Less than 15 years ago, hotels never considered suing a national organization (or other customer) for canceling a meeting contract or showing up in insufficient number.
All that has changed. Because of the economics of the hotel business and the impact of a handful of decided cases, hotels increasingly write into their contracts with meeting planners specific provisions that state specific penalties for cancelled meetings or when there is substantial attrition from the number of rooms reserved for attendance.
CANCELLATION
Liquidated-damage clauses are increasingly becoming the industry standard when it comes to meetings that outright cancel. Such clauses minimize the necessity of litigation should there be a cancellation. An ideal cancellation clause will attempt to protect a substantial portion of the hotel's anticipated profit in the event of cancellation.
Here is an example of a liquidated damages/cancellation clause that attempts to protect against lost hotel profits:
Under the terms of this Agreement, the Hotel is reserving the room block and public space requirements described herein for your use. In the event these reserved facilities and related services are not used, the Hotel will experience significant monetary losses.
You shall have the right to cancel this Agreement without cause upon written notice to the Hotel at any time prior to the event, and upon payment of an amount based on the following scale:
Notice of Cancellation Received
Cancellation Fee
- Signing of the Agreement
- During 1st year after signing Agreement
- During 2d year after signing Agreement
- After 2d Anniversary of signing Agreement
The existence of cancellation clauses with liquidated-damages provisions provides a strong deterrent against meeting planners moving a convention or meeting to a different city or a different facility in the same city.
Nevertheless, there are still occasions when meeting planners will attempt to avoid obligations to hotels upon cancellation. They will attempt to argue that force majeure conditions - e.g., usually political conditions of some kind - made it impossible for them to hold the meeting in a particular locale. If the meeting planner prevails in the argument, the meeting will be excused from liability to the hotel.
An example of a case where the force majeure argument failed, and the hotel prevailed in obtaining a judgment requiring the meeting sponsor to pay lost profits for an unexcused cancellation, is found in 1200 Scottsdale Road General Partners v. Kuhn Farm Machinery, Inc., 909 P.2d 408 (Ariz. App. 1995). There, a large corporate meeting, scheduled for the Phoenix area, was cancelled when, during the Gulf War in February 1991, the sponsor of the conference concluded that participants would not fly to Phoenix to attend. However, the court rejected the argument, holding that, merely because some of the expected attendees would not fly to Phoenix due to Gulf War anxiety, the conference was not rendered impossible or even impractical. The conference simply might not be as successful or as large as the sponsors had hoped.
ATTRITION
Separate and apart from a complete cancellation of a planned meeting is the situation that arises when a meeting or convention fails to produce the number of attendees expected to fill the hotel's room block. The result of this slippage is compound: not only is room revenue lost, so, too, are revenues for food, beverage and incidental guest expenditures.
To protect against slippage, hotel managers are wise to include an attrition clause, which will spell out specifically the cost to be borne by the meeting when actual use of reserved rooms fails to occur.
Rooms Attrition
Attrition clauses, like cancellation clauses, must be tailored for the specific situation. Here is a typical attrition clause:
Hotel is relying upon Association's use of 2245 Total Room Nights. Association agrees that a loss will be incurred by Hotel should there be a reduction greater than 20% in Total Room Nights actually used.
Should the room nights actually used by Association be less than 80% of the Total Room Nights, Association agrees to pay, as liquidated damages and not as a penalty, the difference between 80% of the Total Room Nights and Association's actual usage of rooms, multiplied by the average group room rate.
Although attrition clauses can differ dramatically from one another, depending upon the circumstances, one thing is clear: if an express attrition clause is not included in the parties' contract at the outset it will not be created by a court after the fact. This proposition was demonstrated in Hyatt Corporation v. Women's International Bowling Congress, Inc., 97-CV-767A(F), U.S.D.C. (W.D.N.Y. 1999). In Hyatt, the hotel went to court to recover damages where the pick-up on rooms for a bowling convention turned out to be woefully short of the number of rooms reserved. However, Hyatt's argument ended up in the gutter - because there was no attrition clause in the contract.
In short, for all large meetings, hotel operators are well advised to include cancellation clauses (with liquidated damages provisions) and attrition clauses in their contracts with the meeting sponsor. Further, spending a small amount to have your in-house or outside counsel review such contracts to assure the soundness of the cancellation and attrition clauses can save large amounts in the long run.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.