Lisa's Response on Force Majeure

By Lisa Sommer Devlin

When I was a little girl, my parents encouraged my three sisters and me to create “Christmas Lists,” of what we wanted for Christmas. Mine was always a “Birthday and Christmas List” since my birthday is right before Christmas. Many families probably do the same thing.

When we were small, our lists were pictures cut from toy catalogs glued to a page. Not understanding who would be footing the bill for the gifts we might receive, we included out wildest desires.  I am not sure exactly when it started, but when I was still relatively small, I started adding “a diamond ring” to my annual list.  I soon understood that the chances of getting that ring were nil and none, but I included it on my list nonetheless.  It was a “wish” list after all, and I still wished for that diamond.

The tradition has continued and now not only do my sisters and I create lists, but my four children do, too.  And yes, Virginia, even though I am now forty seven years old, my list still includes that diamond ring every year.

What is the point of this story?  I wholeheartedly agree with "John's Golden Rule of Business Agreements": If you ask for something from the other side before the contract is signed it's called "Negotiating"; If you ask the other side for something after the contract is signed it's called "Begging," and when I quote his rule during presentations I always give him due credit.  The point is, while you have every right to ask for something, do not expect that just because you ask that you will or should receive it.

The law of Force Majeure has been passed down to us from the common law courts of England, and hasn’t really changed significantly in a very long time despite the radical changes in the world in which we live. I agree with John that the law only allows a party to terminate a contract in extreme circumstances, usually when performance becomes impossible or impracticable. 

Impracticable is not the same thing as impractical. Here is the legal definition:

§ 261.  Discharge of Supervening Impracticability

Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

There are other legal doctrines that may be applied, like “commercial frustration,” but for purposes of our discussion, it is enough to understand that the legal doctrines allowing termination of contracts require very extreme circumstances to apply.  Termination is not allowed simply because performance of a contract becomes more difficult, or more expensive, or even if it becomes unprofitable. Those situations are simply what my father would have described as the “Joys of doing business.”

As I always say, “Force Majeure is similar to how the Supreme Court explained pornography: it is difficult to define, but I know it when I see it.” When a true Force Majeure occurs, like the planes being grounded after 9/11 or the city of New Orleans being under water, it is obvious.

Terminating a contract means that the contract is treated as if it never happened; neither party is liable to pay damages (“damages” is the correct legal term, not “penalties”) to the other.  A party always can opt to cancel a contract, but in that case the canceling party owes damages to the other side.  When a true Force Majeure event occurs, the contract is terminated as a matter of law.

A contract can also be terminated by agreement, meaning that parties can agree in their contract on circumstances that would allow one side or the other to terminate, even if the law would not have automatically allowed it.  This is the area in which John and I diverge.

John has submitted his Christmas List of things to include in Force Majeure clauses, but planners need to understand that it is just that, a wish list, and it is unlikely that hoteliers will be willing to accept these terms.  And, just like it would not have been a good idea for those of us living in an apartment to get that pony for Christmas, even if you get a hotel to agree to accept the terms suggested by John, it does not mean that it will work out well for the group.

Entering into a contract for an event, sometimes years down the road, is a risky business for both sides.  The event sponsor has to estimate how many attendees will come when agreeing to rooms blocks and other commitments, and it is true that most of the time the attendees can’t be forced to come.  There are too many factors to count that could impact attendance:  the economy, meeting location, world events, the event agenda, the hotel, and so on.  The planner has to evaluate all these things and estimate how many people will attend. 

There are also risks for the hotel. The hotelier must evaluate how much of its inventory to commit to the group, what rate to charge, estimate how much it will make on ancillary spending, and determine whether the concessions it offers to give to the group will pay off.  Its ultimate risk is that when it enters into the contract with the group, it loses the opportunity to book other business that might turn out to be more lucrative.

In any business, the proprietor has to factor in all the things that may impact supply and demand to determine how many employees to hire, how much product to make, how to market and so on. If all the predictions are correct, the proprietor makes money.  If not, the proprietor may not. This is what business is all about.

What hoteliers see, and what John is suggesting in his post, is that planners should pass many of the risks that are the group’s on to the hotel.  Typical hotel contracts already address the risk that the meeting will not be as successful as expected. That is the purpose of the Attrition Clause.  The group is accepting responsibility to fill the room block and accepts the risk that it may not occur by agreeing to pay damages to the hotel if it does not fill the block.  Any time you include an additional term in a Force Majeure clause that allows the group to terminate, what is really happening is that the group is passing one of the risks that it usually bears onto the hotel.

Let’s take John’s example that strikes or lockouts should be a basis for termination by a group.  Why?  The law does not automatically allow termination simply because one party’s employees go on strike, and clearly does not allow it if employees elsewhere in the city are on strike. Why would a hotel want to agree to hold rooms and space for a group for months or years, but also agree that if a strike occurs somewhere in the city the group may terminate the contract? The hotel is assuming a significant risk that it would not otherwise bear under the law. 

There is always a risk of some communicable disease.  There was recently an outbreak of mumps in my home state of Iowa.  When there is truly a danger posed by a disease, the government organizations that control health threats are empowered to impose quarantines or other regulations to contain the risk. When this occurs and directly impacts the meeting venue, the law would allow termination.  Why would a hotel want to agree to allow termination simply because a group believes that there is some health risk even if the local health authorities do not? 

The type of language that John recommends is often open ended and not clearly defined which instead of helping the group can lead to disputes. When would a disease outbreak be significant enough to allow termination? One case, two, twenty?  Similarly, and unfortunately, there is always a threat of terrorism any where in our country. When would such a such a “threat” allow termination? 

Most, if not all, of the additional terms that John suggests including in a Force Majeure clause are designed to address situations in which attendees choose not to attend, rather than a situation in which it is actually impossible for them to do so, or for the event to take place. In other words, John’s terms are designed to place the risk of attrition on the hotel, rather than on the group.

What this does from the hotel’s perspective is make the contract tentative.  If a group can terminate the contract based on any of these broad and undefined situations, then the group is not really making a commitment to the hotel. A hotel will not hold rooms on a tentative basis for a group indefinitely, but including these types of terms is asking the hotel to do just that.  Not only would it be bad business for the hotel, it could even raise Sarbanes Oxley issues if the hotel reported the contract as a definite commitment on its books when in fact the group could cancel with out liability for a variety of undefined reasons.

Ultimately, including these additional broad Force Majeure terms in the clause rarely assists the group.  If one party claims that it has a right to terminate and the other disagrees, the parties may end up in court or arbitration. The party claiming the right to terminate has the legal obligation to prove that its performance was prevented due to the cause listed in the clause. 

Most of the time these clauses are used by a group to cancel when attendance is down and the group is facing attrition damages.  While the law may vary slightly from state to state, I am unaware of any court that has found that the fact that attendees do not want to come to a meeting location for whatever reason, whether threat of terrorist attack or disease, strike or the fact that they do not like the keynote speaker, amounts to a Force Majeure.  Thus, including these terms which are not objectively defined is not only more likely to lead to disputes, the disputes are rarely resolved in the group’s favor.

How should a group negotiate its wish list with the hotel?

•As John suggests, include any “basic assumption” of the event in the contract, like: This event is being held for the purpose of having Bill Gates give a speech to the sales staff. 

If Bill Gates is in the hospital, you can terminate the contract.

•Offer to share the risk.

My hotel clients don’t like this, but they would rather agree that if the terrorism threat level in the city is raised to orange that attrition will be reduced by 25%, than agree that if the terrorist threat level is raised that the group can completely terminate the event without payment.  Make sure it is clearly defined in numbers; do not use undefined terms like “attrition obligations will be reduced accordingly.”

•Base your commitments on a realistic evaluation of risk factors.

If your attendees are afraid of terrorism, you might want to hold your event in places that are less likely to be targets. Estimate what percentage of your attendees would refuse to cross a picket line and reduce your room block accordingly.

•Do pursue John’s suggestion of meeting insurance.
Be very cautious in purchasing policies to be sure that they will cover the situations that you are concerned about.

•Remember that you are negotiating your “wish list.”  Do not expect hotels to accept risks in a meeting contract that they would not usually have under the law.  If you have a legitimate concern, explain it to the hotel and create a clause that is objectively and narrowly tailored to cover the issue.

•Do not abuse Force Majeure clauses. Do not attempt to avoid paying damages when your group decides to cancel an event for business reasons by claiming Force Majeure.  I had groups in 2003 claiming that they were cancelling “due to 9/11.”  When either side to a contract acts unreasonably, the other side will naturally react.

Just like I’ll keep putting that diamond ring on my Birthday/Christmas List, but I won’t be disappointed if I don’t get it, planners can keep asking hotels to assume more of the group’s risk under a contract so long as they recognize that the hotel has a legitimate business and legal reason for deciding not to accept.

Comments

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