The COVID-19 pandemic, and the travel restrictions imposed in response, are already having a severe impact on the hospitality industry. In a previous blog post and podcast, Dechert’s Global Finance Group discussed certain key issues that lenders, hotel owners and operators should consider at this time. In this briefing, we address key commercial disputes that could arise out of the crisis and provide practical advice to assist participants in the hospitality industry in preparing for and managing these disputes.
While hotel management agreements (HMAs) may be a primary source of disputes over the coming weeks and months, all participants in the hospitality industry may face difficulty in meeting their contractual obligations given the economic, social and other consequences of the pandemic. Weaker financial performance by operators, and a consequent failure to meet agreed budgets, may lead to disputes regarding whether certain contractual rights and/or obligations in HMAs have been triggered, such as obligations on owners to contribute capital, the right of owners to terminate the HMA or take over management of the hotel, and guarantees by which the operator underwrites an agreed return to the owner. In customer-supplier contacts, agreed deliveries may be deferred, contracted payments may be delayed and transactions that should have closed may be abandoned. In order to prepare for potential disputes, businesses should:
If a dispute does arise, businesses should consider whether the contractually specified method for dispute resolution (which may have been agreed years ago in substantially different circumstances) is the best method for resolving a dispute in the current economic climate. In particular:
The coronavirus crisis needs to be met with a healthy dose of flexibility and empathy for one’s contractual counter-parties coupled with a thorough analysis of the contract and the rapidly changing legal norms.
1) For more details on the ICC Model Clauses, see ICC Force Majeure and Hardship Clauses (March 2020).
2) At the time of writing, 52 countries have signed the Singapore Convention (including China, India, Iran, Israel, Malaysia, Nigeria, South Korea, Saudi Arabia, Turkey, Ukraine, the USA, Uruguay and Venezuela), though only three have ratified it (Fiji, Qatar and Singapore).
3) For examples of expedited procedures, see HKIAC Administered Arbitration Rules (2018), Rule 42; SIAC Rules (2016), Rule 5; ICDR International Dispute Resolution Procedures (2014), Article E-1; CIETAC Arbitration Rules (2015), Article 56; SCC, Rules for Expedited Arbitrations (2017); ICC Arbitration Rules (2017), Appendix VI.
4) For examples of summary dismissal procedures, see SIAC Rules (2016), Rule 29; SCC Arbitration Rules (2017), Article 39; and HKIAC Administered Arbitration Rules (2018), Article 43. Furthermore, it is generally accepted that it is within an arbitral tribunal’s inherent power to dismiss a manifestly meritless claim at an early stage: see, for example, ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (2019), paragraph 74.
5) Virtually all arbitral institutions allow the parties to seek interim relief. For examples of emergency arbitrator procedures, see ICDR International Dispute Resolution Procedures (2014), Article 6, CIETAC Arbitration Rules (2015), Appendix III, HKIAC Administered Arbitration Rules (2018), Article 23, SIAC Rules (2016), Rule 30, ICC Rules of Arbitration (2017), Article 29; LCIA Arbitration Rules (2014), Article 9B, SCC Arbitration Rules (2017), Appendix II.
6) Key arbitration markets in which third party funding is legal include Australia, Canada, England and Wales, France, Germany, Hong Kong, Singapore, Sweden, Switzerland, and various states and territories of the USA.