Hotel arbitration: What, why and how?

As economies rise and grow, the hotel sector is a remarkable indicator both of the current state of development and where investors think it is heading. How many new hotels are being built across a city? How many rooms are coming online in the next 12 months? What brands are the large hotel groups betting on being right for the market over the next decade?

Disputes and dispute resolution are an inevitable part of such development and growth. All the more so when short-term shocks (such as the obvious), put strain on the relationships and financial commitments underpinning that growth.

Given the cross-border nature of much of the investment in the hotel and hospitality sector, it is no surprise that international arbitration clauses are a regular feature of hotel development agreements, hotel management agreements, joint ventures, shareholder structures, financings, and others.

A 2021 survey by Queen Mary University of London (‘Adapting Arbitration to a Changing World’) found that 90% of over 1,200 respondents favoured international arbitration (with or without alternative dispute resolution, such as mediation) as their preferred method of resolving cross-border disputes. When the alternative is a public court in one party’s ‘home town’, it is easy to see why a confidential process, in a neutral location, before a hand-picked tribunal of experts may appeal. But of even greater significance is the superior enforcement regime for arbitral awards under the New York Convention compared with national court judgments, especially for emerging markets.

Even within Europe, the uncertainties created by Brexit and the failure of the UK and EU negotiators to agree on a regime for mutual recognition and enforcement of court judgments has led some parties to opt for an international arbitration regime that sits outside the realm of EU legislation.

Parties seeking to include arbitration clauses in their contracts are spoilt for choice regarding the procedural rules and location of any arbitration. Major arbitral institutions such as the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA) or American Arbitration Association (AAA) have been joined in recent decades by ever more national and regional arbitration centres. Some, like the China International Economic and Trade Commission (CIETAC) have grown to handle over 3,600 cases in 2020. Others, like the Singapore International Arbitration Centre (SIAC) are now established centres with global reach.

But international arbitration is not only used between private parties. It may also offer a remedy against national governments where acts of state (or state entities) damage or obliterate cross-border investments in hotels and leisure developments. Among the many consequences of Russia’s annexation of Ukraine in 2014, was a claim by Everest Estates, the Ukrainian owner of hotels and real estate expropriated during the annexation. Everest brought a claim in international arbitration against Russia for a breach of investor protections promised in a 1998 bilateral investment treaty between Russia and Ukraine. In 2018, a tribunal of 3 arbitrators awarded the claimants US$150 million in compensation.

What is international arbitration?

A private, non-national dispute resolution forum chosen by commercial parties in their cross-border contracts. For example, a US brand investing with an Indian owner in a hotel project in Kerala may choose to send any disputes for resolution in London or Singapore by a tribunal which they appoint between them.

Why do parties choose international arbitration?

  • Confidentiality: unlike public courts, arbitration is usually confidential
  • Neutrality: parties choose their own arbitrators and seat their tribunal away from ‘home town’ interests
  • Finality: arbitral awards are generally not subject to appeal on their merits
  • Flexibility: parties can choose procedures or sets of rules that suit their commercial needs
  • Expertise: parties can choose arbitrators with commercial and sector experience
  • Enforceability: arbitration awards benefit from recognition and enforcement in over 160 countries around the world

The New York Convention 1958

The “Convention on the Recognition and Enforcement of Foreign Arbitral Awards” signed at New York in 1958 must rank as one of the most successful of all international treaties, yet its significance is appreciated by few outside the international legal profession. In 16 short Articles, the treaty commits national governments to recognise agreements in writing to arbitrate disputes outside of national courts, and sets out both a regime for enforcing the awards resulting from those arbitrations, and a limited set of grounds on which enforcement may be refused. Of the 195 countries recognised by the United Nations, 168 are signatories to the Convention.

Supporting businesses in the hotel and hospitality sector

The International Arbitration practice at Bird & Bird acts for owners, operators, lenders and all other stakeholders in the hotel and hospitality sector. We advise on using and drafting arbitration clauses, structuring investments to take advantage of investment treaty protections, early stage dispute handling and avoidance when problems arise, and bringing and defending claims in all forms of international arbitration, as well as challenging or enforcing awards. Please contact Nick Peacock, Partner and Head of the London Arbitration team, or your usual Bird & Bird contact for more information.

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