California company must pay $7 million-plus award to Hyatt for violating franchise agreement

By Melissa Busch | May 11, 2017

CHICAGO — A U.S. District Court confirmed that a hotel builder will have to pay Hyatt more than $8.3 million for failing to honor a franchise agreement.

On April 19, U.S. District Judge Virginia M. Kendall confirmed an arbitration award, granting Hyatt Franchising LLC a more than $7.7 million award, plus more than $1.3 million in attorneys' fees, plus interest. Shen Zhen New World I LLC violated the terms of their franchise agreement to convert a hotel, therefore the court denied it motion to vacate the award.

On Sept. 24, 2012, Hyatt, which is headquartered in Chicago, entered into a written franchise agreement with Shen Zhen, based in California. Hyatt granted Shen Zhen a franchise to convert the hotel located at 333 South Figueroa Street in Los Angeles into a Hyatt Regency hotel.

After Shen Zhen violated the franchise agreement by failing to make its payment obligations, Hyatt terminated the agreement and filed for arbitration.

The arbitrator ruled in favor of Hyatt because “evidence clearly show[ed] that Shen Zhen repeatedly failed to comply with its payment obligations” under the agreement, according to court documents.

After post-hearing briefing, the arbitrator issued a 51-page interim award that found in favor of Hyatt and against Shen Zhen and its parent company, awarding Hyatt $7.73 million. On Aug. 24, 2016, the arbitrator issued a final award, incorporating the interim award and also awarding Hyatt $1.3 million in attorneys’ fees and costs, along with post-award interest at 0.56 percent per year, according to court records.

Shen Zhen moved to vacate the arbitration award for violations under the Federal Arbitration Act. It argued the arbitrator engaged in misconduct and manifest disregard of the law and contended that public policy supported vacating the award.

The court found that Shen Zhen did not provide any support that the court possessed the ability to vacate a commercial arbitration award on public policy grounds, so the claim was rejected.

The court also denied its claim that the arbitrator “manifestly disregarded” the mediator’s obligation to the California Franchise Investment Laws and Federal Trade Commission regulations, which Shen Zhen claimed would render the franchise agreement’s liquidated damages clause “unconscionable per se,” according to court records. The court noted that arbitrators are under no “obligation to apply” to statutes that do not provide relief for the controversies before them.

Also, the court rejected Shen Zhen’s claim that the arbitrator didn’t consider the effect of a letter in which the parties agreed to extend the project deadline if certain financial obligations were fulfilled. The court found that the arbitrator was correct in rejecting the extension because Shen Zhen failed to fulfill the outstanding payment obligations, according to court records.

Shen Zhen also argued competency, stating its chairman was not able to understand English.

The court rejected this argument, noting the chairman’s “personal inability to understand English is not a valid contract defense. Shen Zhen received the updated version of the Franchise Agreement two months prior to its execution,” according to court documents. Furthermore, the court stated that Shen Zhen was a “sophisticated party,” and its chairman had plenty of time to review a translated version of the document, noting it had retained many English-speaking employees in connection with the hotel conversion project.

Hyatt was represented by attorneys with the firm of  DLA Piper US LLP, of Chicago.

Shen Zhen was represented by the firms of Cohen & Lord, of Los Angeles, and Kelly, Olson, Michod, DeHaan & Richter, of Chicago.

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Organizations in this Story

DLA Piper US LLP Hyatt Hotels Corporation Kelly, Olson, Michod, DeHaan and Richter, L.L.C. U.S. District Court for the Northern District of Illinois

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