SHELBOURNE HOTEL Ltd v TORRIAM HOTEL OPERATING Company Ltd

• Jurisdiction: Ireland
• Judge: Mr. Justice Kelly
• Judgment Date: 18 December 2008
• Neutral Citation: [2008] IEHC 376
• Court: High Court
• Docket Number: [2008 Nos. 9112 P & 241 COM]
• Date: 18 December 2008

Shelbourne Hotel Holdings Ltd v Torriam Hotel Operating Company Ltd

COMMERICAL

[2008/9112 P]

BETWEEN

SHELBOURNE HOTEL HOLDINGS LIMITED

PLAINTIFF

AND

TORRIAM HOTEL OPERATING COMPANY LIMITED

DEFENDENT

[2008] IEHC 376

[9112 P/2008]

[No. 241COM/2008]

THE HIGH COURT

ARBITRATION

Stay

Arbitration clause - Mandatory injunction seeking access to books and records - Hotel - Management agreement - Obligation of defendant to keep books and records - Liability of plaintiff to account for tax liability - Problems with financial management - Referral to arbitration -Whether application for injunctive relief captured by arbitration clause - Principles applicable to interlocutory mandatory relief - Whether obligation to demonstrate serious issue for trial or strong likelihood of success - Adequacy of damages - Seriousness of revenue obligations - Possibility of penalties and prosecution - Reputation - Balance of convenience - Urgency - Confidentiality concerns - Telenor Invest AS v IIU Nominees Limited (Unrep, O'Sullivan J, 20/7/1999), Campus Oil Limited v Minister for Energy (No 2) [1983] IR 88; American Cyanamid Co v Ethicon Limited [1975] AC 396, Cronin v Minister for Education [2004] IEHC 255, [2004] 3 IR 205, A & M Pharmacy Limited v United Drug Wholesale Limited [1996] 2 ILRM 46, Sheehy v Ryan (Unrep, Peart J, 29/8/2002), Shepherd Homes Limited v Shandham [1971] Ch 340, Locabail International Finance Limited v Agroexport [1986] 1 All ER 901, Irish Shell Limited v Elm Motors [1984] 1 IR 200, Boyhan v Tribunal of Inquiry into the Beef Industry [1993] 1 IR 210, Ling ham v Health Service Executive [2005] IESC 89, [2006] 17 ELR 137 and Zockoll Group Limited v Mercury Communications [1998] FSR 354 considered - Arbitration Act 1954 (No 26), s 22 - Arbitration Act 1980 (No 7), s 5 - Action but not motion stayed and access to specific information granted - (2008/9112P - Kelly J - 18/12/2008) [2008] IEHC 376

Shelbourne Hotel Holdings Ltd v Torriam Hotel Operating Company Ltd

ARBITRATION ACT 1980 S5

ARBITRATION ACT 1954 S22

TELENOR INVEST AS v IIU NOMINEES LTD & ESAT TELECOM HOLDINGS LTD UNREP O'SULLIVAN 20.7.1999 1999/23/7666

ARBITRATION ACT 1954 S22(1)(H)

ARBITRATION ACT 1980 S5(1)

CAMPUS OIL LTD & ORS v MIN FOR INDUSTRY & ORS (NO 2) 1983 IR 88

AMERICAN CYANAMID CO v ETHICON LTD 1975 AC 396

CRONIN v MIN FOR EDUCATION & ORS 2004 3 IR 205 2004/11/2501

A & N PHARMACY LTD v UNITED DRUG WHOLESALE LTD 1996 2 ILRM 42 1996/1/1

SHEEHY v RYAN UNREP PEART 29.8.2002 2002/25/6357

SHEPHARD HOMES LTD v SANDHAM (NO 1) 1971 CH 340

LOCABAIL INTERNATIONAL FINANCE LTD v AGROEXPORT & ORS 1986 1 AER 901

IRISH SHELL LTD v ELAN MOTORS LTD 1984 IR 200

UNITED FARMERS ASSOCIATION v GOODMAN TRIBUNAL 1993 1 IR 210 1992 ILRM 545 1992/4/1075

LINGHAM v HEALTH SERVICE EXECUTIVE 2006 17 ELR 137

ZOCKALL GROUP LTD v MERCURY COMMUNICATIONS LTD (NO 1) 1998 FSR 354

FILMS ROVER INTERNATIONAL LTD & ORS v CANNON FILM SALES LTD 1987 1 WLR 670

ARBITRATION ACT S5

1 JUDGMENT of Mr. Justice Kelly delivered on the 18th day of December, 2008

Background

2 Four years ago, in December 2004, the plaintiff purchased the well known Shelbourne Hotel situated at St. Stephen's Green, Dublin. It purchased it from the Royal Bank of Scotland for €145m. Following the purchase, an extensive refurbishment of the hotel was effected at a cost of €120m. With 262 rooms in the hotel, the plaintiff has expended, between purchase and refurbishment, a sum of about €1m per room.

3 On 23 ^rd August, 2006 a management agreement (the Agreement) was executed between the plaintiff and the defendant.

4 The defendant is an affiliate of the well known Marriot Hotel Group. Marriot International Holding Company B.V. is a guarantor of the defendant' s obligations to the plaintiff under the terms of the Agreement.

5 The Agreement has an initial term of 20 years. During that period, the defendant is constituted as manager of the hotel, has exclusive control of it and is responsible for its proper and efficient operation.

6 For reasons which I will return to later in this judgment, the plaintiffs have become extremely dissatisfied with the defendant' s performance on foot of the Agreement. That dissatisfaction has given rise to these proceedings.

These Proceedings

7 On 5 ^th November, 2008 the plenary summons in this action was issued. On the same day, a notice of motion seeking interlocutory injunctive relief was issued. Two days later the defendant issued a motion seeking to stay these proceedings pursuant to s. 5 of the Arbitration Act 1980.

8 Thereafter, the plaintiff applied to have the case transferred to the Commercial List. Such an order was made on 24 ^th November, 2008 and the hearing of both motions was directed to take place on 2 ^nd December, 2008. I heard both applications on that and the following day.

The Agreement

9 The Agreement runs to in excess of 90 closely typed pages exclusive of schedules and exhibits. It is divided into twelve different sections.

10 The following are the relevant provisions of the Agreement for the purposes of the two applications before me.

11 Under Article 1.01, the defendant is obliged to manage and operate the hotel to a standard of managerial expertise and financial control consistent with the operating standards applicable to other similarly situated first class, full service hotels that are operated by the defendant or its affiliates in Ireland as well as international hotel standards. The defendant is required to act as a reasonable and prudent operator and has to do so with the goal of optimising the profitability of the hotel over what is called "a reasonable duration". The Agreement provides that it is understood "that a reasonable duration shall encompass a horizon of at least five years".

12 Under Article 1.02, the plaintiff authorised and engaged the defendant to supervise, direct and control the management and operation of the hotel in accordance with the terms and conditions of the Agreement.

13 Under Article 1.03, all of the hotel employees are employed by the defendant which is responsible for payment of their remuneration and deduction of all tax and other liabilities. The defendant is given absolute discretion with respect to all hotel employees including their hiring, promoting, transferring and dismissing. In the case of some employees however, there are certain rights reserved to the plaintiff. For example, whilst the defendant has the authority to hire, dismiss or transfer the hotel's general manager and director of sales and marketing, it is obliged to keep the plaintiff informed with respect to such actions, and must give prior notification to the plaintiff of the defendant' s desire to effect a transfer of either of those persons. In certain defined circumstances the plaintiff's consent is required before the general manager and sales director may be transferred. (See Article 1.03B)

14 In the case of the hiring of a general manager, the plaintiff has to be consulted and has a limited right of veto in respect of candidates for that post. (See Article 1.03B(2))

15 Under Article 1.04, the plaintiff is given a right of inspection of the hotel. The article provides:-

"Owner and its agents shall have access to the hotel at any and all reasonable times for the purpose of inspecting the hotel and the business carried on at the hotel or showing the hotel to prospective purchasers, tenants or secured lenders, provided that owner and its agents shall exercise such right in cooperation with manager and with the goal of minimising the adverse impact of such access on manager's operation and management of the hotel."

16 The defendant is obliged, at the plaintiff's request, to hold meetings on a monthly basis with a view to discussing the performance of hotel and related issues. Amongst the items which are specifically mentioned as appropriate to be dealt with at such meetings are material deviations from either the business plan for the preceding month or the most recent accounting period statements.

17 The Agreement also provides for the defendant to be able to share services with other hotels that it manages but subject to the owner's approval.

18 Article 1.08 places certain limitations on the defendant' s authority by requiring it to obtain the plaintiff's approval in respect of the matters which are listed in that Article.

19 Article IV of the Agreement deals with accounting matters.

20 Article 4.02A requires that books of control and account pertaining to the operations of the hotel are to be kept on "the accrual basis" and in all material respects in accordance with what is described as " Uniform System of Accounts". That term is defined as meaning:-

"The Uniform System of Accounts for the Lodging Industry, 9 ^th Revised Edition, 1996, as published by the Educational Institute of the American Hotel and Motel Association, as revised from time to time to the extent such revision has been or is in the process of being generally implemented within the Renaissance System."

21 No evidence has been placed before me as to what that system of accounting requires.

22 The Article goes on to confer a right on the plaintiff at reasonable intervals during the defendant' s normal business hours to examine such records. Furthermore, it expressly provides that if the plaintiff desires to engage an auditor to audit, examine or review the annual operating statement or the final accounting statement, it is entitled to notify the defendant in writing within 60 days after receipt of such statements of its intention to so audit.

23 Article 4.02B insofar as it is relevant provides as follows:-

"In connection with Owner's responsibility to maintain its own effective internal controls over financial and tax reporting and...