Key Take: Hotel management and franchise agreements often require arbitrators with specific hospitality industry expertise, but overly restrictive qualifications or unclear selection procedures can lead to court intervention or even invalidate the arbitration clause if a suitable arbitrator cannot be found or agreed upon.

Hotel management agreements (HMAs) and franchise agreements (FAs), like many other commercial contracts, very often contain provisions requiring that the owner and manager, or the franchisor and franchisee, arbitrate any disputes between the parties. However, the business and law of hospitality is unique and specialized, such that the parties often desire to ensure that the individual or individuals resolving their disputes have sufficient knowledge of the hospitality industry and its laws.

As a result, unlike some other commercial contracts, HMAs and FAs frequently contain detailed qualifications and requirements for the arbitrator(s) to be selected. For example, a dispute resolution clause in an HMA or FA may contain the following provision, or something substantially similar:

The parties shall select Party Designated Arbitrators who (1) are practicing lawyers each with not less than fifteen (15) years’ experience; (2) have experience representing clients in the hospitality industry or who have otherwise litigated, arbitrated or mediated disputes within the hospitality industry; and (3) have not had any direct relationship with either party in the preceding five year period.

Many such provisions may be even more restrictive, requiring that the arbitrator(s) have experience with the precise business or legal issue in dispute and/or have experience in the specific locality where the dispute arises.

Perhaps not surprisingly, a party may dispute whether the arbitrator selected by its adversary satisfies the contract’s qualification requirements. In that event, how is such a preliminary dispute resolved, such that the parties can move forward with the actual arbitration? Sometimes the HMA or FA will contain a clause giving the dispute resolution organization, such as AAA or JAMS, discretion or authority to select the arbitrator. However, many HMAs and FAs do not contain a clause determining how such a disagreement is to be resolved. In such case, the parties may be compelled to raise the issue to the courts, despite agreeing to the more private and efficient arbitration process for resolution of the substance of their dispute.

Such a scenario is addressed by the Federal Arbitration Act, 9 U.S.C. § 5, and many of its state law counterparts. Under 9 U.S.C. § 5:

if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein.

Lapse refers to a “lapse in time in the naming of the arbitrator” or “some other mechanical breakdown in the arbitrator selection process,” like a deadlock in naming the arbitrator.[1]

Thus, “[u]nder the FAA, courts may intervene into the arbitral process to select an arbitrator upon application of a party, if the parties fail to avail themselves of a method for arbitrator selection within their agreement or ‘if for any reason there shall be a lapse in the naming of an arbitrator.”[2]

Courts will avail themselves of 9 U.S.C. § 5 to resolve a dispute over whether a particular individual meets the HMA’s or FA’s arbitrator qualifications requirement.[3] In such a case, the court will examine whether the arbitrator was appointed consistent with the requirements of the contract. That analysis will include examining the potential arbitrator’s professional background and experience.[4]

However, what if the parties both agree that an arbitrator with the required qualifications does not exist, yet they cannot agree on an alternative arbitrator or process? Although it does not appear that this precise scenario has been dealt with in any published court decisions, the courts have dealt with a similar scenario in which the contract required that the parties use an arbitration organization that no longer exists.

“In determining the applicability of Section 5 of the FAA when an arbitrator is unavailable, courts have focused on whether the designation of the arbitrator was ‘integral’ to the arbitration provision or was merely an ancillary consideration.”[5] Where the designation of the arbitrator is in fact “integral” to the arbitration provision, the courts will not appoint an arbitrator and the parties will not be required to arbitrate.[6]

In this situation, the court could resolve the issue in a couple of ways. First, the court might decide to set alternative conditions for the selection of the arbitrator, such as expanding the geographical scope of the arbitrator’s required experience, or otherwise guide the parties on the selection of an arbitrator. The court acting in this manner is consistent with the “[t]he congressional purpose of the FAA [which] is to move the parties to an arbitral dispute out of court and into arbitration as quickly and easily as possible.”[7]

Alternatively, the court could determine that the qualifications contained in the HMA or FA for the arbitrator are an “integral” part of the agreement and that the court will not rewrite the parties’ contract.[8] In that case, the court could determine that the arbitration provision in the agreement is not binding and that the parties need not arbitrate.

In sum, parties should carefully consider the list of qualifications for the arbitrators to be selected to resolve any disputes. To the extent that the parties impose detailed and extensive requirements, the parties may also want to consider addressing the scenario in which a qualified arbitrator cannot be located or agreed upon. Otherwise, the parties will be left to address the issue with the courts, which has the possibility of resulting in the non-enforcement of the arbitration clause in its entirety.  

[1] In re Salomon Inc. Shareholders’ Derivative Litig., 68 F.3d 554, 560 (2d Cir. 1995).

[2] Safety Nat. Cas. Corp. v. Certain Underwriters at Lloyd’s London, 2011 WL 3610411, *1 (M.D. La. Aug. 16, 2011) (citing Gulf Guaranty Life Insurance v. Connecticut General Life Insurance, 304 F.3d 476 (5th Cir. 2002)).

[3] See B/E Aerospace, Inc. v. Jet Aviation St. Louis, Inc., 2011 WL 2852857 (S.D.N.Y. July 1, 2011); Jefferson-Pilot Life Ins. Co. v. LeafRe Reinsurance Co., 2000 WL 1724661 (N.D. Ill. Nov. 20, 2000).

[4] See B/E Aerospace, Inc., 2011 WL 2852857.

[5] Khan v. Dell Inc., 669 F.3d 350, 354 (3d Cir. 2012).

[6] Id., at 357. See also Green v. U.S. Cash Advance Illinois, LLC, 724 F.3d 787, 792-93 (7th Cir. 2013).

[7] Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 22 (1982). See Safety Nat. Cas. Corp., 2011 WL 3610411, *2 (ordering that “all umpire candidates possess the requisite experience in worker’s compensation reinsurance,” despite the fact that not all of the contracts at issue required such qualifications).

[8] Universal Reinsurance Corp. v. Allstate Insurance Co., 16 F.3d 125, 128 (7th Cir. 1994) (holding the parties to the letter of their arbitrator selection clause because “the parties themselves have dictated the outcome in this situation, and absent compelling circumstances, it is not our province to rewrite their agreement.”)