migurus

Lisa's Thoughts on Attrition and Cancellation

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.

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.

Issues Facing the Meeting Industry

By Lisa Sommer Devlin

I was honored to be asked to serve as a “Meeting Industry Guru” this week to create a “point/counterpoint” blog with John Foster.  After several discussions with John on how we would approach this task, we decided to start with a summary of our opinions on the key issues facing the industry and then follow up with in depth discussions on the issues.  While John usually represents groups and associations and I represent hotels, I anticipate that we will not have serious disagreement on the major issues to address.

There are many topics we could discuss, but it seems that the same clauses and issues in meeting contracts continue to generate the most discussion, debate and often confusion.  Here is a list of the things that I think hoteliers and meeting planners should be most concerned about:

FORCE MAJEURE 

Under what circumstances does the law excuse a party from some or all of its obligations under a contract because of unforeseen or unexpected events?  How do clauses agreed upon by the parties change the legal standard?  Has the law kept pace with to our global economy, instant communication, and ability to travel almost anywhere in the world within a day?  How are hotels and meeting planners reacting to these issues? 

CANCELLATION CLAUSES

What are the losses suffered by a hotel when a group cancels?  What is the loss suffered by a group if a hotel cancels?  What should a cancellation clause include, and how can the parties determine if it is fair and legally enforceable?  What does the law require as opposed to what a party may be able to negotiate to include in a clause?

ATTRITION CLAUSES

How does an attrition situation differ from cancellation?  What can the hotel and groups do to reduce attrition?  What are the parties legally entitled or required to include in the clause, versus what can be negotiated?  Are there commonly requested attrition terms that present legal problems for the hotel or the group?

LABOR UNION ISSUES

The major hotel workers’ union is threatening a variety of actions that could impact the industry, from boycotts to strikes, to direct communication to attendees.  How will this impact meetings from the perspective of the hotels and the groups?  What are the legal issues, versus the business issues? 

“STANDARD” CONTRACTS

It seems that every hotel and every group has its own contract form and negotiations to get an agreement take forever. While it would seem that a standard form would make doing business easier, what are the dangers? Why are industry attorneys who represent both hotels and groups so strongly against any “standard” form? 

These are the topics that I intend to explore this week. As John and I go back and forth, I am sure that he will raise other issues and the comments from those who read the blog may lead us into other areas.  I am sure that the debate will be lively!