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Lisa's Thoughts on Attrition and Cancellation


Posted on May 18, 2006

Where has this week gone? Here we are at Thursday already and John and I have barely begun to address all the topics we hoped to cover. In the interest of hitting as much as we can, I am going to address both attrition and cancellation together and give some quick responses to some of the  questions that I get asked most often by meeting planners.

Hotels don't want to include resale credit in their cancellation and attrition clauses, aren't they required to do that?

Hotel damage clauses are "liquidated damages," a legal term for an agreement by the parties in their contract as to the amount of damages that will be paid in a certain situation (remember again, the correct term is "damages" not "penalties").  By definition, liquidated damages are used when the parties agree that it would be difficult to determine the actual loss.  In other words, if it is easy to figure out the loss, a court could invalidate the liquidated damages.

I could write for hours on all the reasons why it is difficult to determine the hotel's actual loss in cancellation or attrition, but for our purposes, consider just one aspect: the hotel may sell two identical rooms at two different rates on the same night.  The hotel is clearly not making 70% profit on both the room sold for $100 and also on the room sold at $175.  But, you can't necessarily say that the hotel is making more on the $175 room, as you don't know if that guest used more power or water or if the guest damaged the furniture , etc.

So, the parties agree to use liquidated damages, in which they agree on an amount or a dollar figure in the contract rather than attempting to determine the actual loss.  In reaching that agreement, they are supposed to estimate the loss AND the ability of the injured party--the hotel--to reduce or "mitigate" that loss through resale.  In other words, if the parties agree that fair compensation for the hotel in a cancellation would be $100, and that there is a 50% chance that the hotel would be able to resell the room at the same rate, then they might agree on damages of $50.  Since the damages are already a compromise, it is not appropriate to reduce the damages even more by resale.

When a contract contains a liquidated damage clause, the injured party is not required to prove its actual loss or whether it reduced that loss by mitigation. The injured party simply is given the amount agreed upon in the contract--whether its actual loss turned out to be less or more than the agreed amount.

Even though the law does not require mitigation in a liquidated damage clause, many hotels do agree to give such credit, especially in attrition clasues.  Since hotels do not hold room blocks by room number, the parties must agree on a specific formula for how "resold" rooms will be counted and what credit will be given. Simply stating "less rooms resold" will only lead to disputes.

In a cancellation situation, hotels are very reluctant to include resale, and groups should be, as well.  If you cancel a 2007 meeting in 2006, under a regular liquidated damage clause you would pay the damages immediately, and the issue would be closed. If you add resale, you won't know what amount you will owe until after the meeting dates pass, which requires both sides to keep the matter on their books and to wait around to determine what is owed.  A group can't make a sound business decision as to whether or not it should cancel if it doesn't know how much it might owe.

Hotels are not out to "double dip" with their damage clauses, and in the majority of cases the hotel ends up not collecting even close to what it estimates.  If a group is concerned that the hotel will be able to resell all the cancelled rooms and thus the hotel will get an fair recovery, it is better to negotiate for a smaller liquidated damage payment rather than to include a resale credit.

Hotels want damages based on revenue, rather than profit. Isn't that wrong?

No. The question is whether the amount owed is fair.  If the clause requires payment of 60% of $100 in revenue, it is just as legally appropriate as paying 100% of the estimated profit of 75%, and actually turns out to be better for the group. 

Why shouldn't damages be applied to a future event?

The hotel sells perishable inventory, meaning that if rooms are empty on May 18, the hotel has lost revenue on that inventory forever. If you cancel on May 18 but come to the hotel on October 18, you are not making up the loss as the hotel could have sold that room on May 18 and October 18 and made money on both nights. Applying damages to a future event is booking the hotel twice and paying only once.

Why aren't damage clauses reciprocal?

If a hotel cancels a group, or cuts its block without permission, there is no question that the hotel owes the group damages. However, there are two reasons why the damage clause should not be reciprocal.

1. It is easy to determine the loss suffered by the group--costs of finding a new location, increase rates at the new location, costs of reprinting materials, etc.  Since it is not difficult to determine the group's loss, liquidated damages are not appropriate. A court would likely not uphold the clause in favor of the group.

2.  The amount would be unreasonable and unenforceable.  In most cases, the loss that a group suffers due to cancellation by a hotel is much smaller than the loss the hotel suffers if the group cancels.  If the damage clause calls for payment of $100,000 and the group's actual loss is only $15,000, the liquidated damage clause would be unreasonable and unenforceable.

Remember that the damage clause is supposed to be an estimate of the loss that would be suffered by the injured party.  No court is going to accept that the loss that would be suffered by the group would be exactly the same as the loss that the hotel would suffer.

In other words, reciprocal liquidated damage clauses should not be used because they are not legally enforceable.

3.  I know that some groups convince hotels to accept clauses that have terms that are the opposite of what you are saying. How does that happen?

Almost all rules of contract law are subject to negotiation, meaning that even though the law does not require proof of actual loss or mitigation in liquidated damages, if the parties to a contract agree otherwise, their agreement will control over the general legal rule. Thus, if a group has the right bargaining power, such as millions of dollars worth of business, or an event that would take place at at time when a hotel has a particular need for business, the customer may be able to convince the hotel to accept clauses that it otherwise would not accept.

The important thing to remember is that negotiating clauses that vary from the general legal requirements can be tricky business.  If the clause is not worded carefully so that there is no question as to how it is to be applied, it can lead to disputes that will be expensive and time consuming to resolve.  It is far wiser to spend a little money to get sound legal advice during the contract negotiation process than to end up spending much more litigating over a poorly worded clause.

What will the APEX initiative do to assist with these damage clauses?

While many people advocate a "standard" contract, there are many legal and business reasons why there should not be one in the meeting industry.  Many lawyers involved in working on the APEX contracts panel, myself included, feel very strongly that it is inappropriate to make any attempt to recommend any contract form or clauses, or even any list of suggested clause topics.

While there are some clauses that are included in almost every event contract, the list does vary based upon a number of factors. Also, creation of any standardized template reduces competition, which is not good for any participants in the industry.

The Convention Industry Council's Project Attrition has some good recommendations on attrition issues (though I did not agree with all of the report), particularly in acknowleding that groups do have the power to control where and how attendees make reservations and that groups and hotels should work together to maximize room block utilization, rather than seeing each other as adversaries.  The report's analysis of the factors that lead to attrition and how they can be controlled is very helpful. In contrast, in my opinion, any attempt by the APEX panel to create any standardized contract would only lead to problems. Hleping people understand the business and legal issues so that they can negotiate clauses that work for their particular situation is a better approach than attempting to create a standard "one size fits all" contract or templace in my opinion.

I am sure John will have lots to say about this post, so I'll stop here and let him respond.

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