The Four Seasons Aviara Resort Case

Four Seasons Uses an Arbitration Clause to Defeat an Owner’s Request for an Injunction to Terminate its Management Agreement

This Stroock Hospitality Industry Practice Group Special Bulletin discusses BRCP HEF Hotel Tenant LLC v. Four Seasons Hotels Ltd. (the “Four Seasons Aviara Resort Case”), which illustrates how an arbitration clause in a hotel management agreement (“HMA”) can defeat an owner’s attempt to seek emergency relief from a court in order to terminate a manager.
The Termination Dispute

The dispute in the Four Seasons Aviara Resort Case arose when the hotel’s owner (“BRCP”) and Four Seasons could not agree on a 2009 operating budget, a scenario that is likely to play out in many hotels in this economy. Four Seasons proceeded to operate the hotel under the 2008 budget and demanded capital from the owner. In March 2009, the owner terminated the HMA and started an arbitration seeking a declaration that termination was proper. The owner also sought the same relief from a federal court in California.

On May 8, 2009, the owner demanded that Four Seasons vacate the property by May 11 to make way for a new management company. That day, Four Seasons wrote to the arbitrators requesting a conference to seek injunctive relief halting the termination. On May 11, each party sought an injunction against the other in federal court, in a procedural battle over whether termination should be decided in court or by an arbitration panel.

The Owner’s Failed Attempt to Litigate the Termination Dispute in Court

The owner’s filing asserted an absolute power to terminate the HMA, relying on the 1996 Third Circuit Court of Appeals’ decision in Government Guarantee Fund of the Republic of Finland v. Hyatt Corp.,¹which firmly established this power of termination under the law governing agency relationships. The owner demanded preliminary injunctive relief prohibiting Four Seasons from: (1) holding itself out as the manager of the hotel; (2) incurring any further obligations on the owner’s behalf; (3) continuing to occupy the hotel property; (4) obstructing access to the hotel by the new manager; (5) interfering with the owner’s personal property, including the hotel’s books and records; and (6) retaining or expending any of the hotel’s revenues or the owner’s funds.

Four Seasons’ Response: The Dispute Must Be Arbitrated Under the HMA

Four Seasons’ injunction application cited the fact that the owner had allegedly attempted to seize the hotel “by force” and requested a court order “that Owner desist from further unilateral action until the parties can go before the arbitration panel and meaningfully resolve their disputes, in terms of interim relief and long-term issues, as they are obligated under the HMA to do.”
The Arbitration Provision in the Four Seasons Management Agreement

Four Seasons’ strategy to move the termination dispute into arbitration was based upon a broad arbitration clause that provided as follows:

Except as to matters to be determined under this Agreement by auditors and as otherwise provided in this Agreement, any controversy or claim arising out of or relating to this Agreement shall be settled by arbitration . . . .

Neither BRCP nor Four Seasons claimed that the dispute fell outside the arbitration clause. However, the owner argued that, under California’s arbitration statute, the Court had authority to render injunctive relief “in connection with an arbitrable controversy.” The owner also argued that federal courts routinely grant injunctions in aid of pending arbitrations.
The Court’s Resolution: Rejection of Owner’s Request for Injunctive Relief Seeking Termination

On May 27, 2009, in a terse, one-paragraph order, the court rejected the owner’s arguments and ordered the parties to arbitrate their dispute as Four Seasons had urged. The court’s decision followed decades of precedent in which courts defer to the federal policy favoring arbitration where the parties entered into a contract with a broad arbitration clause. The court reasoned that:

Commensurate with the court’s limited role in disputes subject to binding arbitration, the court defers ruling on the pending motions to allow the parties the opportunity to address their claims in the chosen forum [i.e., the arbitration]. Under the Federal Arbitration Act, “it is for the arbitrator to determine the relative merits of the parties’ substantive interpretations of the agreement,” . . . and not this court.

The Four Seasons Aviara Resort Case’s Lessons For Hotel Owners About Arbitration

Negotiate Your Arbitration Clause Carefully

Arbitration “should be compelled ‘unless it may be said with positive assurance that [the] arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”² Because federal law empowers an arbitration panel to issue injunctive relief,³ a demand for an injunction is not sufficient to avoid arbitration, unless the arbitration clause expressly removes injunctive relief from the arbitrator’s power, which the arbitration clause in the Four Seasons HMA did not do.

The owner in the Four Seasons Aviara Resort Case apparently believed that a court would be a better forum in which to litigate a management agreement termination. This strategy raises a host of issues about the deficiencies of alternative dispute resolution as a means of resolving hotel disputes – a topic that is beyond the scope of this Special Bulletin. Suffice it to say that whether arbitration, as opposed to a court proceeding, is a preferred method of dispute resolu-tion is a complex legal question. No owner should consider an arbitration clause to be simply a boilerplate provision that is a secondary consideration to the economic terms during the negotiation of an HMA. The arbitration provision is critical. If the owner wants to reserve its right to litigate certain aspects of the relationship with the manager in court, then it should customize the provision appropriately: for example, by excluding disputes regarding securities law violations, fiduciary duties and/or books and records. If an owner is apprehensive about relinquishing its right to have a court of law handle potential disputes, then it should avoid entering into any type of arbitration agreement.

Read Your Arbitration Clause Carefully Before You Try to Go to Court

When an owner agrees to an arbitration clause like that in the Four Seasons HMA, an attempt to go to court to seek termination is typically a losing strategy that only results in significant and ultimately pointless legal expenses for the owner. Worse yet, the owner is then consigned to adjudicating its claims before an arbitration panel that it just tried to avoid by going to court. Such a strategy risks diminishing the owner’s credibility with the panel members, perhaps adversely impacting its claims on the merits of the dispute. While Government Guarantee Fund establishes an owner’s power to terminate an HMA at will, the test in the Four Seasons Aviara Resort Case will be whether and how the arbitration panel applies that legal precedent to the owner’s attempt to terminate Four Seasons HMA. Arbitration awards are not typically appealable and, if the panel’s ruling is mistaken on the law, it will be difficult and expensive to attempt to have the award set aside.

• 1 95 F.3d 291 (3d Cir. 1996). Cecelia L. Fanelli, one of the authors of this Bulletin, represented the successful owners in Government Guarant
• 2 David L. Threlkeld & Co. v. Metallgesellschaft Ltd. (London), 923 F.2d 245, 251 (2d Cir. 1991).
• 3 See, e.g., American Express Fin. Advisors Inc. v. Thorley, 147 F.3d 229, 230-31 (2d Cir. 1998).

About the Author

Cecelia L. Fanelli is a former member of Cayuga Hospitality Consultants.