Approaching the International Hotel Project Intelligently: Considerations to Reduce Complexity, Costs, and Risks

Approaching the International Hotel Project Intelligently: 
Considerations to Reduce Complexity, Costs, and Risks

By Irvin W. Sandman
January 23, 2009

The forces of globalization continue to change our world, and with it the hotel industry.  In response, U.S. hotel developers, brand owners, and investors have continued to accelerate their efforts to extend their reach across borders and apply their skills in new, international markets.  As U.S. markets contract in the current, ongoing recession, the effort to reach new markets has become even more urgent.

Experienced hotel counselors have special industry knowledge and legal skills to help developers in the complex process of acquiring, developing, and stabilizing hotel projects.  As hotel clients cross borders, the U.S. lawyer faces a new set of challenges.

This article provides an approach to international hotel projects to allow both hotel companies and their counselors to understand the big-picture risks and objectives and to apply their skills without exceeding their limitations.  By approaching international hotel projects intelligently, the complexity, costs and risks can be reduced.

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1. How Much Foreign Law Will You Need?

All international hotel projects are not alike.   Some are more affected by the law of the foreign jurisdiction than others.  For example, an ordinary hotel franchise agreement that is governed by U.S. law and that has a strong arbitration clause may require little application of foreign law.  In contrast, a co-investment in foreign real property by citizens and entities of multiple countries will require extensive application of foreign law.

Accordingly, the first step in approaching the international project is to inventory and understand the objectives of the legal documents and relationships.  To do this, it is important to bring back from the subconscious essential concepts that experienced lawyers take for granted in a domestic deal. 

For example, when we enter into a contract, such as a hotel management agreement or franchise agreement, our ultimate objectives are usually the following:

• We want the parties to understand and accept their promises.
• If the other side breaches, usually we want to be able to take legal action in pursuit of damages or other bargained-for remedies.
• We then want to be able to get to judgment, enter the judgment in appropriate jurisdictions, enforce the judgment, and collect.

In contrast to the objectives in creating simple, contractual relationship, if we are investing in real estate, our ultimate objectives include the following:

• We want to “own” the property and understand what the normal attributes of ownership are.
• We want to know how to establish and protect our “ownership.”
• We want to know what we have to do, legally and practically, to accomplish our development objectives.
• We want to know how we will be able to protect our interests if things do not go according to plan.

Hotel projects can involve dozens of different kinds of legal relationships and transactions.  In each relationship, the U.S. lawyer should bring to top-of-mind these basic objectives and fundamentals.  In contrast to a domestic deal, the U.S. lawyer must realize that these fundamentals cannot be assumed and will require specific attention.  Then the lawyer can begin to understand how deeply the lawyer will need to delve into foreign law and foreign issues to accomplish the expected results and have recourse to the expected remedies.

2.  Arbitration: The Most Important Cleavage Point for Drafting Contracts.

In any contract, the most essential, ultimate legal concern is enforcement.  A contract accomplishes little if it cannot be enforced according to the parties’ expectations.

If the parties do not effectively establish the law and forum for enforcing the contract, then the possibility remains that a foreign court will be involved.  And if a foreign court will be involved, then local procedural or substantive law might govern the contract and what it means.  And if the foreign courts might decide those critical matters, then the deal lawyer will have to start from scratch in drafting the contracts so they conform to local law and can be enforced under it.  This slippery slope leads to very large local and U.S. legal bills.

The answer usually does not lie in specifying venue in U.S. courts.  In general, courts in every country do not give much weight to the judgments entered by the courts of other countries.  This is even the case when, for example, a party attempts to enter and enforce in Canada a judgment obtained in a U.S. court.  Very often, the foreign court will reopen the facts and a new mini-trial or a retrial may occur.  This risk then leads back to the slippery slope.

The answer usually does lie in arbitration.  Interestingly, although countries seldom give much deference to foreign courts’ decisions, virtually all countries must give great deference to arbitration awards.  This is because most countries are bound by one or more treaties that require it.  More than 120 countries are now parties to the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), 21 U.S.T. 2517 (1958).   These countries include, for example, Mexico, Canada, and the Peoples Republic of China.   A few South American countries that are not parties to the New York Convention are parties to the similar Inter-American Convention on International Commercial Arbitration, 14 I.L.M. 336 (1975), which the U.S. has also ratified. 

These two treaties (the “Arbitration Enforcement Treaties”) are pivotal.  They allow the parties to effectively choose the applicable law, the venue, the trier of fact, and the procedures for the hearing process.  Then, when the arbitrator’s judgment is obtained, the foreign court must enter and recognize the judgment as the equivalent of a final judgment in the foreign court.  The only exceptions to the obligation to do so are narrow defenses based on gross abuses of procedural rights or violation of public policy.

3. Making Choices About Arbitration:  Selecting the Arbitrator, Governing Law, and Venue.

Even though the Arbitration Enforcement Treaties provide for only narrow defenses to recognition, those narrow defenses do exist.  Accordingly, a primary consideration in choosing the arbitrator, the governing law, and the venue is whether the choices will help steer clear of those narrow defenses.  A secondary consideration is the impact these choices will have on the objective of diminishing involvement of foreign law and foreign lawyers in the negotiation and documentation of the deal.

(a) Choosing the Arbitration Service. 

An arbitration provision can call for arbitration with the assistance of an international arbitration organization.  This kind of arbitration is often called an administered arbitration.  Alternatively, the provision can identify a specific, independent arbitrator (often called an ad hoc arbitrator or a non-administered arbitration). 

One of the defenses under the Arbitration Enforcement Treaties is that “the recognition or enforcement of the award would be contrary to the public policy of” the country where recognition is sought.  Another defense is that “the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.”

These defenses suggest that the U.S. lawyer should make all aspects of the arbitration procedure as mainstream as possible.  Also, the lawyer should ensure that the arbitration service has a good deal of international arbitration experience.  By doing so, one can expect to reduce the risks that the procedure or the arbitrator will inadvertently trigger defenses under the Arbitration Enforcement Treaties. 

The leading international arbitration organizations are:

• The International Chamber of Commerce’s Court of International Arbitration (ICC).  It is based in Paris but administers proceedings worldwide, with Switzerland being a particularly important site.
• The American Arbitration Association.  Its International Center is based in New York, but it operates nationwide.
• The LCIA Court of International Arbitration in London.  It is active in England and elsewhere, primarily in Commonwealth countries.
• The International Centre for the Settlement of Investment Disputes (ICSID).  It is operated by the World Bank and is a specialized arbitration organization for disputes in transactions between private investors and foreign governments.

All of these organizations have generally similar rules, typically available on their web sites.  They also all provide basically equivalent types of services.

If an ad hoc or nonadministered arbitration process is chosen, then the arbitration clause will have to specify a governing set of rules.   The most commonly used rules in nonadministered arbitration are those published by the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.

(b) Choosing the Governing Law. 

Of course, any U.S. lawyer will want U.S. law to apply and, ideally, the law of the State in which the lawyer practices.  The closer to home the lawyer can keep the governing law, the less advice will be needed to make sure the laws of an unfamiliar jurisdiction will not unexpectedly override the intentions and expectations of the parties. 

Also, one of the defenses to enforcement under the Arbitration Enforcement Treaties is that the parties’ agreement “is not valid under the law to which the parties have subjected it.”  To the extent that the applicable law is familiar and accessible to the U.S. lawyer, the lawyer can more easily reach comfort that the agreement is valid under the applicable law and that an arbitration award based on the agreement will be enforceable under the Arbitration Enforcement Treaties.

If, despite the U.S. lawyer’s best efforts, the parties’ negotiations lead them away from U.S. law, then normally a U.S. lawyer should fight hard to make sure the foreign law is based on common law and not civil law.

The law in the U.S. and all its States (other than Louisiana) is based on common law.  Courts are responsible for creating and applying case law and resolving most civil disputes.  The system is borrowed, essentially, from English common law.  Many other countries around the world have also borrowed this system.  It is remarkable how similarly contractual issues and enforcement are handled in common law jurisdictions.  The familiarity and similarities help diminish the amount of foreign law advice and contractual modifications needed to make sure the documents do what they are supposed to do.

The civil law system, in contrast, is based on the Napoleonic Code.  Under this system, almost everything that a U.S. lawyer knows is wrong.  If the governing laws are those of a civil law country, then foreign lawyers will need to be heavily involved, and the documents will need significant modification in form and substance to make sure they are enforceable and fulfill the parties’ expectations.

(c) Choosing the Venue.

The New York Convention states that a country ratifying the Convention may “declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State.”  As a result, it is important that venue selected is in a country that is a party to the Convention.

Also, one might reasonably conclude that arbitrators who are in, or close to, the governing law jurisdiction might have more experience with and knowledge about the governing law.  This experience and knowledge should help reduce costs and the chances of an aberrant ruling.  Accordingly, it is logical to select a venue that correlates to the governing law.

(d) Other Choices.

Sample arbitration clauses can be obtained from the websites of the leading arbitration organizations mentioned above, as well as UNCITRAL.  These clauses will help identify other choices.

The choices will include, for example, the identification of the language to be used in the proceedings.  They also may suggest mediation as a step before arbitration.  The considerations in making these choices are rather obvious or are no different than those involved in usual, domestic transactions.

4. Considerations When Foreign Property Investments are Involved.

If the international hotel project will involve the client in foreign ownership, then the lawyer and client will, by necessity, need to become heavily involved in local law.  Local counsel will be required and will be an essential part of the team.  The U.S. lawyer will need to apply all of his “issue spotting” skills and his/her ability to “think like a lawyer” to ferret out and understand the areas where local law impacts the client’s normal expectations, and then the lawyer will need to skillfully communicate those variances and risks to the client.

Even when ownership of foreign real estate is an essential part of the client’s rights and expectations, however, the lawyer still can and should work to structure the deal so that application of foreign law will be minimized. 

If, for example, multiple parties will have interests in the real estate, a single entity can be created to own the property.  Then, a separate entity can be created in a familiar jurisdiction under familiar laws.  The deal between the parties can then reside primarily in the documents governing that entity.  The documents can include an effective arbitration clause that follows the suggestions set forth in previous sections of this part II.  Obviously, tax considerations, the laws of the foreign jurisdiction, and the parties’ expectations will affect the structure.  But the impact of foreign law can be minimized and costs and complexity can be reduced by isolating the real estate issues and then building the deal points into separate entities governed by familiar structures, documentation, and enforcement mechanisms.

5. Selecting And Working With Foreign Counsel.

Once the U.S. lawyer has taken inventory the objectives of the legal documents and relationships and has determined how much foreign law and lawyering will be needed, the U.S. lawyer must then select foreign counsel. 

As suggested above, every international hotel deal will have some foreign law to consider.  At a minimum, local counsel is usually needed to help evaluate and anticipate circumstances that could trigger enforcement defenses under the Arbitration Enforcement Treaties.  And if, for example, the U.S. party’s main recourse upon a breach is to arbitrate to judgment, enter the judgment in the foreign jurisdiction, and execute on foreign assets, then the U.S. lawyer likely will need to learn from local counsel how effective that execution process will be and then steer the transaction to accommodate those considerations. 

At the other end of the spectrum, the project may involve acquisition and development of foreign real estate.  Then, local counsel will be an essential part of the team, as heavily involved as the local real estate/land use/construction lawyer in a domestic development project.

The choice of foreign counsel should be made with full understanding of these needs and roles.  Then, a number of considerations may weighed.

(a) Factors in Selecting Foreign Counsel.

First, the U.S. lawyer should understand what kind of lawyers are available in the foreign jurisdiction and what they do.  In common law countries, one can expect barristers and solicitors.  They often have different roles and capacities.  In civil law countries, the notary is a distinct legal profession and may be required.   The U.S. lawyer may also encounter a “foreign legal consultant (FLC).  The FLC may not, for example, be permitted to advise on purely local-law matters.  If the U.S. lawyer is not aware of these limitations, the employment of the FLC may unknowingly build in an extra layer of expense.

Next, the U.S. lawyer can tap a number of sources to create a list of potential foreign counsel choices.  Personal experience and trust with the foreign lawyer is, of course, very useful.  One normally also seeks out recommendations from other lawyers, law firms, and other professionals whom the U.S. lawyer knows and trusts.  Research and verification on the Internet has its usual role, as well.

Once a list of potential foreign counsel has been compiled, U.S. counsel should contact and talk with each of them.  The process of coming to a final selection is essentially the same as the process of selecting local counsel in a domestic transaction.  Ask:

• What skills and experience are needed for the engagement?
• Does the candidate have those skills?
• Does the candidate have a good reputation for honesty, service and integrity?  Does the candidate reflect these attributes in his contacts with you?
• Can you communicate with the candidate easily and without waste of time? 
• Do you feel a comfortable connection with the way the candidate behaves and thinks?
• Do you believe that the candidate will be a team player?  Or do you sense the candidate be or driven by personal gain, fee generation, and ego?
• Will the candidate be able to work well with those he or she will needs to work with?
• Does the candidate have the technology needed to communicate effectively and accomplish the work?
• Are the fees and rates reasonable?

(b) Special Factors and Hazards.

U.S. lawyers take for granted and expect behavior and conduct mandated by ethical rules applicable to U.S. lawyers.  Do not assume that they apply in the foreign country. 

For example, the foreign jurisdiction might not require that the lawyer treat your communications as confidential and privileged.  Obviously, if the project is not publically announced and confidentiality is important, the failure to recognize the absence of these protections can have grave consequences.

Similarly, the foreign jurisdiction may not protect against conflicts of interest.  It is very annoying to hire a local lawyer only to find that he has a personal interest diametrically opposed to the client’s objectives and is actively pursuing them to the client’s detriment.

(c) The Engagement Letter.

As indicated above, the ethical rules, expectations, norms, and customs applicable in a foreign legal engagement may not line up with our normal expectations.  The engagement letter is a key document to help bring these expectations in line. 

In addition to the usual terms of a typical engagement letter, the letter can provide for confidentiality, protections against conflicts of interest, provisions about service expectations and deadlines, billing expectations, and specific terms about the opinions or other work product expected from the foreign lawyer.  If these terms are critical, consider the advantages of employing arbitration provisions, as discussed earlier in this Section II.

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Globalization will continue, both in good times and in times of recession and crisis.  To survive, hotel developers, brand owners, and investors will continue their efforts to access new, international markets. The need to approach the international hotel project intelligently has never been more important.  By understanding how much foreign law will be needed, taking full advantage of the Arbitration Enforcement Treaties, making the right choices on enforcement issues and structuring, and carefully considering and selecting foreign counsel, hotel industry stakeholders and their counsel will accomplish their objectives with reduced complexity and with increased success.