Mediation of Hospitality Industry Disputes: It’s Not Perfect, But It Sure Beats the Alternative
 
June 16, 2010
 
James M. "Jim" Norman- Ft Lauderdale

The hospitality industry is no stranger to disputes between and among parties to its operating and license agreements: owners and operators, franchisors and franchisees, restaurant operators and hotel operators, operators and employees, condo-hotel developers and unit purchasers, and on and on. Every relationship and every industry agreement is a potential source of a dispute.

Almost every hospitality industry agreement – and most particularly those that represent the core agreements, hotel management agreements, franchise agreements, technical service agreements and license agreements – provides for what is generally termed alternative dispute resolution. Alternative dispute resolution might also be termed “anything but litigation.” In practice, the dispute resolution provisions of industry agreements generally favor arbitration and, except in rare and specified situations, prohibit litigation. Additionally, these provisions almost universally require mediation before a party is entitled to file suit or make a demand for arbitration. The dispute resolution provisions of, for example, hotel management agreements, are often vigorously negotiated, most particularly those portions of the agreement that deal with the arbitration process and the rules under which the arbitration would be conducted and the rights of appeal, if any, that may be permitted.

Less discussion and negotiation occurs with respect to mediation, except to possibly provide for the organization which will be conducting the mediation (such as the American Arbitration Association, JAMS, etc.) and perhaps prohibition against selection of a mediator who has had some relationship with one of the parties during a stated timeframe.

Mediation that is required prior to any other form of dispute resolution is sometimes referred to as “pre-suit mediation.” In the context of pre-suit mediation, the parties are free to select, either pursuant to their contract or by mutual agreement, any mediator. If the nature of the dispute and the terms of the applicable contract are such that litigation is permitted, then in most jurisdictions, the trial court judge has the absolute authority to refer the case for mediation, before a mediator of the judge’s choosing in the event that the parties do not come to an agreement on the mediator. The judge may refer the matter for court ordered mediation, whether or not pre-suit mediation has taken place. Mediations that are court ordered generally require appointment of a jurisdiction-certified mediator and are governed by an approved set of rules adopted by the Supreme Court of the state in which the court is located.

What Is and Is Not Mediation?

Many of those who work in the hospitality industry have been involved in alternative dispute resolution and have had experience participating in mediations, but for purposes of this article, it is worth describing what mediation is and is not.

Mediation is, in terms of the actual mediation conference, a consensual, informal, confidential and collaborative process. Virtually nothing that is said in a mediation conference can be used as an admission or in any way against a party during the litigation or arbitration process that may follow. This is to encourage the free exchange of ideas, without fear of a legal “gotcha” in a subsequent proceeding. The mediator is a neutral party and has no role in ruling on the merits of the case or imposing a settlement on the parties. Rather, the mediator’s role is to be a facilitator in assisting the parties in fully airing their differences and exploring potential avenues leading towards, if not to, a settlement of the dispute. Why is this important?

Hospitality industry contracts generally create long-term relationships and involve a great deal of money. Issues of paramount importance – from branding to economics and fiduciary duties – are covered. In many cases, getting to the stage where a finder of fact (the judge or jury in the litigation context or the arbitrator or arbitration panel in arbitration) makes decisions that bear upon the ultimate outcome is fatal to any chance of restoring or continuing the relationship of the parties. Litigation and arbitration have no certainty of outcome, and no matter how strong one side’s case, the lawyer who provides an absolute assurance of victory is a lawyer who has never tried a case.

The loss of a management contract or the loss of the licensed branding of a property, in the context of a multi-decade management or franchise agreement, is a serious detriment to both sides. Yes, the cost is indeed a significant factor, as is the distraction from the real goal: getting “heads in beds.”

The Mediation Process: Who, What, Where, When and Why

Traditionally, mediators came from the ranks of civil litigators. They brought considerable litigation experience, knowledge of the rules of evidence and civil procedure, and the “gift of gab” from years of arguing motions and making closing arguments. Other mediators came from the ranks of retired judges. Judges are used to evaluating the merits of each side’s case and rendering a ruling or verdict – this is exactly what a mediator is not supposed to do. In a mediation conference, the progress or lack of progress in reaching a settlement is determined by the parties and their counsel with the assistance of an impartial, neutral mediator who creates a dialogue between the warring sides. The conferences typically start with a session where everyone is in the same room and each side gets to express to the other their view of the case. Following that initial session, the mediator will separate the two sides and caucus with each in order to explore on a confidential basis matters relating to the claims, defenses and settlement posture. At an appropriate time, determined by the mediator, who in the interim shuffles between the two parties, the two sides once again come together and progress is further explored. Depending on progress, further rounds of caucus and joint session will occur. The conference ends on the basis of a settlement, termination, adjournment or impasse. In court ordered mediation, only the fact that the mediation occurred and the manner in which it was concluded are shared with the judge. The mediator provides no details and no commentary.

If there is a settlement, the agreement is prepared by the two sides. The mediator’s role does not include acting as counsel to either or both parties in preparing any settlement agreement. Often, mediators do recommend that the attorneys bring some boilerplate settlement agreements and general release forms. The settlement terms, like the mediation itself, are confidential, unless the parties otherwise agree.

The current trend is for mediators to bring specific industry experience to their role as mediator, rather than general civil litigation experience. In many states, non-lawyers can be certified as mediators. The basis for this trend is that a mediator with industry experience can probe, with specific questions relating to industry law and operating practices, in a way that may lead to a more open evaluation by each side of the merits of their position and then move on to areas of agreement and disagreement. Then, ultimately, a settlement of the dispute can be achieved in a manner which preserves the relationship and the viability of the contracts without a long, drawn out war. This is especially important in hospitality industry disputes.

There is an old expression which says that a bad settlement is better than a good lawsuit. With the assistance of an effective and qualified mediator with industry experience, a good settlement, or even a great settlement, is an achievable goal.

Related Practices

• Global Hospitality, Resort and Timeshare