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.