Mr. Pucciarelli

Hospitality Law

When to Use Expert Determination in Hotel Disputes

By Albert Pucciarelli, Partner, McElroy Deutsch Mulvaney & Carpenter, LLP

There are three options in alternative dispute resolution. Mediation, arbitration and expert determination. The 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:

  1. 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.

  2. 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.

  3. 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).

  4. The terms of engagement of the Expert shall include an obligation on the part of the Expert to:

    a. 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);

    b. apply the Manager's Standards to issues involving the level of facilities and services at the Hotel; and

    c. establish a timetable for the making of submissions and replies.

Albert J. Pucciarelli is a partner with McElroy, Deutsch, Mulvaney & Carpenter, LLP. Active with the firm since September 2005, Mr. Pucciarelli i s recognized for his expertise in hotel and resort development and operations. His practice is concentrated in these areas, as well as in aviation law, general corporate law and real estate law. Mr. Pucciarelli served as: Executive Vice President, General Counsel and Secretary of InterContinental Hotels, Chair of the Hotels, Restaurants and Tourism Committee and as Chair of the Aeronautics Law Committee of the Association of the Bar of the City of New York. He is a Director and past President of the Hospitality Industry Bar Association. Mr. Pucciarelli can be contacted at (201) 493-3718 or apucciarelli@mdmc-law.com Please visit http://www.mdmc-law.com/ for more information. Extended Bio...

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