has been written, the legal “agency” principle now seemed entrenched. Like it or not, although a hotel management agreement these days is the result of a long and tough negotiation between two very sophisticated parties, perhaps Marriott or Hilton on the one hand as “manager” and a huge publicly traded REIT or insurance company on the other hand as “owner”, the owner enjoys the added common law benefits arising from the “agency” analysis. The owner may still invoke agency principles as overlaying and superseding the provisions of the agreement and (i) exercise the power of termination, (ii) allege violations of the fiduciary duty, typically for self-dealing not in the best interest of owner, and (iii) resist any attempt by the terminated management company to seek judicial reinstatement of the agreement. If as a matter of contract law the exercise by the owner of its power to terminate the management agreement was wrongful, that owner may face a contract damage claim; i.e., a claim for a monetary judgment for wrongful termination. But to a judgment-proof owner, this threat may be meaningless and to the management company, a lawsuit for monetary damages is time-consuming and costly with an uncertain outcome.

In 2005, Marriott responded to all this “mayhem” by petitioning successfully the Maryland Legislature to pass a law that became Section 23-102(a) of the Commercial Law of the Code of Maryland. That statute provides that “[i]f a conflict exists between the express terms and conditions of an operating agreement and the terms and conditions implied by the law governing the relationship between a principal and agent, the express terms and conditions of the operating agreement shall govern”. The statute also provides that a court may grant “specific performance”; i.e., an injunction – for an anticipatory or actual breach or attempted or actual termination of a hotel management agreement even if an agency relationship exists between the parties. Id. § 23-102(b). The statute clearly is aimed at negating the common law overlay that gives owners the power to terminate a management agreement and that denies to the manager the remedy of court-ordered reinstatement. Instead, the law provides that the terms of the negotiated agreement between the parties governs their respective rights, without added help to the owner from a common law overlay. This really seems to be what many of us might expect. Hence Marriott and other hotel companies now seek to have their management agreements governed by the law of the State of Maryland, no matter where the hotel is situated.

But then the New York courts added an odd twist. In Marriott International versus Eden Roc, an appellate court in New York, reversing the lower court, decided that the hotel management agreement in question “is a classic example of a personal services contract that may not be enforced by injunction”. Further, the court held that the agreement “is not and agency agreement”. Now that is confusing. So at this juncture, in New York, the law was that hotel management agreements may not constitute an agency appointment or give rise to an agency relationship, but even so, they are terminable by the hotel owner. IN addition, these agreements may not be enforced by injunction because they are personal services contracts. So much for the prior analytical clarity, wrong though it may have seemed to many of us who follow these cases.

But it does not end there. In a recent 2017 case, Chelsea Grand, LLC versus Interstate Hotels & Resorts, Inc., a Federal District Court in New York, applying New York law, held that Interstate Hotels, as the hotel manager (“operator”), does NOT owe a fiduciary duty to the hotel owner. The result seems right to some of us, but the analysis is very strained. The court concluded that because the management agreement between Interstate Hotels and Chelsea Grand Hotel did not create an agency, even though the management agreement expressly states that the manager – “operator” – is owner’s agent, there is no fiduciary duty. But the management agreement in question contains the following language.

3.2 The operator (Interstate) as agent for the owner to perform enumerated tasks;

5.1 “…the operator shall act solely as agent of owner”, but will not be construed as a “partnership or joint venture between owner and operator”;

6.1 Operator shall act solely as agent for the account of the owner, but will not be in default if there is a lack of funds from the operator of hotel or as otherwise provided by owner.

So, where does all this leave us? Owners and management companies alike are left in a very murky legal environment where hotel management agreements are accompanies by an overlay of contradictory and uncertain principles of common law. Somewhere out there may be a case that will clarify all this. It likely involves a dispute between an owner and a management company where the owner purports to terminate the agreement, perhaps without even giving notice or complying with other contractually mandated requirements, such as allowing the management company its contractual right to cure the alleged default. And there is a judge out there who will hold that the hotel management agreement was carefully drafted by capable lawyers and negotiated zealously by both parties. Then maybe the court will leave the parties to the bargain they freely negotiated that is embodied in their commercial contract, without resort to common law agency or personal services principles. In my view, that will add certainty and clarity and leave the parties to the deal they cut, with no added help from the common law to one or the other.

This article appeared EHotelier Insights

About the Author:

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

Mar 22

Hotel Management Agreements – The Illusory Performance Test

In the negotiation of management agreements, owners take comfort from the performance test that in the most optimistic light will allow the hotel owner to terminate a management company that does not meet the standards of the performance test. But let’s look more deeply into the proposition that the performance protects the owner from the under-achieving management company.

The typical performance test these days, and they have become very standardized across the major US branded management companies (e.g., Marriott, Hyatt, Hilton, InterContinental…), looks like this:

The owner may terminate the management agreement if for two consecutive years the hotel has not achieved (a) [90 per cent] of budgeted revenue (or possibly gross operating profit) AND (b) [90 per cent] of the RevPAR of the agreed competitive set.

On face value, not bad. But here are the features that detract from the efficacy of the test to assure that the owner is getting the best possible performance from its management company:

The management company will have a cure right that usually is satisfied by the management company’s making a payment to cure one of the two year’s failures and one of the two prongs of the test, prong (a) or prong (b). Prong (a) is susceptible to cure, so the payment to bring gross revenue to within 90 per cent of budget is the route to cure. The cure payment is not an adequate substitute for hotel performance;

The cure can be a cure of either year, so the management company will choose the year in which a cure is accomplished by paying less;

The cure of either year negates both of the two years, and the slate is wiped clean;

If the management company perceived in the first of the two years in which the test was failed that it had budgeted gross revenue too optimistically, it can adjust the budget for the next year to make budgeted gross revenue more achievable. The owner must be wary of this;

The competitive may not be a high enough bar. It has to be made up of those hotels that are truly comparable and are doing well;

The test is not failed if the shortfall can be attributed to a broadly defined “event that constitutes force majeure”;

The test is not failed if owner is in breach (any breach), and this may include a failure to spend all the capex required to meet each and every brand standard;

Any termination of the agreement, whether because of a failed performance test or otherwise, is almost always conditioned on the owner’s repaying all amounts that are owed to the management company, and these can be very considerable where the management company has advanced key money or a made a loan to the owner, as are often the case with new hotels. A hotel that has been failing the performance test is not likely to have accumulated the cash to satisfy these obligations.

What can an owner do?

It would be better for the owner if the “AND” separating the two prongs were instead “OR”, but this is rarely agreed.

Make the years to which the test applies not two consecutive years, but any two of three consecutive years;

The percentages – 90 per cent in the examples – should be at least 100 per cent and arguably even more where the management company flaunts its ability in the negotiation leading up to the management agreement and has a new hotel at its disposal. The owner should seek to have the hotel under the supervision of the management company exceed the budget and the RevPAR of the competition, not just come within a respectable proximity to the budgeted revenue or the performance of the competitors;

The owner must insist always on aggressive, stretch budgets, not an easy-to-achieve “softball budget” that might be proposed by the management company after it has failed the first of the two consecutive year tests;

Be sure the competitive is a good one and that it is adjusted over time to remain truly “competitive”;

The right to cure should not be unlimited, and allow only one or two cure rights throughout the term of the management agreement;

Make the cure payment from the management company apply to the shortfall for both years, or at least negate only the year for which the payment was made (meaningful where the test applies to any two of three consecutive years);

If the management company has a right to extend the term at its expiration, condition that extension upon the management company’s not having failed the performance test, whether or not the failure was cured;

Tighten up the definition of “force of majeure” so that it applies only when there are extraordinary, unforeseen events, such as a tsunami. Do not allow a general economic downturn either globally or locally to be part of the definition of “force majeure”. The management company should be expected to manage through economic downturns;

Make only those owner breaches that directly impacted the management company’s ability to meet the performance test apply as excuses for the failure;

The obligation of the owner to repay all amounts owing to the management company as a condition precedent to termination of the management agreement should not apply where the termination arises from a failure of the performance test. This is a difficult one because the management company is not likely to agree to leave the property unless it is fully paid for all amounts owed;

Make the performance test measure the net income that flows to the owner. This is difficult because in a hotel P&L, management companies measure their performance only above those expense lines over which they argue that they have no control, such as the FF&E replacement reserve, property insurance, property taxes, capex and most importantly, debt service. But net income is ultimately the only performance outcome that is truly meaningful to the owner.

In short, if the owner is genuinely interested in having a meaningful performance test, the owner must think long and hard about what performance it wants to use as the test standard and what constitutes a failure of the test, and then negotiate hard to make the test meaningful and not an illusory cosmetic.

By Albert J. Pucciarelli, Esq.

This article appeared in eHotelier on March 21,2017

About the Author:

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

Mar 05

The Illusory Indemnification

The major US hotel brands (e.g., Marriott, Hyatt, Hilton, InterContinental…) have become truly global in the past 20 years and many of them now franchise or manage more hotels outside the US than within the US. In the management agreements whereby these brand owners not only license their names and know-how for use by a hotel, but also oversee the day-to-day operation of the hotel, the management company assumes, and insists upon, the exclusive right to hire, train, supervise and, as necessary, terminate the employment of, all hotel-based personnel.

In the franchise world, employees based at the hotel are employees of the hotel owning company, no matter where the hotel is located, with the franchisor having no hiring or supervisory role, although the franchisor may make training programs available to certain hotel personnel. In the management agreement context, the situation is less uniform.

In the US, the management companies generally insist upon being the employer of each and every hotel employee. The hotel-based employees receive pay checks from the management company and participate in their nation-wide benefit plans. There are enormous synergies and policy uniformity that are achieved by making the hotel-based personnel at all levels employees of the management company rather than the hotel owning company. Even so, the recruitment and relocation costs, training costs, salaries and benefits, and termination-related payments are all above-the-GOP-line operating expenses of the “hotel” which means that they are borne by the hotel owner as routine operating expenses.

Outside the US, the employer/employee relationship is very different. Typically, all hotel-based employees are expressly required in the management agreement to be employees of the “hotel” and therefore they are employees of the hotel owning company and not the management company. The key personnel, such as the General Manager and other members of the hotel’s executive committee, may be employees of the US-based management company (e.g., Marriott), but while they are serving at the non-US hotel, they are also on the hotel’s payroll as employees of the hotel owning company and at least part of their salary is in local currency. They may also remain participants in the management company’s benefit plans and may draw a dollar-denominated salary in the U.S. from the management company that is a charge-back to the hotel owning company, with the benefit of tax-free US income for residents working abroad, currently $101,300.

Why this distinction? While not articulated in the management agreement, the motivations of the management companies seem to be (a) to avoid having a tax “presence” in the many non-US jurisdictions where they manage hotels and (b) to avoid the complexity of compliance with the local employment law regimes in each such jurisdiction.

What about liability for acts of employees under supervision of the management company? Whether in the US or not, the management agreements slavishly follow the limited indemnification obligations as follows. The hotel owning company must indemnify, defend and hold harmless the management company from all liabilities arising at the hotel, no matter that the employees are selected, trained, supervised and disciplined by the management company. The exception is for gross negligence or willful misconduct on the part of the management company in which event the indemnification obligation runs in the opposite direction, i.e., the management company will indemnify, defend and hold harmless the hotel owning company. While this may seem an unreasonable allocation of risk, it has become the industry standard, at least based upon my own experience and that of other lawyers who represent owners and management companies in the negotiation of hotel management agreements. But at least the management company is protecting the hotel owning company from those truly grossly negligent or willful acts attributable to it that may arise in the course of managing a hotel, such as grossly negligence in hiring (possibly where no background check is done when a rapist is hired) or in day-to-day operations (possibly when a slippery wet floor not cordoned off) or in employee discipline (possibly where an employee is terminated based upon age, race, religion or other protected classification). While the management company will stand behind these really bad acts of its employees in the US, what is the result where the employees – including all supervisory personnel and rank-and-file personnel – are employees of the local owning company?

Outside the US where all employees at a hotel are employees of the hotel owning company, the indemnification obligation of the hotel management company becomes much less certain and even illusory. The argument can be made that anything that takes place at the hotel, whether ordinary negligence, gross negligence or willful misconduct, is not attributable to the hotel management company because it is not even present at the hotel. In fact, one can question how the management company can even perform its day-to-day supervisory role without any employees at the hotel. The best that can be argued by the owning company is that those employees assigned by the management company to serve at the hotel for a time, remain employees of the management company. But these employees may have no involvement in the acts in question. Consequently, the indemnification can be illusory.

So, what to do?

The first line of recourse for almost all liability arising at any hotel is the general liability insurance policy. By naming both the management company and the hotel owning company as named insureds, both parties are protected no matter who technically bears responsibility under the management agreement, naturally with the caveat that the deductible will have to be allocated. The next two approaches will deal with uninsured losses or deductibles.
A second approach to the problem is to provide that all acts of the hotel’s key personnel, no matter whose employees they are, are attributable to the management company. The key personnel typically are hired and trained by the management company and some may be assigned to the hotel for a time, and then move on as itinerant management company personnel to other managed hotels. It is logical and fair that the conduct of all key personnel within the scope of their employment should be deemed to constitute conduct of the management company.
A third approach is to provide that any liability arising as a consequence of a policy or procedure promulgated by the management company is attributable to the management company. It is the management company’s inadequate “know-how” that caused the problem and it should be responsible.

If a hotel owner is contracting for more than the brand and reservation system (as in franchise agreements), but is looking to the management company to “supervise, direct and control the day-to-day operation of the hotel” (as is typically stated in management agreements), then the allocation of liability for matters arising at the hotel should be the same whether the hotel is in the US or not and certain acts must be attributed to the management company as set forth in numbers 2 and 3 above. Negotiation of these matters before the management agreement is executed will protect the hotel owning company and, in my view, fairly allocate risk, while not disturbing the now generally accepted principle that the management company will not protect the owning company from the results of ordinary negligence because “stuff happens” even in the best managed hotels and insurance is there for these kind of risks. But uninsured losses and deductibles should be allocated in a rational and consistent matter.

(This article also appears on eHotelier.com)

About the Author:

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

Dec 20

The Pros and Cons of Mediation in Hotel Disputes

As a lawyer involved for over 30 years in the drafting and negotiation of contracts for the hospitality industry, I can assure you that disputes are inevitable. Even among parties such as owners and management companies that have the best working relationships, there will nevertheless be issues that cause discord.

It is in how we resolve these matters that will determine if the relationship between the disputing parties will survive. If preservation of the contract and the relationship is desired, then the goal of both parties should be to resolve the matter quickly and efficiently, while also recognizing at the outset that neither of them is likely to be completely satisfied.

Resorting to court, for so many reasons, should be the last resort. Going straight to court is analogous to going to war without any attempt at diplomacy. Short of a pitched battle, there are three recognized alternatives: mediation, expert resolution (or determination) and arbitration. This article will focus on mediation, which offers the best opportunity for the parties to move forward in the ‘status quo ante’ following resolution of the dispute.

Before diving into the pros and cons, a definition is in order. Mediation means the intervention of a person chosen by agreement of the conflicting parties to promote reconciliation, settlement or compromise. Most people are familiar with mediation in a marital context. It applies with equal efficacy to commercial disputes as a means to bring the parties ‘into the same room, face-to-face’ so that, with the assistance of a trusted and sometimes trained/certified mediator, the parties can craft a resolution themselves.

For a summary of mediator certification requirements state-by-state, go to: http://www.mediationworks.com/medcert3/staterequirements.htm

A mediator assists the parties to find common ground and, where the parties disagree, to make concessions in the interest of a compromised solution. Mediation techniques include separate meetings with each party, developing a statement of the parties’ exact differences to avoid having the dispute expand in the heat of disagreement and drafting a memorandum of understanding to capture the ‘deal’. This memorandum may be enough for the parties, or it may in some cases go to the lawyers to become a more formal contract or contract amendment.

Generally, agreements to mediate that are often found as mediation clauses in contracts are enforceable. But as a consensual process, a settlement is less likely if one party is forced to participate. The mediation clause recognizes that both parties have considered and are open to the mediation process. If the mediation fails to produce an agreement, then typically the contract in question will provide that the parties may then go to arbitration or court.

Advantages of Hotel Mediation:

Consensual in nature; no one feels ‘summoned to appear in court’
Brings the parties together before the relationship is destroyed
The mediator, chosen for relevant experience, will be someone who knows the industry and has experience specific to the matter in controversy
The mediator is acceptable to both parties
The parties contribute to the process that results in a mutually acceptable resolution
The cost of a mediator is not exorbitant
Lawyer involvement in most cases is minimal
The scheduling is up to the parties

Disadvantages of Hotel Mediation:

No binding award is issued until the agreement is memorialized in a written agreement executed by both parties
Can consume a lot of time with no resolution
The admission of documents, statements and other ‘evidence’ is left to the mediator who will not be constrained by formal rules of pre-trial discovery or the rules governing the admission of evidence during a trial
Each party will ‘show its hand’ in the process and that information may result in a tactical advantage if the parties later arbitrate or litigate

Hotel Mediation Case Example

For years, a hotel used a particular vendor for linen services. Then, a new driver was assigned to the account. This driver became verbally abusive to the hotel receiving clerk and her manager within days of taking over the route. Repeated complaints were made to the vendor management without response.

The hotel was left with no choice but to file notice with the vendor to cancel their contract. The vendor refused to meet with hotel management about the situation and instead commenced a lawsuit to collect damages from the cancelled contract. Because the damages claimed fell within state mandated amounts requiring mediation prior to a trial, the case was directed to mediation.

Within two hours of discussions managed by an independent and unbiased professional mediator, not only was the case dismissed by the vendor, but both parties also left the mediation expressing relief and affirming how valuable they were to one another. With apologies to the hotel staff, reinstatement of the vendor contract and dismissal of the abusive driver, both parties found a path forward and preserved an important relationship.

While this case may have been for a relatively small sum of money, it nonetheless represents the importance of using mediation to limit legal costs, business disruption, management time dedicated to the issue and the unpredictability of a court decision. Whether it’s a simple vendor dispute, an employee/employer conflict or a larger issue such as a management contract challenge, mediation should be considered as the first course of action to prevent escalation.

Mediation Clause

Here is a sample mediation section for a contract. Shorter, less detailed versions are also available. Please review so you are familiar with the terms when it comes time to put them to use.

1. The parties agree to attempt to resolve any dispute, claim or controversy arising out of or relating to this Agreement by mediation, which shall be conducted under the then current mediation procedures of [AGENCY] or any other procedure upon which the parties may agree. The parties further agree that their respective good faith participation in mediation is a condition precedent to pursuing any other available legal or equitable remedy, including litigation, arbitration or other dispute resolution procedures.

2. Either party may commence the mediation process by providing to the other party written notice, setting forth the subject of the dispute, claim or controversy and the relief requested. Within ten (10) days after the receipt of the foregoing notice, the other party shall deliver a written response to the initiating party’s notice. [OPTIONAL PROVISION: The mediation shall be conducted by ___________ with its principal offices located at __________]. The initial mediation session shall be held within thirty (30) days after the initial notice. The parties agree to share equally the costs and expenses of the mediation (which shall not include the expenses incurred by each party for its own legal representation in connection with the mediation

3. The parties further acknowledge and agree that mediation proceedings are settlement negotiations, and that, to the extent allowed by applicable law, all offers, promises, conduct and statements, whether oral or written, made in the course of the mediation by any of the parties or their agents shall be confidential and inadmissible in any arbitration or other legal proceeding involving the parties; provided, however, that evidence which is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation.

4. The provisions of this section may be enforced by any court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including reasonable attorneys’ fees, to be paid by the party against whom enforcement is ordered.

(Article by Albert Pucciarelli, published in Hotel Executive on May 29, 2016)

About the Author

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

Dec 19

Preparation Is the Foundation for Achieving Settlement in Mediation

Mediation is becoming a “must” in many states prior to a judge hearing a case. While it may not be a written statute or rule, it is a preferred practice, especially in civil cases. Having the opportunity to achieve settlement of a dispute without the time, expense and unpredictability of a trial takes an effort, but when properly planned for can allow both parties to feel that a fair resolution has been accomplished.

Whether you are one of the disputing parties or the mediator/facilitator, being prepared to participate in mediation responsibly, collaboratively and rationally is essential for a positive outcome. Especially as one of the disputing parties, being prepared to present your case in a clear and convincing manner is important. Before entering the meditation session, having some idea what possible areas of compromise you might accept, what issues you believe your opposing party would most likely be unwilling to concede to and compete to protect, those issues that are simply best to avoid, and finally what your ultimate objective is gives the best chance for a positive outcome.

However, the emotional quotient in the midst of an unresolved conflict is highly charged and, if not controlled can too easily hijack any chance of settlement. Most of us know better than to go into a negotiation/settlement discussion ready to pick a fight so, why do so many parties still show up unprepared with teeth bared and weapons drawn? I suppose it goes back to our primitive instinct of “fight-or-flight.” Executives or high level professionals didn’t reach their positions by being push-overs, so it is possible that if the parties participating in the discussions have not prepared properly for the settlement conference, which includes managing emotions, we will unconsciously (or consciously!) come ready to do battle.

Whether you are the participating adversaries in the dispute or the third-party facilitator, preparation for the dispute resolution conference is essential. Being prepared before entering the dialogue gives the best chance for a positive conclusion to be reached in mediation. If given the opportunity to advise participants prior to the mediation, some of my recommendations are:

• If you have never been in a mediation before, do not hesitate to ask attorneys or other professionals who may have knowledge of the mediation process if they can give you an overview. Having some idea of what to expect will ease stress, anxiety, or apprehensions you may have, which will help you to be more productive once the session begins.

• Come organized and ready to clearly and rationally explain your position in an opening statement.

• There may be elevated emotions at the start of mediation, which is natural when disputing parties find themselves face-to-face and having to listen to the opposing party describe their perception of the situation. Focus on entering the process as calmly as possible. It is likely that you know the opposing disputants emotional triggers. If you are truly looking for resolution, think of ways to approach and present those issues differently to prevent any unnecessary distractions during the mediation.

• Know, as best you can, what your ultimate objectives are. Also know what the minimum is that you expect to settle for. Sometimes the issue is not just monetary, but emotional distress, repairing brand damage, or other issues may also need to be considered when working toward a final settlement agreement.

• Know what the priorities are you want discussed and included in a settlement.

• Are there items you are immediately able and willing to accommodate?

• Think carefully about which issues you are prepared to collaborate and/or compromise on.

• What are the matters you are prepared to fight to protect?

• If there is something you feel a need to avoid if possible, be prepared to accept that it may be brought up by the opposing party, and have an idea of how you might deal with it if it does arise.

• Come with a focus on settling the case and not on “win or lose.” Trust that your mediator is able to not only hear what you and the other disputant are saying, but also able to “read between the lines” to help you to reach common ground on even some of the seemingly most disparate issues. Being ready to collaborate and compromise are essential.

• Think about the worst case outcomes of taking the issues to court and determine the possible actualities if a resolution is not achieved:

• Are you prepared for the public scrutiny and revelation of possible confidential information, trade secrets or “dirty laundry” that arguing in court triggers?

• If the possible damages of leaving the outcome up to a judge’s opinion – both financial and emotional – are worth preventing settlement in mediation?.

• Do you have the time to wait for a litigated resolution that can take weeks, months or even years to work through the court system?

• Are you prepared to fund the potentially significant legal costs to argue the dispute in court, and even take responsibility for the other party’s legal costs if you lose in court?

• Is the opposing party a person or business one with which you want to attempt to remain on good terms?

All too often a mediator does not have the “luxury” of reviewing the issues and having an introduction to the disputants before the dispute resolution conference. In that case, that is where an experienced third-party often has the most important role of all – setting the table for the most productive dialogue and a positive outcome in the opening remarks and especially in the early part of the conference. Using the above questions (and so many others that experienced negotiators can add to the list) as a backdrop to establish the key issues will be essential in framing the day’s discussions and effecting a positive outcome.

It is important to remember that mediation is not a guarantee of resolution, but it can be an invaluable tool to settling conflicts. As prepared as you may be entering the session, there will be issues that arise that you may simply not have expected. What seemed like realistic compromises and outcomes coming into the mediation can end up being superfluous or even risky depending on how the mediation evolves. Mediation rarely ends in a “winner take all” scenario. With the range of options for which professionally facilitated negotiation allows, along with the threat of likely unexpected consequences that could occur in a courtroom, mediation will more likely allow a more balanced settlement conclusion.

Inflexibility, unrealistic expectations, and lack of preparation are sure-fire ways to prevent a case from settling. Coming prepared for mediation will limit anxiety, expedites the negotiations, and has been proven to result in a higher chance of a resolution of the dispute.

About the Author

Katherine Moulton is an award-winning hospitality executive and industry leader with more than 30 years’ experience..She is widely recognized by peers and business leaders, including as Independent Hotelier of The World by Hotels Magazine. She also offers strong advocacy for hospitality excellence, education and mentoring as well as a commitment to community through diversity of board and institutional roles. Ms. Moulton is a Florida Supreme Court Certified Mediator and focuses her alternate dispute resolution work on issues related to the hospitality and related industries. Katherine is a Partner and the Executive Director of Cayuga Hospitality Consultants and president of Hospitality Advisory Services.

Dec 18

When to Use Expert Determination in Hotel Disputes

When we think about alternative dispute resolutions, our first thoughts are likely go to mediation and arbitration. For these situations, a neutral third party is called upon to resolve the issue. In the case of a mediator, it’s by skillful intermediation to bring about a compromise. And in the case of an arbitrator, it’s a decision after a process that is similar to a court proceeding (as a judge might render), but intended to be less protracted and costly.

This article, however, discusses a third option – expert determination – whereby the parties who have been unable to resolve a dispute generally concerning a specific, technical matter, look to a specifically qualified individual to decide the matter for them.

These disputes generally involve a technical issue, one that is limited in its scope and implications for the overall contract. Even among parties such as owners and management companies that have the best working relationships, issues arise that may cause discord if left unresolved. Expert determination is a method to efficiently and quickly lay the dispute to rest before it can erode the relationship or paralyze the operation of the hotel.

Defining Expert Resolution

If parties disagree on technical matters (as opposed to more legally-centered issues such as allegations of mismanagement or failure to comply with brand standards), they may decide either in advance by having ‘expert determination’ drafted into their contract or in an ‘ad hoc’ manner to jointly appoint a professional to render a binding opinion on the matter.

This expert should be someone with specific and extensive knowledge in the technical subject matter, such as a CPA in respect of financial accounting matters or an engineer in respect of a matter involving the need to upgrade HVAC systems. The question to be decided should be carefully crafted by the parties as should the degree of latitude that the expert may exercise in reaching a decision.

If the dispute is monetary, the parties may also agree to ‘baseball arbitration’ whereby the expert is required to choose the position of one of the parties as correct or left free to determine the correct remunerative value. In any case, the parties should agree either in the contract calling for expert resolution or in their subsequent agreement that the expert’s decision is binding and unappealable, except for ‘manifest error’.

Obviously, this expert should have no preexisting relationship so that all judgments are objective and impartial.

Expert determination can involve many different types of disputes including:

Calculation of fees such as the license fee, the management fees or the amount of the owner’s priority (if relevant)
Calculation, withholding and payment of taxes whereby a tax lawyer or CPA is likely to be considered as the expert
Necessary working capital
Calculation or payment of disputed central service charges
Approval of necessary expenditures in excess of the approved budget
Application of the Uniform System and whether or not proposed expenses are operating expenses or capital expenses
Termination for failure of the performance test or composition of the competitive set
Whether or not capital expenditures are needed to meet a brand standard, an emergency or a legal requirement
Whether or not proposed salary levels for key personnel are reasonable

Primary Benefits of Expert Determination

Expert determination is likely to ensure the technical accuracy and appropriateness of the solution
Expert determination is likely to reinforce party autonomy as the parties can freely appoint their expert as well as define his or her mission and tasks
Expert determination is likely to ensure confidentiality as the opinion will very rarely be made publicly available

Disadvantages of Expert Resolution

Non-lawyers may not be sensitive to evidentiary issues that are screened in a judicial setting
It isn’t clear if a court will enforce the decision, but the contract wherein expert resolution is provided can make it clear that the decision is final, binding and non-appealable

Case Examples

Disputes within the scope of the matters listed above are easy to imagine and are bound to occur between a hotel owner and the management company or franchisor.

For example, the deduction of operating expenses (that is, subtracted from gross revenue) to arrive at gross operating profit (GOP) is often used to determine the management company’s incentive fee. But there may be some issues arising from capital expenditures determined by the management company as below the GOP line. The hotel owner may instead see these as normal operating expenses that must be deducted before calculating the incentive fee.

An expert thoroughly familiar with the uniform system of accounts for the lodging industry will be able to determine if the expenses in question are operating expenses or capex excluded from the GOP calculation. Wall coverings, leased office equipment and kitchen equipment come to mind as areas ripe for this kind of dispute.

As another example, the management company, as is typical in the United States, is the employer of all hotel employees and is responsible to set salaries as well as other key benefits. If the management company has assigned a seasoned general manager from a major metropolitan area hotel to a property in a secondary or tertiary market, and that GM’s salary seems above-market to the owner, resolving such an issue may be best handled by an impartial expert. If the salary is too high by, say, $25,000, then the expert can fashion a remedy whereby the management company bears that amount and the hotel pays only the balance.

Instances like this should be resolved quickly and without a formal arbitration or litigation because it keeps the relationship intact and because these disputes are so common that proceeding immediately to litigation would drown both parties in attorney fees. And this is a recommendation coming from a lawyer!

I am certain that those of you working for management companies and hotel owners can think of many other types of disputes that are ideal for expert determination. Sometimes we litigators are the right choice for an expert, while other times a CPA, operations person or other ‘expert’ is better suited to resolve the matter.

Expert Resolution Clauses

Here is a sample expert resolution section for a contract. Shorter, less detailed versions are also available. Please review so you are familiar with the terms when it comes time to put them to use.

Expert means an independent nationally recognized hotel consulting firm or individual with at least ten (10) years’ experience in the hotel industry relevant to and appropriate for the matter which such individual is being asked to resolve.

Determination by an Expert. Where pursuant to this Agreement a matter is referred to an Expert for determination, the following provisions shall apply to such Expert’s determination:

The Expert shall be appointed within fifteen (15) days after either party invokes the Expert process set forth herein in each instance by agreement of the parties or, failing agreement within such fifteen (15) -day period, by agreement concluded as soon as practicable of the proposed Experts nominated by each party (in any event within thirty (30) days following the date a party invokes the Expert process), in which event the determination shall be made by majority vote of the two (2) proposed Experts and the additional one (1) Expert chosen by them. All references hereinafter to the “Expert” shall be deemed to refer to the three (3) Experts if three (3) Experts are appointed as contemplated herein.
The decision of the Expert shall be rendered within fifteen (15) days after a matter is referred to the Expert, shall be final and binding on the parties, and shall not be capable of challenge, whether by arbitration, in court or otherwise.
Each party shall be entitled to make written submissions to the Expert, and if a party makes any submission it shall also provide a copy to the other party and the other party shall have the right to comment on such submission prior to any decision by the Expert. The parties shall make available to the Expert all books and records relating to the issue in dispute and shall render to the Expert any assistance requested of the parties. The costs of the Expert and the proceedings shall be borne as directed by the Expert unless otherwise provided for herein. The Expert may direct that such costs be treated as a Net Operating Expense (as defined in the Management Agreement).
The terms of engagement of the Expert shall include an obligation on the part of the Expert to:
1. notify the parties in writing of his decision within thirty (30) days from the date on which the Expert has been selected (or such other period as the parties may agree or as set forth herein);
2. apply the Manager’s Standards to issues involving the level of facilities and services at the Hotel; and
3. establish a timetable for the making of submissions and replies.

(Article by Albert Pucciarelli, published in Hotel Executive on July 17, 2016)

About the Author

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

Dec 18

What’s Negotiable in Hotel Management Agreements

Having represented management companies and owner/developers in projects ranging from five-star mixed-use luxury branded resorts to limited-service highway franchised hotels, I have had the opportunity to work on many branded management agreements, third-party management agreements (non-branded) and franchise agreements. From my years of experience, I’ve compiled a list of key terms and tips for you to live by.

In this article we will look at the key terms of a Hotel Management Agreement (HMA) that form the basis of the ‘bargain’ between the management company and the owner in a typical, full-service branded hotel management agreement. These are the provisions that are likely to be negotiated over a period of weeks, even months, assuming bargaining strength exists on both sides of the negotiating table.

The trend is to set out the basic business terms first in a Letter of Intent (LOI) before proceeding to the ‘definitive document’ phase. Here are those key terms on which there should be a ‘meeting of the minds’ before the parties may conclude that they have come to agreement on the terms of an HMA:

Some basics:

Brand Selection: Is the chosen brand right for the location? Has a feasibility study been done to confirm this? Is there competition in the market that will dilute the brand’s effectiveness? Does the developer have the required financing (equity and debt) to build to the brand standards?
Identification of the Parties: Is the developer entity the ultimate owner or will the developer negotiating the terms instead be a partner, member or shareholder in the entity into which equity investments will be made?
Description of the ‘Hotel’ or ‘Project’: Are all hotel rooms ‘dedicated’ as full-time hotel space or are there ‘condo-hotel’ units available as hotel ‘keys’ when the unit owner is not in occupancy? Is commercial space to be managed as part of the Hotel or leased to an operator, which affects how revenue is treated? Are there other not-strictly-hotel uses – perhaps a parking garage or amenities such as a spa or resort facilities – that are to be included in the scope of management?
Residences: Will they be branded, marketed and managed by the management company? What hotel amenities will be available to residence owners? What is the split of rental proceeds with residence owners?

Once you have a fundamental understanding of these, you can then focus on what is actually negotiable in the HMA:

1. Term: The term tends to be longer for branded management agreements – 20 years these days with perhaps one ten-year renewal at the management company’s election, conditioned perhaps and with no prior failures of the performance test (see below). Third-party (non-branded) management agreements tend to be much shorter duration. The HMA typically may not be terminated by the owner with the payment of an agreed termination fee (liquidated damages), but this is becoming more common.

2. Performance Test: This is typically a two-pronged test. For example, the management company must achieve 90% of budgeted GOP and 85% of the RevPAR of an agreed competitive; with failure to meet both tests for two consecutive years (or sometimes two out of three) constituting a failure of the performance test that may be ‘cured’ by the management company’s paying to cure one of the budgeted GOP shortfalls. A more meaningful test for the owner would be a bottom line NOI test, but management companies generally decline to be evaluated that low in the hotels.

3. Revenue-Based Fees: Base fees, typically 3% or 4% of total revenue, plus perhaps a marketing fee of 1%, are generally not negotiable. But an owner may obtain a ramp up in the early years of a new hotel until stabilization. These are overhead recovery fees by the management company. There has to be clarity as to what is and is not included in total revenue. For example, only the net rent from space leased to third parties, such as sundry shops, rather than the third-party’s total revenue, is included in the hotel’s top-line revenue number.

4. Incentive Fee: This fee rewards not just volume (which is measured by total revenue) but also operating efficiency, by basing the fee on GOP (typically 8% to 12%). GOP is arrived at by deducting from total revenue those operating expenses within the management company’s control. This fee is ripe for negotiation, with owners wanting more expenses deducted and perhaps an ‘owner’s priority’ that must be satisfied, such as a return on the owner’s total investment in the project or debt service, before the incentive fee is paid. Another issue: are unpaid fees ‘earned’ and therefore accrued to be paid at a later date from excess earnings? There are many variations to how the incentive fee is determined.

5. Other Charges: There are many other fee opportunities for and impositions from management companies, such as reservation fees, reward programs charges, employee training charges, technical services fees, optional purchasing programs, brand marketing cost reimbursements and other programs for which the management company charges all managed hotels. Allocation of these charges to participating hotels is a topic that owners will want to explore. These charges may be hard to predict unless the owner looks to a similar hotel managed by the same management company for some idea as to what to expect.

6. FF&E Reserve: Generally this is funded from hotel operations and is 4-5% of total revenue that is set aside for replacement of FF&E (soft goods, carpets and the like).

7. Budget Approval by Owner: The owner will always want more than just a right to review the budget that the management company prepares, and generally owner approval is allowed. But some items can be excluded from the owner’s approval right, such as the cost of utilities or the central service charges. Items in dispute can be set at the prior fiscal year’s level plus a CPI-based increase pending resolution by an expert.

8. Capital Expenditures: The owner must fund all CAPEX to achieve compliance with brand standards, life safety requirements and legal compliance.

9. Owner’s Financing: The management company will seek to impose limitations on the owner’s debt level to avoid over-leveraging and is likely to seek a Subordination Non-Disturbance Agreement (SNDA). In these instances, the management company acknowledges that its fees are subordinate in priority to debt service (but typically only after a default by the owner under the loan agreement) and the lender agrees to keep the management company in place after a foreclosure.

10. Credit Enhancements: These are sometimes provided by management companies to enhance the owner’s ability to finance the hotel. Indeed, they take many forms, such as a contribution of technical services, key money (an outright grant paid on opening that’s recoverable if the management agreement is terminated early), debt service guarantees and more.

11. Employees: In the U.S., the management company typically employs all hotel employees, with the unintended consequence of preventing the owner from obtaining a roster of each employee’s salary and benefits out of privacy considerations. Outside the U.S., the owner acts as the employer, but the management company will assign certain experienced personnel to serve in key positions such as the Executive Committee. These key personnel will usually exit the property when the HMA is terminated or expires. In many jurisdictions, hotel employees will be deemed to be jointly employed by both the management company and the owner for purposes of assessing liability to the employer for conduct of the employees.

12. Hiring and Firing Key Personnel: The owner typically requests and obtains the right to interview candidates and approve the hiring of key personnel such as the General Manager, Controller, and Director of Marketing and Sales. However, management companies may be able to negotiate limits as to how many qualified candidates can be rejected by the owner before the management company is able to hire its choice for best candidate. The owner may also obtain the management company’s good faith consideration to the owner’s complaints about the performance of personnel, but the decision to fire or not is generally solely the management company’s decision.

13. Indemnification and Insurance: It’s typical for the management company to expect the owner to indemnify the management company against all claims, losses and liabilities, except for those arising out of the management company’s acts that constitute willful misconduct or gross negligence. For the management company’s indemnification to be meaningful to the owner, acts of key employees should be attributed to the management company. Ultimately, liability insurance coverage of both the management company and the owner under the same policy is the means by which both parties are protected from third-party hotel-related claims, such as ‘slips and falls’.

14. Damage and Destruction: Property insurance is provided by the owner with coverage acceptable to the management company. The owner will have to apply insurance proceeds to repair the hotel, but may have a termination right if the damage is severe.

15. Sale of the Asset: Typically, the management company can stipulate that its agreement survive a sale of the hotel and that certain purchasers be prohibited, such as competitors, purchasers with criminal backgrounds or buyers with other legal issues.

16. Agency: HMAs have been held by many courts to constitute agency appointments by the owner as ‘principal’ and the management company as ‘agent’. For this, there are two consequences: (a) the owner has the power to terminate the HMA at any time for any or no reason, but may face a damage claim from the management company under contract law for wrongful termination; and (b) the management company owes the owner a fiduciary duty. This area of law is complex and experienced counsel is required to advise both parties as to its implications. These agreements have also been held to be personal service contracts with the owner having the same power to terminate the agreement as if it were an agency appointment.

These are many but not all of the negotiating considerations. Many other areas are addressed in the HMA, such as governing law, dispute resolution and more. Management HMAs have evolved since their first appearance in the early 1950s to the point of becoming highly specialized in their vocabulary, business terms and legal interpretation. They require experienced counsel as well as hotel development and operational expertise. Industry custom has rendered these agreements somewhat ‘standard’ in appearance nowadays, but there is plenty of room to negotiate the key terms.

About the Author

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

Dec 18

Can Emotions Aid in Dispute Resolution and Mediation?

In dispute resolution it is important to recognize that emotions among and between the parties will run the gamut…from anger, fear, grief, humiliation, frustration, and even fatigue to elation, gratification, and appreciation. Mediators often find themselves in a paradoxical position – on one side encouraging and empathizing with productive and often intense emotions, and at the same time compelled to fulfill our obligation to remain unbiased and impartial during mediation sessions.

Many experts suggest that hiding emotional energy in a mediation session is the only way to reach resolution. I disagree. I believe that attempting to ignore the emotional components will most often prevent the dispute from ending with reconciliation and resolution. Embracing the power of emotions when entering into a mediation or settlement discussion, and even using them to benefit the dialogue can be effective. Once it is understood that emotion is often the foundation of most conflicts, rooting out and understanding those specific sensitivities that can influence settlement between the disputants becomes a helpful tool.

When a mediator does admit the expression of feelings by the disputants, within reason of course, she has the opportunity to offer understanding and empathy for the parties’ positions, and not only gain respect but, also through the expression of emotions can glean valuable information that may be instructive to the mediator. So often the most important part of engaging a party in positive resolution is simply giving them a chance to be heard. At the same time, embedded in emotional discourse can be the tiny nuggets that ultimately form the basis for settlement.

Emotions can indeed play both a positive and negative role in mediation. Knowing how to glean information and disputant goals and needs from passionate discussion is extremely effective in moving a negotiation forward. An important role of the mediator is to carefully balance between allowing emotionally charged dialogue and normalizing it without making the party feel marginalized (i.e. “I understand how you feel”, “it’s normal to feel angry in a situation like this”, etc.) Properly managed so that the party believes the neutral facilitator is truly interested and respectful of their feelings can foster trust in the mediator, a calmer environment for discussions and constructively contributes to resolution.

On the other hand, it is also possible that the idiom “give them an inch and they’ll take a mile” could result! In this case, and to prevent combustive behavior from waylaying an otherwise productive mediation, at the first opportunity the mediator must regain control of the discussion, ask the parties if they are comfortable discussing the issues in a joint session, suggest that it might be a good time to take a break, ask the party who is not expressing the emotion if they would agree to a brief caucus, or other such strategies. The mediator must maintain a balanced emotional environment so that negative thoughts and dialogue do not prevent the parties from thinking clearly and creatively. Knowing when, and when not to interject oneself into an intensifying conflict takes focus and solid reasoning.

To be effective in managing emotions during dispute resolution discussions, a mediator must possess a keen ability to quickly assess the parties’ emotional state, understand what we are hearing, and recognize motivation behind what is being said. Renowned Psychologists P. Salovey and J.D. Mayer presented several thesis on the subject of “Emotional Intelligence” and define it as, “The ability to perceive emotion, integrate emotion to facilitate thought, understand emotions and to regulate emotions to promote personal growth.” This theory seems very fitting to the task of a mediator in establishing an environment that gives the disputants a sense of compassion, trust, respect and other essential elements of a productive mediation. After all, if we have not given the disputants as much emotional resolution as there is settlement of the more traditional matters at issue in the dispute, the ultimate solution remains somewhat incomplete.

Even the most experienced mediators continue to hone their skills in being able to recognize the signs of rising emotions before they become uncontrollable, polarizing and destructive, understanding strategies to redirect emotions so they can be used positively and productively in the dialogue, and being comfortable addressing and managing emotional situations.

And finally, though a written settlement agreement is the ultimate goal in mediation, succeeding in also meeting the emotional satisfaction of the parties brings a more collaborative and rational agreement. The use of emotions to promote and foster positive dispute resolution, and being able to deal with feelings skillfully, is an effective tool available to mediators and disputants in attaining a lasting and complete resolution.

About the Author

Dec 18

Litigation as the Method of Dispute Resolution for Hospitality Cases

In my three prior articles on alternative dispute resolution, I discussed mediation, expert determination and arbitration. Resorting to the court system may be necessary only because the parties in their agreements did not provide for the resolution of disputes by one of the three alternative dispute mechanisms. Even so, as the dispute devolves to one that the parties will not resolve by negotiation alone, they may at any time agree to mediate, submit the matter to an expert or arbitrate.

If the dispute has taken on a level of severity so that the parties are not able even to agree to some form of alternative dispute resolution, they or either of them may resort to the courts as the only way forward. For reasons stated below, it is rare that taking the matter to the county, state or federal court house is better than the alternatives, but there simply may be no choice.

Litigation (civil, as opposed to criminal) commences with the ‘plaintiff’ filing in court, and then serving on (presenting to) the other party, the ‘defendant’, a summons and complaint summoning the other party to respond within a period of time established in the local law (typically 20 or 30 days), and then ultimately to appear before a judge or a judge and jury who will decide the matter. But there is a lot of activity between serving the summons and complaint and the rendering of a decision (by the judge) or verdict (by the jury) – the pretrial discovery phase, about which more is said below.

The threshold question in litigation is the jurisdiction of the court. ‘Jurisdiction’ essentially means that the court has legal power over the defendant and the subject matter to decide the matter in question. In the case of a dispute involving a hotel, the obvious place for the lawsuit is a court in the same location as the hotel.

But even then, there are choices of courts in any one location – typically a municipal court, a county court, a state court and a federal district court – so the appropriate court must be chosen. In addition, the parties may have consented to jurisdiction elsewhere.

For example, in the case of a dispute between a hotel management company and the hotel owner, the management agreement may have provided, as is frequently the case, that the owner consents to jurisdiction in a state selected in the agreement by the management company, typically its ‘home state’ (where its headquarters is located). Federal court is often preferred because of the perception that federal judges are the best judges for dealing with sophisticated commercial disputes and their calendars are more efficiently managed.

Where there is more than one court with jurisdiction, then venue (the physical location of the court) must be chosen. This may be decided by considerations such as convenience of the location, availability of a judge perceived as friendly to your case or a faster calendar.

In addition to the jurisdiction and venue questions, the choice of governing law must be decided. While a court will, as a rule, apply the law of the state where the court is located (even a federal court will apply the state law, unless the matter in dispute is specifically a matter of federal law), the parties may provide that the agreement and disputes arising thereunder are governed by the law of another state.

It is frequently the case that a management company, even though neither it nor the hotel is located in Maryland, will designate Maryland law because of its special statute (adopted at the behest of Marriott International) that negates the ‘agency’ common law overlay that provides to owners the power to terminate the agreement and imposes a fiduciary duty on the management company (1). Thus, it is not unusual that jurisdiction may be in one state – for instance, New York – while the law to be applied to the case by the court is that of another state – as in the previous example, Maryland.

When it has been served with the summons and complaint, the defendant has several opportunities available to get out of the lawsuit before becoming entangled deeply in the process. In its answer, the defendant will assert defenses and even counterclaims. It may also make a motion to dismiss the case before a trial because the plaintiff has failed to state a ‘cause of action’ in its complaint or the court lacks jurisdiction over the defendant. Or, lastly, the defendant may argue that the matter has been previously decided in a prior lawsuit (i.e., ‘res adjudicata’).

If these fail and the case goes forward, the pretrial discovery process that involves the production of documents, depositions of witnesses and exchange of legal briefs will commence in earnest. And when concluded, a trial date will be set. The trial will be conducted before a judge (decides questions of law) and jury (decides questions of fact) unless both parties waive a trial by jury. The trial may last just hours or months (or years as in the fictional, but not entirely so, case of Jarndyce v. Jarndyce in Charles Dickins’s “Bleak House”).

Primary Benefits of Litigation

The court system is state or federally funded and, unlike arbitration, the parties do not have to pay the judge, jury or recorder; court costs assessed against the parties are relatively modest.
The case will be managed and heard by a professional judge.
The court can provide for the enforcement of its own decision that becomes an order, by various means.
The court has ‘equitable’ as well as ‘legal’ powers whereby it can impose mandatory orders (injunctions) to do or refrain from doing certain acts, such as ordering an owner to refrain from interfering with a management company’s exclusive right to supervise hotel employees.
The formality of the proceeding enhances the deliberateness and articulation of the legal arguments.
The threat of litigation induces the parties to seek a compromise solution before heading to the courthouse.
Jury trial may be waived (by agreement of both parties), leaving the judge to decide all matters – that is, questions of law and factual matters.
The decision has precedential value to other potential litigants; it becomes part of the common law of the jurisdiction where the court is located, which is good from the perspective of the winning party.

Primary Disadvantages of Litigation:

The expense for legal counsel to comply with judicial formality of the pleadings and other court procedures may outweigh the benefit of having a judge and jury that is paid for by the tax payers.
The professional judge and the jurors may lack any expertise about the hotel industry and industry standards.
Quality of the judges, particularly in the lower state courts, may vary and ‘luck of the draw’ plays a part.
Cases get limited attention in short intervals while the courts manage a heavy workload, and this may affect quality and prolong the process.
Each party must pay its own legal expenses (except in very rare cases) so the party with deeper pockets may outlast the other party that eventually is forced into submission – that is, a settlement.
A judgment-proof party may lose, but the winning party never collects a judgment.
The decision is not final but is subject to appeal to the same or a higher court.
The decision has precedential value to other potential litigants; it becomes part of the common law of the jurisdiction where the court is located, which is bad from the perspective of the losing party.
The process of litigation, particularly the pretrial discovery, can cause major disruption to a business that must meet the requirements for document production and witness depositions.
The public nature of a trial may mean that sensitive information is revealed, such as trade secrets, and a company’s reputation, inner workings or even ‘dirty laundry’, may be put under a bright light for public scrutiny.
There is likely to be very little hope of salvaging the business relationship between adverse parties in litigation.
The entire proceeding can cause emotional distress on the persons involved in litigation where the formality, strict rules, and potential for perjury is ever present.

Given the very onerous disadvantageous of litigation, the party commencing a lawsuit must carefully weigh the merits of the case without letting emotion color the evaluation and the costs involved, financial or otherwise, before embarking down the litigation path from which it may be difficult to extricate oneself later. Many litigants who initiate lawsuits, after months of pretrial discovery and mounting legal costs, then seek a settlement on terms that might well have been available without the lawsuit.

Types of Hotel Industry Disputes Suitable for Litigation

As with arbitration, litigation can involve many different types of disputes in the hotel industry, but the following are typical of disputes involving a degree of ‘severity’ for which litigation (or arbitration) is suitable as an alternative to expert determination.

The scope and validity of a significant agreement
Claims of wrongful termination of a significant agreement
Owner claims of mismanagement by the management company
Owner-contractor disputes regarding the construction of a new hotel
Interpretation of collective bargaining agreements
Franchisor claims that the hotel fails to comply with mandated standards

Sample Litigation Clause for Inclusion in a Contract

Resolution by Judicial Proceeding. Except as provided in Section __ wherein certain matters are to be resolved by Expert determination, all disagreements and disputes arising under this Agreement may be resolved by judicial proceedings, for which purpose each party hereby irrevocably submits to the non-exclusive jurisdiction of any New York State or Federal court of competent jurisdiction sitting in the County of New York, and each party hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such New York State court, or to the extent permitted by law, in such Federal court. Each party hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding in such court and such court may order the remedy of specific performance for anticipatory or actual breach or attempted or actual termination of this Agreement.

Case Illustration

Owner claims that Management Company has mismanaged the hotel for the past X years resulting in losses to Owner of $Y. Moreover, the Management Company has failed the performance test. Owner has terminated the management agreement based on the alleged mismanagement and the performance test failure, and seeks $Y from Management Company as damages.

Manager claims that Owner has refused to make required capital expenditures to comply with brand standards and has repeatedly interfered with Management Company’s right to exclusive operational control by issuing its orders to hotel personnel. It seeks $Z for damages resulting from wrongful termination, recognizing that under the ‘agency theory’ overlaying management contracts, Management Company cannot be reinstated, so the court is not likely to issue an injunction ordering that the Management Company be reinstated pending determination.

This matter is well-suited for a judicial determination (or arbitration).

——————————————————-
Note 1: Maryland Code – Commercial Law – 23-102. Conflicts between terms and conditions; remedies for breach.
(a) Conflicts between operating agreement and the law. If a conflict exists between the express terms and conditions of an operating agreement and the terms and conditions implied by the law governing the relationship between a principal and agent, the express terms and conditions of the operating agreement shall govern.
(b) Remedies for breach. A court may order the remedy of specific performance for anticipatory or actual breach or attempted or actual termination of an operating agreement notwithstanding the existence of an agency relationship between the parties to the operating agreement.

(Article by Albert Pucciarelli, published in Hotel Executive on November 1, 2016)

About the Author

Albert Pucciarelli is a former member of Cayuga Hospitality Consultants.

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