Pros and cons of arbitration

Arbitration is a way to resolve lawsuits without going to court. The parties argue their case to an arbitrator in a private, informal setting. Arbitration appeals to some because it is quicker, private and often cheaper.

Arbitration is undesirable to others for several reasons. Typically, an arbitrator’s decision cannot be appealed. Instead, the parties get one hearing and the decision is final. The arbitrator, who could be a lawyer or an industry professional, is not bound to follow the law. The exchange of information between the parties prior to the hearing is limited. Also, the devil often lurks in the details of many an arbitration clause.

Arbitration occurs only if all the parties to a lawsuit agree to forgo court. Not infrequently, the contract underlying the parties’ transactions contains a mandatory arbitration provision. If the parties’ relationship sours, there may be regret about having surrendered court proceedings. Such was the circumstance in two recent hospitality cases.

The first involved Fox Valley Hospitality, which operates a DoubleTree Hotel in Appleton, Wis. FVH contracted with Hotel Connections, a company that manages airline crew logistics. DoubleTree agreed to provide hotel rooms at a reduced rate to pilots and other airline personnel. Hotel Connections allegedly was slow to pay and FVH sued in a Wisconsin court. The parties’ contract included a clause mandating arbitration of disputes in Delaware. Hotel Connections sought to dismiss the case and compel arbitration in Delaware which, of course, is far from Wisconsin. The judge enforced the arbitration clause and dismissed the court case.

In the second lawsuit, the plaintiffs included 90 Choice Hotels International franchisees, presumably from around the country. The franchisor was the defendant. Plaintiffs asserted numerous complaints, including that defendant requires franchisees to pay inflated prices to third-party vendors for necessary products, defendant discriminates against hoteliers of Indian and South Asian background, defendant imposes excessive penalties on departing franchisees and defendant mandates costly membership in a franchise association designated by the franchisor and not helpful in plaintiffs’ view.

A provision in the franchise contract requires arbitration of disputes in Maryland, where Choice Hotels’ headquarters is located. The contract also requires the losing party to pay the prevailing party’s attorney’s fees and all arbitration costs, which can be quite expensive. Perhaps most irksome, the contract prohibits a class action arbitration. The 90 franchisees asked the court to declare these clauses void on the ground of gross unfairness. The franchisees claimed that when they first became affiliated with Choice Hotels, the contract was presented as a take-it-or-leave-it agreement, allowing no opportunity to negotiate the terms.

The court refused to negate the provisions and instead dismissed the court case and ordered arbitration. The judge reasoned that the plaintiffs were all business companies expected to possess “sophistication” in business dealings. Noted the court, all plaintiffs “could have walked away before signing. None was forced to brand their hotel properties with a Choice mark.”

Upshot: Arbitration clauses are enforceable. Examine them carefully before you sign. If your facility is drafting the terms of a contract, consider your preference between court and arbitration, and incorporate that into your document.

Karen Morris is a lawyer, municipal judge and Distinguished Professor at Monroe Community College in Rochester, N.Y., where she teaches hospitality law.