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Introduction

The hospitality industry occupies a position of considerable economic importance. The sector's aggregate revenue worldwide is predicted to reach USD 550 billion in 2016, which represents an increase of almost USD 100 billion since 2009.1 This sector attracts investors looking for high property yields2 and directly employs 10.2 million people in Europe.3

Through a range of structures from boutique hotels to large resorts, hotel operators have to accommodate at best the needs of both business customers and tourists. They have developed segmented offers, which are continually evolving. For instance, traditional establishments are now having to respond to competition from mixed-use resorts that offer real estate in addition to hospitality services such as restaurants, boutiques, spas, conference centres and the like.

Hotel operators are also confronted with the explosion in on-line booking services and the expansion of alternative accommodation proposals, and must adapt to a fast-changing regulatory environment.

In addition, the hotel industry is highly sensitive to changes in circumstances, such as political unrest, natural catastrophes, economic downturns, epidemics, or simply fashion.

These conditions have led to major concentrations in the sector and to changes in the way hotels are managed. Not surprisingly, this challenging economic context has also resulted in disputes. Given the international character of many hotel management agreements (HMAs), these agreements often provide for disputes to be resolved by arbitration4 and ICC arbitration has been used to this end on many occasions. However, arbitration in the hospitality sector has rarely been the subject of special study.5

As there is no contract law specific to the hospitality industry, let alone any international instruments regulating its activity, these disputes are determined on the basis of general domestic contract law. In practice, however, HMAs and related contracts generally follow similar patterns and schemes, so it is particularly interesting to analyse recurrent issues over which parties have differed and any trends that have emerged in arbitral tribunals' decisions.

ICC has made available 15 awards rendered in 11 hospitality disputes mostly between 2009 and 2013 (the selection also includes two awards from 2001-2002). These cases involved parties from Australia, China, Egypt, France, Germany, Morocco, Nigeria, Tunisia and the Middle East. They reveal what can be considered typical features of hotel projects, in particular:

• they frequently involve multi-contract schemes, including consultancy agreements, HMAs, technical services agreements, licence and royalty agreements, franchises, leases, etc.;

• they span relatively lengthy periods of time (almost all of the HMAs at issue were for a period of 10 years,6 while other contracts, such as leases, were for longer periods).7

This article will discuss the main issues that were discussed in these ICC awards relating to the hospitality industry. It will begin with procedural issues (1), then turn to issues relating to the validity of HMAs (2), their performance (3) and termination (4) and, lastly, the calculation of damages in such cases (5). [Page22:]

1. Procedural questions

(a) The arbitral tribunal

As a general matter, ICC arbitration clauses found in hospitality contracts do not display any special characteristics. It may be noted, however, that in ICC Case 15760, which arose out of a dispute between an Australian company and a Chinese company over the management of a hotel in China, the arbitration clause provided that '[t]he arbitrators must be either experienced in the practice of hotel or franchise law, or experienced hotel consultants … and at least two of them must not be citizens of the People's Republic of China and all of them must be fluent in the Chinese and English languages'.8

(b) Assignments

Given their often lengthy duration, HMAs are sometimes assigned by one of the original contracting parties. Upon the occurrence of a dispute, such assignment has, on occasion, been used by the respondent to try to resist the assignee's claims.

In ICC Case 15082, the owner challenged the validity of purported transfers of service and licence agreements it had made with the company originally chosen to manage and operate the hotel.9 The arbitral tribunal reviewed the contractual provisions relating to assignments and found that the manager was entitled to make such a transfer to an affiliated company without the consent of the owner if the manager could reasonably demonstrate that such affiliate was able to perform its obligations as manager under the contract equally well. The arbitral tribunal noted that the owner had not questioned the validity of the purported assignment at the time and had been paying the assignee for several months, so it was, in any event, far too late for the owner to dispute the validity of the assignment.

The assignment of rights under a hotel franchise agreement was also discussed by a sole arbitrator in ICC Case 17508. In this case, the respondent did not take part in the procedure. The sole arbitrator nevertheless ascertained whether it was a proper party to the arbitration, especially as a series of assignment agreements relating to the franchise agreements had subsequently been executed. The sole arbitrator concluded that '[t]o consider the Assignment Agreements as not creating directly enforceable rights and obligations between the Claimant and the Respondent would flout business common sense'.10

(c) Procedural disruption

ICC Case 1718511 offers a flagrant example of the disruptive behaviour a recalcitrant defendant can resort to in an attempt to derail an arbitration procedure. The claimant, a large hotel chain, was in dispute with a prominent local figure who owned hotel properties in a Middle Eastern country. In the hope of escaping his obligations, the defendant: challenged the jurisdiction of the arbitral tribunal; refused to pay the advance on costs; claimed that the financial projections provided by the manager were 'forgeries' and that the arbitration should be suspended pending a local court ruling on this allegation; challenged the chairman for alleged bias in 'his' decision-making; refused to attend the hearing as it was not held at the place of arbitration; challenged the co-arbitrators; obtained from a local court an initial order setting an unduly short deadline for rendering the award and a second order terminating the arbitration when that deadline was not met. Despite these ambushes, the arbitral tribunal rendered its award, in which it noted the high cost of these obstructive measures. It held that the costs incurred by the claimant in defending itself against the owner's tactics were the result of the latter's breach of the arbitration agreement and were, therefore, recoverable in the arbitration.

2. The validity of HMAs

(a) Consent and misrepresentation

In ICC Case 11045, the lessee (respondent), a holiday resorts operator, contended that its consent to a lease agreement was flawed as it had not been properly informed of title defects in relation to the leased plots. The tribunal rejected the respondent's accusations of misrepresentation and held that it could not have been unaware of the relativity of the lessor's property rights, not only because it was an experienced professional, but also because the contract contained specific [Page23:] warranties relating to this issue.12 The tribunal also recalled that, under French law, a professional cannot be excused for errors of substance in relation to the professional's speciality. It added that investigating sites of future hotels and resorts was part of the job and skills that could be expected of the respondent, which, both parties acknowledged, was a leader in its field of activity.13

In ICC Case 15082, the hotel owner argued that the claimant group had reneged on its promise of dedicating a company to marketing the hotel and ensuring that it would compete effectively with other hotels under the manager's brands. The owner further argued that it had deliberately been provided with five-year projections of performance, rather than ten-year projections, to conceal a decline in performance. The arbitral tribunal rejected these arguments, finding no evidence of any expectation that the hotel would be managed by a specific subsidiary independently of the rest of the manager's group.14 On the owner's allegations of misrepresentation over performance projections, the tribunal held that there was no evidence showing that the owner had relied on them in deciding whether, and on what terms, to enter into the management agreement. It further noted that the family that owned the hotel and its advisers were experienced and sophisticated hotel operators and that it would be difficult to believe that they had not made or relied on their own projections.15

In ICC Case 15825, the beneficiary of the lease of a hotel business complained that the hotel owner failed to develop a hotel chain, which, the lessee argued, was an obligation constituting part of the cause of the contract. The tribunal rejected this argument, observing that there was no such obligation in either the lease agreement or any previous or subsequent contractual documents. It pointed out that the agreement contained a four-corner clause preventing any other documents, in particular contracts relating to other projects, from being taken into account and added that it would be surprising if the parties had intended to introduce a subjective, extracontractual element, given the importance of the transaction in business terms, the nature of the contracting parties (both joint stock companies with considerable market experience) and the meticulousness with which their relations were regulated in their agreement.16 Nor, in the tribunal's view, did the development of this hotel chain constitute a 'presupposizione' under Italian law allowing the lessee to suspend payment under the lease. Similarly, the lessee's argument that it was excused from performance on account of the lessor's failure to build an access road was also rejected. The tribunal took into consideration the length and detail of the agreement and noted that it did not contain a provision specifically creating an obligation to build a road. While the construction of a new access road had been contemplated during the negotiations, it had never become an obligation for the parties. Once again, the tribunal referred to the four-corner clause and remarked that if the parties had wanted to agree on the construction of a new access road, they would certainly have regulated this obligation in express terms.17

(b) Legal requirements for a valid agreement

In ICC Case 15082, the owner argued that the HMA and related agreements were invalid because local law required the manager to have branches registered locally, which it did not have. The tribunal accepted the claimants' argument that, in the case of a hotel operated by an international chain, the only relevant requirement of local law was that the hotel owner (and not the operator) should have a tourism licence to operate the hotel and that, in any case, the breach of registration requirements did not invalidate the agreements.18

A similar discussion is found in ICC Case 16751 relating to the operation of a hotel in Nigeria. The hotel owner argued that the HMA was void because it constituted an agreement for the manager to carry on business in Nigeria without being incorporated locally. The tribunal considered that the nub of the question was whether the conclusion and/or the performance of the HMA required the claimant to do things which amounted to carrying on business in Nigeria. It ruled that it could not be inferred from the conditions in which the HMA was concluded and performed that the manager was carrying on business in Nigeria. It noted that most of the [Page24:] manager's obligations under the HMA were required to be, and were in fact, performed outside Nigeria. This was the case, for example, with the preparation of annual plans, the analysis of financial reports and the marketing of the hotel. As for staff, they were, as a matter of law, employed by the owner, even though they took instructions from the general manager. Ultimately, the question of whether the manager was carrying business in Nigeria depended on the position of the general manager. The tribunal found that, as an individual on secondment, the general manager did not give the managing group a sufficient presence in Nigeria, nor was the group sufficiently visible to third parties to be regarded as carrying on business in Nigeria. As in the previous case, the arbitral tribunal considered that it was rather the owner that was performing business in the state where the hotel was situated, albeit with the assistance of the manager. The tribunal nevertheless acknowledged that the position was 'finely balanced'.19

In ICC Case 16266, the discussion was somewhat different, since the owner argued that the HMAs were void because they did not respect the form imposed for such contracts under Tunisian law. The tribunal analysed the nature of the contract and found that it did not fall within the scope of the legal provision invoked by the claimant.20

Even though, in the cases discussed above, the validity of the agreements was upheld, they point to the need, when entering into HMAs, to carefully review any local requirements that may impact their validity, to avoid later avoidance claims.

3. Performance of HMAs

(a) Characterisation of the contract

As mentioned in the introduction, domestic contract law does not generally contain provisions specific to HMAs. As a consequence, arbitral tribunals faced with a dispute between a hotel manager and a hotel owner were sometimes required to determine the legal regime applicable to these contracts.

The issue was discussed at length in ICC Case 16266 relating to the operation of four hotels in Tunisia. The tribunal first noted that the contract was described as a 'contrat de mandat de gestion', i.e. an agency agreement, and that it expressly provided for the application of the rules of Tunisian law on agency agreements. However, the tribunal was of the view that this designation was not conclusive and reviewed the substance of the agreement itself to determine its nature. It noted that, as a general matter, an agency contract empowers a party to subscribe to legal commitments on someone else's behalf. It observed that, although part of the manager's role under the HMA was to conclude contracts on behalf of the owner (marketing and advertising contracts, contracts for the supply of goods and services, for the maintenance of the hotel etc.), its sphere of action went further than this and included performing material acts necessary for the management of the hotel, such as using the manager's brand, defining an employment policy and a marketing strategy, etc. As a result, the arbitral tribunal considered that the HMAs did not qualify as agency agreements but were sui generis contracts subject to general contract law, not the law of agency.21

By contrast, in ICC Case No 15082, when ruling on the manager's duty to account to the owner, the tribunal described the HMA as creating a commercial agency relationship under the applicable law. The tribunal found that the manager had fulfilled its obligations as an agent by providing monthly interim accounts and a certified annual statement, and that it was under no obligation to answer questions raised by the owner outside the framework of the HMA just because the owner raised them or alleged improper behaviour on the part of the manager, although it left open the question of whether it was commercially wise to do so or only answer them partially.22[Page25:]

(b) Manager's breach

(i) Claims of mismanagement

In ICC Case 15082 the arbitral tribunal had to rule on the standard of care applicable to the manager, which the contract described as being that of 'a reasonable and prudent operator'. The owner complained of inadequate strategic supervision and the incompetence and inexperience of two general managers. Rejecting these complaints as ill-founded, the tribunal noted that: (i) one of the managers did not lack relevant experience as he was practised at running hotels in general and in the Middle East in particular; (ii) steps were taken to give the hotel a distinctive brand identity; (iii) the general manager discussed strategic planning for the hotel with the area team; (iv) the general manager brought in new and experienced marketing and sales directors and a revenue manager; and (v) rooms rates were not unduly low and were attractive to the hotel's main clientele, which consisted of tourism wholesalers in neighbouring countries and airline crews.23

The owner also complained that the manager misused its reservation system to favour another of its hotels in the city. The arbitral tribunal found nothing to support this allegation, noting that the general managers' remuneration was in part tied to the success of the hotel, so it was in their interest to do the opposite. Nor did it find any evidence of partiality in the use of the reservation system. It concluded that, without any evidence of an 'identifiable, particular, substantial breach', it could not infer from the mere fact that the other hotels had fared better that the standard of care had been deficient.

(ii) Breach of confidentiality

In ICC Case 15082, the owner complained that the manager disclosed information about the hotel's occupancy rates and revenue per available room per night to third party benchmarking companies. The tribunal held that while the disclosure of this information within the manager's group of companies did not constitute a breach of the confidentiality clause in the HMA, disclosure to third parties outside that group was 'a different matter'. It noted that the owner never consented to external disclosure and that the manager did not demonstrate that the owner knew of and acquiesced to such disclosure. The tribunal did not accept the manager's 'everybody does it' argument and stated that it was no defence either to argue, as the manager did, that the existence of confidentiality agreements with the benchmarking companies or the difficulty of separating the information about the hotel from the general figures ruled out a breach of the HMA. However, it awarded only nominal damages, as it did not appear that the owner had suffered any loss as a result of the breach.24

(c) Owner's breach

(i) Disturbance

For the arbitral tribunal in ICC Case 15802, the owner's instruction to remove the manager's employees as authorised signatories for the hotel's bank account was a clear breach of the HMA, as was its failure to make payments under the HMA and related agreements. The tribunal rejected the owner's argument that a further detailed investigation into the merits of the case was required before it could confirm the termination of the HMA pursuant to the notice of termination given by the manager to the owner. The tribunal added that it would 'make no sense for the Tribunal to confirm the termination of the Management Agreement without also confirming the termination of the Services Agreement and Licence Agreement', which were 'coterminous' with it.25

In ICC Case 16751, the hotel owner was a state entity when the management agreement was made. It was subsequently privatised and the new controlling shareholder decided to oust the hotel operator with which the management agreement had been made. For instance, the general manager was forced, under duress, to sign documents transferring funds into a new bank account and to sack staff. The tribunal decided that the owner was wrong to think that it could to disregard the owner's existing contractual obligations under the HMA. By failing to provide sufficient working capital to ensure the operation of the hotel and appointing a financial controller of its own choice, it prevented the manager from performing its services. The tribunal was therefore more than satisfied that the owner was in breach of the HMA in all these respects.26[Page26:]

The sale of a hotel was also at issue, although in a different context, in ICC Case 17185, where the owner, an influential political figure in a Middle Eastern country, sold the hotel covered by the HMA without informing the manager of the identity of the new owner. The tribunal found that such a sale to a third party without previously notifying the manager and protecting its ongoing rights as manager, plus the owner's failure to complete the construction of the hotel on time, constituted breaches of the HMA, unless the owner had a legal excuse. The tribunal found none and dismissed the owner's accusations of disorganised management and lack of support in the construction project, such accusations being unproven and of little relevance to the owner's breach.27

(ii) Change in the project

In ICC Case 16958, the parties signed two agreements relating to the construction and management of two hotels in the Middle East. Following the signing of the agreements, the parties worked together to submit the design for the hotels to the relevant authority for approval. The authority found the project acceptable but requested several adjustments. The owner, which was an investment company, subsequently presented a new concept for the plots, which the manager regarded as incompatible with the parties' agreement. The owner therefore wrote to the manager purporting to terminate the agreements 'following a re-evaluation of the company's investment strategy'. The owner subsequently built a hotel and villas on the plots based on its new concept and using the services of a different management company. The arbitral tribunal noted that the HMA was a typical management agreement conforming to international industry standards. By failing to build the hotel and deliver the hotels in operational condition, the owner had breached its obligation. The tribunal further noted that 're-evaluation of the owner's investment strategy' was not mentioned in the contract as a reason for terminating the HMA.28

(iii) Opening date and calculation of the manager's fees

In ICC Case 15760, the dispute turned on the fees to be paid to the manager. The contract contained different formula for the calculation of these fees depending on the 'Opening Date' as defined in the HMA. The tribunal noted that this was a question of contractual interpretation, and, in particular, the meaning to be given to the words 'fully open for business'. The tribunal held that these words meant that all guest rooms, food, beverage and banquet facilities and public spaces should be ready and available. The tribunal then had to decide whether this had been achieved before a certain date set in the contract. It noted that a press release announcing the opening of the hotel had been issued by the manager before that date. While admitting that, in a major project, minor defects and their correction could be expected and were part and parcel of the run-up to the full and proper functioning of the building, it decided that, based on the evidence adduced, the hotel could not be considered to have been sufficiently advanced for the opening date to have occurred before the date set in the contract. The tribunal reassessed the fees due to the manager on this basis.29

(d) Lessor's obligation of delivery and warranty against latent defects

ICC Case 11045 concerned the construction of a resort in Africa. A lease agreement was concluded between the holder of rights in coastal land under a long-term lease from the state and a large international hotel resorts operator. The dispute arose out of the failure to complete the site, including, in particular, a swimming pool and a pier. The tribunal ruled on the parties' respective liability for not completing the work and found that the owner had fulfilled its obligation to deliver except in relation to the pier and a garden.

The tribunal remarked that, under French law, the lessor's obligation of delivery must be assessed in light of the intended purpose of the property. The lease agreement indicated that the project manager knew the conditions of the premises. The arbitral tribunal found that the manager could not have been unaware of the poor conditions of the premises, as it was able to glean information in this regard from the tender offer for the lease. It concluded that, based on the wording of the [Page27:] contract and the circumstances leading to its conclusion, the lessor had no obligation to remedy certain defects in the property.

The tribunal also ruled that challenges based on title defects were not sufficiently severe to affect free enjoyment of the property. The arbitral tribunal held, however, that the lessor had to guarantee against certain hidden defects, including water ingress, which could not have been known at the time the lease was signed. It therefore considered that the lessor had failed to fulfil its obligation since the improper sealing of the building prevented its use by the manager. The tribunal also concluded that there were major weaknesses in the land titles. However, it found that the lessor had taken the necessary steps to remedy these weaknesses by obtaining assurances from local authorities, even though local registration of the titles remained unclear. The tribunal held that the lessee was entitled to suspend the performance of its obligations, in particular in relation to the refurbishment of the site, until such time as these weaknesses were remedied.30

4. Termination of HMAs

(a) Termination clauses and non-fulfilment

Termination clauses appear frequently in HMAs. Pursuant to these clauses, one of the parties has the right to terminate the contract ahead of its term if the other party does not fulfil one of its obligations under the contract. These clauses are regularly invoked in disputes and tribunals have had to decide under what conditions they can be enforced.

In ICC Case 16266,31 the tribunal had to decide whether any of the alleged breaches were of sufficient importance to justify the termination of four HMAs relating to four different hotels. It stated that this could be the case only if the breach concerned a contractual condition that was determinative of the parties' having entered into the contract. The accumulation of several breaches of secondary importance could not constitute a material breach of an HMA, whereas the existence of a single severe breach could. The tribunal added that a breach that justified terminating only one of the four HMAs did not allow the others to be terminated. The tribunal reviewed the ten alleged breaches invoked by the owner to justify termination. One of these was that the manager had wrongfully retained parts of the discounts it obtained from suppliers. While the tribunal ordered the manager to pay these amounts to the owner, it held that this breach was not sufficiently severe to justify the termination of the HMA. Another alleged breach was the absence of any justification for the marketing costs. The tribunal noted that the contract gave the manager a wide margin of appreciation in relation to these costs and that the HMA could not be terminated for failure to justify these expenses, especially since it was not proven that they were overpaid. Similarly, it held that the manager enjoyed broad discretion in the management of employees and was therefore entitled to second employees from other hotels in its chain. The tribunal acknowledged that payment of the gross operating profit (GOP) to the owner was a material obligation under the HMA, but was of the view that, to justify termination, a delay in payment of the GOP should be sufficiently long and could not be considered material if it lasted only 30 days. It also noted that thefts at the hotels could not constitute a material breach if they could not be attributed to the manager or its employees. Also, while the manager was at fault in terminating the lease of a boutique in the hotel, this breach, too, was, insufficient to justify termination. The tribunal rejected several other grounds for termination as they had not been mentioned in the notice of default, given that only those mentioned in the notice of default could subsequently be invoked to justify termination of the HMA.

The notion of material breach was also discussed in ICC Case 17185.32 The tribunal found that at least three key provisions of the HMA had been breached, namely the owner had failed to complete the construction of the hotel within the time limit set in the contract, had sold the hotel without informing the manager or obtaining the written commitment of the buyer to accept and be bound by the HMA, and had failed to keep the hotel free from encumbrances and restrictions adversely affecting the right or ability of the manager to manage and operate the hotel. [Page28:]

In ICC Case 11045, the tribunal recalled that, for notice of default to be valid, it had to fulfil certain substantive and formal requirements.33 With regard to substance, the default in question must be proven and concern a substantial obligation of the contract. The tribunal considered that the lessee was entitled to terminate the lease because the lessor had failed to provide property free of hidden defects (there were sealing problems) and had failed to deliver property conforming to the contract (since it did not have a pier). However, non-completion of garden works was not considered severe enough to justify termination. The tribunal rejected the lessee's argument that loss of confidence in the lessor's ability to carry out the work was a proper reason for terminating the lease, as the loss of confidence resulted from both parties' behaviour. Although there were therefore substantive grounds for terminating the lease, the tribunal found that the formal requirements for exercising this right had not been met (see below). As an alternative, the lessee requested the arbitral tribunal to terminate the lease itself. This, however, would require much wider powers than if it were simply to enforce a termination clause, since it would need to assess the severity of the breach in the light of the contract. The tribunal concluded that, although failure to deliver certain parts of the resort (such as the pier) could have justified termination of the lease pursuant to the termination clause (if it has been properly applied), it could not justify termination by order of the arbitral tribunal.

The same approach was adopted in ICC Case 15802, where, as mentioned earlier, after acknowledging that the owner's removal of the manager's employees as authorised signatories for the hotel bank account and its failure to make payments constituted breaches that justified the termination of the HMA by the manager, the tribunal rejected the owner's argument that a further detailed investigation into the merits of the case was required before such a decision could be made. The tribunal remarked that where the contract provides that, in the event of breach, the injured party is entitled to terminate by notice, the only factual investigation it has to undertake is to determine whether the alleged breach is proven to have taken place.

ICC Case 15825 raised the issue of whether noise emissions could justify terminating the lease of a hotel business. The lessee argued that noise emissions from neighbouring industrial premises seriously undercut the hotel's potential as the lessee was forced to close all rooms located on the side of the hotel overlooking the industrial site. The arbitral tribunal dismissed the claim on the basis of both the applicable law and the terms of the contract. Under Italian law, a lessor had an obligation to guarantee against legal impediments to use of the property, but not factual inconvenience like noise emissions. While admitting that there were some doubts over the proper interpretation of the warranty clause in the parties' contract, it found that the parties' intention was to limit the scope of the warranty to third party demands and rights. It further noted that the lessee could itself assert its rights against the party liable for the inconvenience. The tribunal finally decided that even if a direct causal link could be established between the noise emissions and the closing of 100 rooms in the hotel, the closing of the rooms had not prevented the hotel from operating and concluded that the lessee's subsequent refusal to pay the rentals entitled the lessor to terminate the agreement.34

(b) Force majeure

ICC Case 15949 arose out of the termination of an HMA relating to a hotel in North Africa.35 The manager, a hotel chain, terminated the agreement and sought reimbursement of the minimal financial guarantee on the grounds of force majeure. It argued that terrorist attacks in New York in 2001, Djerba in 2002 and Marrakech in 2003 were force majeure events allowing it to suspend the payment of the minimal guarantee. The tribunal noted that, under the terms of the contract, an event amounted to force majeure only if it materially affected the tourism in the country where the hotel was situated. It also noted that the effect of force majeure under the contract depended on whether it lasted for more than six months or not. Acknowledging that the terrorist attacks were irresistible, unforeseeable and exterior to the parties, the tribunal considered whether they materially affected the local tourist market by reviewing statistics relating to hotel occupancy rates in the country over five years, which it found had fallen dramatically. It accepted that the events constituted force majeure pursuant to the HMA and noted that the manager [Page29:] had properly invoked and notified the occurrence of force majeure. It thus ordered the owner to reimburse the manager for the money it had paid as the minimal guarantee following the application of the force majeure clause.36

In ICC Case 16751, the owner argued that it was entitled to terminate the HMA as the government's sale of its majority stake in the company that owned the hotel qualified as an event of force majeure under the HMA. The tribunal dismissed this argument, referring to the distinction that exists in the law of sovereign immunity between sovereign acts (acta juri imperii) and acts performed by a sovereign like any private person (acta jure gestionis). The tribunal held that the state's sale of its share in the hotel owner fell into the second category, all the more so as it was implemented through an agreement governed by private law, rather than through legislation.37

(c) Notice of default

To terminate an HMA it is not sufficient for a party to have been the victim of a material or defined breach, it must exercise its right of termination by complying with the applicable formal requirements.

In ICC Case 11045, the tribunal recalled that, for the notice of default to be valid, it must fulfil certain formal requirements. In conformity with French law, the contract provided for a two-step process, consisting of first suspension of the contract in the event of breach and then termination if the breach is not cured. The tribunal found that these formal requirements had not been respected as the initial notice of default was not followed by a proper termination notice. As this formalism was designed to protect the debtor, the lease could not be considered as terminated in the absence of proper notice, notwithstanding the fact that substantive breaches had occurred. This resulted in an award largely unfavourable to the hotel operator.38

The form of the notice of default was also discussed in ICC Case 16266.39 The manager terminated the HMA by a letter written in Arabic, whereas the HMA provided that French was the language of the contract. While acknowledging that French was the language of the contract, the tribunal found that correspondence between the parties showed that the use of other languages was accepted and that there was no evidence the owner had been handicapped by receiving the notice of default in Arabic. On the contrary, the fact that it replied the following day showed that it had no difficulty understanding the meaning of the notice. The tribunal therefore held that the use of a language other than that of the contract did not invalidate the notice of termination.

Again, in ICC Case 16751, the tribunal had to decide whether the notices of default and the notice of termination given using the letterhead of the group to which the manager belonged (which was not a party to the HMA) were acceptable. The tribunal noted that the letterhead included the manager's logo and address and that the notices referred to the HMA and made it clear they were intended to constitute notices of default and of termination under that agreement. It therefore accepted the manager's submission that they constituted valid notices.40

The last two cases discussed above suggest that arbitral tribunals are disinclined to let form prevail over substance and allow some derogation from strict compliance with formal notification requirements where the intent of the party is clear or determinable. Formal requirements are nonetheless important, as illustrated by the first case where the termination of the lease was thwarted by the manager's failure to comply with the notification process.

(d) Effect of termination: use of trademarks and names

In ICC Case 15760, the tribunal held that, following termination of the HMA, the owner must cease using all names that could give the impression that the hotel was still associated with the manager. It granted injunctive relief forbidding such use and damages based on the calculation of royalties until the owner ceased using the characters that made up the names.41[Page30:]

In ICC Case 15949, a prestigious hotel chain asked for damages for the owner's use of its name after termination of the HMA. The tribunal first noted that the term 'enseigne' referred to both the name used to individualise the business and the name appearing on the building. It held that the manager, which bore the burden of proving unfair use of the name, had failed to provide such proof (for example, use of the name on the owner's or other websites) and the fact that the manager's name remained on the hotel long (i.e. 20 months) after the HMA was terminated was an isolated incident that could affect only guests who actually visited the hotel. It awarded the manager limited damages of 10,000 euros, given the length of time the name stayed on the building after termination of the HMA.42

5. Damages

(a) Loss of profit

In most of the cases examined, the arbitral tribunals discussed in detail the quantum of the damages claimed by the parties. Their discussion often relied on expert reports filed by the parties and led the tribunal to review the different bases for calculating damages, including the period during which fees or rents were due, the average occupancy rate of the hotel, the ratio of gross operating profit to total turnover and the applicable discount, and any general risk factor to be included in the analysis. In several cases, arbitral tribunals demonstrated considerable rigour when assessing damages and, in particular, applied quite high discount rates.

In ICC Case 11045, the tribunal recalled that harm caused by loss of chance lies midway between potential and real damage and that, unlike loss of profit, rental payments due by the lessee are a certain source of revenue for the lessor. It held that the lessee had to pay the rent from the date of improper termination to the date on which the hotel was leased to another company, as well as the one-off entrance fee and the cost of repair work that the lessee should have carried out under the terminated lease. The lessor's claim for additional damages to cover income it would have received from transporting customers from the airport to the resort and selling recreational activities to customers was rejected, as the tribunal considered that this claim unripe and purely hypothetical. On the other hand, the costs (airfares, communication, etc.) incurred by the lessor in searching for an alternative tenant were recoverable from the lessee. As for the manager's claim for compensation for loss of profit due to the early termination of the contract, the tribunal decided, after discussing at length the method of evaluation of the loss of profit and despite finding it 'perfectly logical', that, as a matter of principle, the alleged loss of profit was too uncertain at the time of the termination of the lease to justify awarding compensation.43

In ICC Case 16751, to determine the amount of damages the manager was entitled to recover from the owner for repudiation of the HMA (such damages consisting of the profits the manager would have earned if the HMA had continued for the remainder of its initial term), the arbitral tribunal considered two expert reports submitted by the parties, one by an expert in the local hotel industry and the other by the managing director of a company providing management, consulting and technology services to the local hospitality industry. It held that the manager was entitled to damages for loss of profit based on the total number of rooms foreseen in the HMA, even though the owner's performance prior to the termination had resulted in far fewer rooms being actually made available, regardless of the manager's acquiescence. In view of the uncertainty of the earnings claimed by the manager, the tribunal took a broad approach and reduced by one third the expert's figures for the management fee, incentive fee and contribution to marketing expenses.44

A similarly broad approach was also adopted by the arbitral tribunal in ICC Case 16958. After recalling that the applicable law gave the arbitral tribunal discretion to determine the amount of recoverable damages, the tribunal reviewed the experts' assessments (in particular the average daily rate, the average occupancy rate and the discount rate) and, after finding a number of uncertainties, used its broad discretionary powers to order a 25% discount for risk.45[Page31:]

The calculation of loss of profit was also discussed in ICC Case 16266. After reviewing both parties' arguments, the arbitral tribunal made a number of adjustments to the amount claimed by the manager. Noting that local unrest had a major impact on tourism, it reduced the estimate submitted by the manager, as well as the ratio of GOP to turnover.46

In ICC Case 15082, the applicable law (the law of a country in the Middle East) authorised the tribunal, once it had confirmed the termination of the contract, to compensate the injured party for losses suffered up to the date of termination and for any losses it had suffered or might suffer thereafter for the remaining term of the contract. The manager produced expert evidence from a hotel consultant, who assessed the incentive fee the manager could have expected on the basis of market conditions.47

ICC Case 15760 also offers an interesting illustration of the calculation of damages in the context of the termination of an HMA. The claimant filed a report by a consultant in support of a claim for lost profit as a result of early termination of the HMA. The consultant compared the hotel's occupancy rates and average daily rates over three years to those of a competitive set of hotels. He then estimated the fees that the claimant ought to receive by applying a cash flow discount of 12% to 14%.48

(b) Duty to mitigate: search for replacement projects or partners

In several cases, arbitral tribunals considered whether and, if so, to what extent the party harmed by wrongful termination had to mitigate its loss. The cases reviewed reveal that arbitral tribunals tend to rule with some severity on this point, be it in relation to the date on which a party should start searching for a replacement partner or the length of time allowed for finding a substitute solution.

For instance, in ICC Case 15082, the tribunal noted that the owner was not liable for the loss that could be avoided by the manager using reasonable efforts. The tribunal took the view that it was 'quite inconceivable that parties in the position of the [manager] would not have plans ready to deal with the very contingency that they have been seeking to bring about, namely the termination of the Agreements' and decided that, using reasonable efforts, the manager could and should have been able to find and bring fully into operation a replacement hotel in the locality within 15 months of the date of the award. It therefore limited post-award compensation to 15 months' loss of incentive fees and royalty payments.49

In ICC Case 15760, the manager produced the report of a consultant who considered the time within which the manager should have been able to find a replacement property similar in size and quality that could be operated in the same city. Given 'the loss of a "first movers" advantage and a "tarnished" image following the termination of the Management Agreement', the consultant suggested that it could take 4.7 to 7.7 years to accomplish this. He added that his projection took into account the financial crisis, an epidemic and the fall in tourist arrivals. While accepting this general approach, the tribunal did not agree that the manager would require more time than the managers of other luxury hotels in China (2.3 to 4.3 years), so awarded damages to cover loss of profit for only three years.50

The duty to mitigate was also considered in relation to a lease in ICC Case 15825. The owner had requested, as damages for wrongful termination of the lease, all rental payments for the full term of the agreement. The tribunal held that this was 'clearly excessive'. It recalled that, after the return of the hotel to its owner, the owner would be in a position to use it productively, by either running it directly or leasing it to a new lessee. It further recalled that the owner had an obligation to limit damage by putting assets to good use. Damages were therefore limited to a maximum of nine months' rent after the return of the hotel.51[Page32:]

(c) Reputation

In ICC Case 11045, the lessor complained that the lessee had given improper publicity to the termination of the lease. The tribunal did not find sufficient evidence in the file to award compensation for this, noting that although articles had been published in the local press, they could not be attributed to the lessee. The arbitral tribunal also rejected the lessee's claim for loss of reputation, noting that, although notional damages could be awarded for such loss, it was not substantiated in the present case. Nor did the tribunal accept the lessee's claim for damages for the loss of credibility it alleged to have suffered on the stock market and vis-à-vis investors on account of the failure of the project, since any such harm was too remote from the dispute.52

Acts detrimental to the image of a hotel chain were also discussed in ICC Case 16266.53 The tribunal noted that the prompt replacement of management teams appeared to be common practice following the termination of HMAs. It therefore held that this and the swift removal of the name of the hotel chain from the premises could not constitute vexatious measures. It conceded, however, that the termination of the agreements did not seem to have been without problems. For example, a press article had referred to the manu militari expulsion of a manager. Although such incidents could not be considered as normal, in the tribunal's view they were not so exceptional as to harm the image of the hotel chain.

Conclusions

There is a wealth of information to be found in ICC's first-ever publication of awards relating to hospitality disputes. These awards shed very interesting light on numerous issues of importance to hotel operators and take account of the specificities of this business. For instance, they demonstrate that the control of the flow of information between the manager and the owner (or the lessor and the lessee) - be it prior to the conclusion of the agreement or during its performance - is a delicate issue that must be carefully addressed in the contract. They also demonstrate that tribunals usually interpret restrictively the grounds upon which HMAs can be terminated. They are limited not only to the grounds referred to in the termination clause, or to essential obligations as narrowly understood, but also to those invoked in the notice of termination.

As a general rule, the proper termination of such agreements calls for care in the observance of formal and substantive requirements and does not put an end to the parties' obligations, since they must then swiftly look for an alternative project in order to mitigate their damages and avoid being penalised when seeking their recovery from arbitral tribunals.

1
'The Global Hotel Industry and Trends for 2016', http://www.hospitalitynet.org/news/4073336.html.

2
EY, 'Global hospitality insights: top 10 thoughts for 2016', http://www.ey.com/Publication/vwLUAssets/EY-global-hospitality-insights/$FILE/EY-global-hospitality-insights-2016.pdf.

3
European Commission report on new challenges and concepts for the promotion of tourism in Europe, 22 Sept. 2015 (2014/2241(INI)); France in particular: EY, 'L'hôtellerie en France : Les grands défis du secteur vus par ses principaux acteurs', http://www.ey.com/fr/fr/industries/real-estate/ey-hotellerie-en-france; Autorité de la concurrence, decision no. 15-D-06, 21 Apr. 2015. EY, 'The Hospitality Sector in Europe' (2013), http://www.ey.com/Publication/vwLUAssets/The_Hospitality_Sector_in_Europe/$FILE/EY_The_Hospitality_Sector_in_Europe.pdf at 8.

4
For a US perspective on this issue, see T.E. Soloway and J.D. Bernstein, 'Arbitration Provisions in Hotel Management Agreements', New York L. J. (13 Jan. 2016).

5
R. Dupeyré, 'L'arbitrage en matière hôtelière', b-Arbitra, 2015/2, 255. See also J. Feigher's report on the ICC YAF conference on arbitration in the hospitality industry that took place in Paris on 28 January 2016, Paris J. Int. Arb., 2016/1, 134.

6
ICC Case 16751; ICC Case 16266; ICC Case 16751; ICC Case 16958; ICC Case 17185.

7
E.g. 20 years in ICC Case 11045, or 15 years for the lease of a hotel business in ICC Case 15825.

8
Final Award, § 6, see full text of award at http://www.iccdrl.com/.

9
First Partial Award, § 77 et seq., see full text of award at http://www.iccdrl.com/.

10
Partial Award, § 54, see full text of award at http://www.iccdrl.com/.

11
Final Award, see full text of award at http://www.iccdrl.com/.

12
Partial Award, § 160, see full text of award at http://www.iccdrl.com/.

13
Ibid., § 161.

14
First Partial Award, §§ 97 et seq., see full text of award at http://www.iccdrl.com/.

15
Ibid., § 115.

16
Final Award, § 58, see full text of award at http://www.iccdrl.com/.

17
Ibid., § 87.

18
First Partial Award, § 73.

19
Final Award, § 110, see full text of award at http://www.iccdrl.com/.

20
Final Award, see hereinafter and full text of award at http://www.iccdrl.com/.

21
Final Award, § 141 et seq., see hereinafter and full text of award at http://www.iccdrl.com/.

22
First Partial Award, § 192, see full text of award at http://www.iccdrl.com/

23
First Partial Award, § 131, see full text of award at http://www.iccdrl.com/.

24
First Partial Award, § 163-171, see full text of award at http://www.iccdrl.com/.

25
First Partial Award, §§ 276-287; Second Partial Award, §§ 49-56, see full texts of awards at http://www.iccdrl.com/.

26
Final Award, § 120 et seq., see full text of award at http://www.iccdrl.com/.

27
Final Award, § 3.23, see full text of award at http://www.iccdrl.com/.

28
Final Award, see hereinafter and full text of award at http://www.iccdrl.com/.

29
Final Award, § 34 et seq., see full text of award at http://www.iccdrl.com/.

30
Partial Award, see full text of award at http://www.iccdrl.com/.

31
Final Award, § 217 et seq., see full text of award at http://www.iccdrl.com/.

32
Final Award, § 4.1 et seq., see full text of award at http://www.iccdrl.com/.

33
Partial Award, § 174 et seq., see full text of award at http://www.iccdrl.com/.

34
Final Award, see full text of award at http://www.iccdrl.com/.

35
This award was challenged in the Paris Court of Appeal, but the challenge was dismissed by judgment no. 12/11849, 18 Feb. 2014.

36
Final Award, §§ 147-156 and §§ 174-186, see hereinafter and full text of award at http://www.iccdrl.com/.

37
Final Award, §§ 117-119, see full text of award at http://www.iccdrl.com/.

38
Partial Award, §§ 178-184, see full text of award at http://www.iccdrl.com/.

39
Final Award, §§ 200-205, see full text of award at http://www.iccdrl.com/.

40
Final Award, §§ 125-128, see full text of award at http://www.iccdrl.com/.

41
Final Award, §§ 93-102, see full text of award at http://www.iccdrl.com/.

42
Final Award, §§ 205-215, see full text of award at http://www.iccdrl.com/.

43
Final Award, §§ 114-123, see full text of award at http://www.iccdrl.com/.

44
Final Award, §§ 141-152, see hereinafter and full text of award at http://www.iccdrl.com/.

45
Final Award, §§ 179-243, see hereinafter and full text of award at http://www.iccdrl.com/. For another discussion of loss of profit, including occupancy rates and discount, see ICC Case 17185, §. 5.1 et seq.

46
Final Award, § 402 et seq., see full text of award at http://www.iccdrl.com/.

47
Second Partial Award, § 62 et seq., see full text of award at http://www.iccdrl.com/.

48
Final Award, §§ 78-84, see full text of award at http://www.iccdrl.com/.

49
Second Partial Award, §§ 97-104, see full text of award at http://www.iccdrl.com/.

50
Final Award, § 85, see full text of award at http://www.iccdrl.com/.

51
Final Award, §§ 193-197, see full text of award at http://www.iccdrl.com/.

52
Final Award, §§ 126-129, see full text of award at http://www.iccdrl.com/.

53
Final Award, §§ 434-436, see full text of award at http://www.iccdrl.com/.