Occupancy rates are up. Room rates are up. Clearly, the seller's market continues. As a result, meeting planners can't negotiate the same deals they used to. Instead, hotels are imposing early departure charges, tough cancellation provisions, and, in general, avoiding concessions. As planners come to terms with this market, arbitration contract provisions warrant a second look.
Arbitration can be an effective way to avoid the sky-high cost of litigation and the stigma of being involved in a suit. Arbitration also can solve disputes quickly compared to the interminable pace of traditional litigation.
The arbitration process, however, has some potential disadvantages. For example, not all forms of relief afforded by the courts are available with arbitration, in particular, "emergency relief." Only the courts are able to provide litigants with the immediate action of temporary restraining orders and injunctions. In addition, arbitrators are not bound by previous arbitration decisions. This lack of legal precedent creates considerable uncertainty.
For some, another consideration is that arbitration does not impose rules of civil procedure or evidence, thus providing a less formal process than with litigation. While some may view that with favor, it also creates a degree of uncertainty and lack of organization for the arbitration process.
Finally, with arbitration there is no right to appeal the case to a higher level.
Many observers believe that to the extent arbitration makes it easier and less expensive to uphold contract rights, it tends to favor the non-breaching party. Thus, arbitration may not be in the best interest of the party attempting to get out of a contract.
Negotiate Everything One major mistake that parties make is to use arbitration as a substitute for contractual negotiation. With arbitration provisions in place, planners and hoteliers don't always feel the need to spell out the most contentious contract issues. If a dispute comes up, they reason, problems can always be addressed by the arbitration process. This is erroneous thinking. All contractual terms should be negotiated, especially the contentious ones.
For example, if the parties cannot or will not agree on a cancellation provision, arbitrators have no guidance when a dispute comes up. The arbitrators might conclude that since the contract was silent on cancellation, the parties must have intended that there be no cancellation right. It is unlikely that arbitrators would look at the timing of the cancellation in relation to the meeting date and conclude that more or less penalty was due relative to that date. They couldn't do that because the contract provides no guidance.
This example also illustrates a potential problem for a buyer in a seller's market. Arbitrators use only the terms of the contract for guidance. If those terms are favorable to the seller, arbitration makes it easy for the seller to pursue a dispute against the buyer--and win.
Arbitration generally works best when the parties are on relatively even footing--not the case today between meeting planners and the hotel industry. And negotiating power--or lack thereof--can influence the terms of the arbitration provision itself.
For example, the contract should establish where the arbitration will take place and the state's laws that will apply in interpreting the contract, as well as the type of arbitration (e.g., binding or not binding, single or multiple arbitrators) and the rules of arbitration (e.g., American Arbitration Association, Convention Liaison Council).
Idle Threats? Arbitration may be less expensive than the formal litigation process, but litigation, or the prospect of litigation, can be a better incentive toward a resolution. For the party with the lesser amount of power, the threat of litigation provides a formidable bargaining chip toward settlement of a contractual dispute.
Besides litigation, meeting planners also should consider other alternative dispute resolute mechanisms before too quickly agreeing to arbitration. Mediation, for example, has become popular. It provides the parties with a means of resolution or, at least, the ability to narrow the focus of the dispute to issues on which the parties cannot agree. Unlike arbitration, mediation does not bind the parties to the recommendation of the mediator, and litigation may proceed if the process is unsuccessful.
Arbitration may be a useful tool for dispute resolution, but it is no panacea. For the buyer in a seller's market, it could prove to be a bitter pill.
Jed R. Mandel is a part ner in the Chicago-based law firm of Neal, Gerber & Eisenberg, where he heads the trade and professional association practice. He is a frequent lecturer and writer on meeting-related topics.