Contract Challenges

Canceling meetings, managing attrition and negotiating in tough times.

By Christine Born

It’s a roller coaster out there. The state of the U.S. economy and financial markets, the swine flu threat, and the  plethora of special deals being offered by the hospitality and travel industries are affecting the usually stable business of planning conferences and conventions. As a result, meetings may be canceled or fewer people may attend. And, for meetings still going forward in these volatile times, negotiations are more demanding as destinations compete for what business remains and planners try to lock in the best deals, while leaving wiggle room for the unknown terrain ahead.

We asked Barbara Dunn, an attorney who specializes in hospitality law, for some advice on canceling meetings and negotiating attrition fees. She also talked about the impact current marketplace conditions are having on new contracts. She began our discussion by distinguishing between two separate challenges: 1) Contracts already in place for existing meetings that might be canceled completely or renegotiated based on partial performance; and 2) new contracts that are being negotiated today, in an environment where special association meetings and conferences are being viewed more favorably than in the past.

1. Canceling or renegotiating existing contracts

What can be done when the pickup is so low that the group can’t afford to have the meeting, or budgets force cancellation? How can damages be minimized and relationships protected?

First, you need to do some soul-searching and decide from an organization standpoint whether you need to have the meeting. Will cancellation hurt the purpose of the organization? Can the meeting be done and the mission accomplished on a reduced scale?

Then, check the contract. Are there any provisions that would allow cancellation without a fee? If the answer is no, then shift to fee negotiation. You should think of the cancellation fee as your maximum exposure. Your leverage for concessions is that you could walk away, but you probably won’t. How soon can you make the decision to go forward with the meeting or not? The closer to the date you cancel, the higher the fee. In today’s climate, the hotel may jump at the opportunity to rebook your meeting in lieu of a cancellation fee if you can reschedule within six months to a year. Hotels are desperate to keep business on the books now.

You may be able to negotiate rate adjustments and attrition fees for future bookings. Hotels may offer a percentage back to the master account or a commission back to the group, something that previously was only offered to a third party. What is important to your group — meal cost, transportation? Talk to the hotelier; the time’s ripe for deals. They’re interested in making your meeting work.

How much hotels will credit toward future meetings depends on the size of the group and when you want to rebook. Even though they want business, hotels are reluctant to book beyond 2010-2011. We are seeing shorter booking times, no matter what size the group is, even for citywides.

If the group decides to go ahead with the meeting as scheduled, but wants to adjust the room block and F&B, how should the meeting planner proceed?

If you have already signed a hotel contract, check to see if the contract has a room block adjustment provision. If there is none, contact the hotel to discuss an adjustment. If the parties agree to adjust the room block, an addendum should be added to the contract reflecting the change and the impact the new room block has on the attrition fee. For example, if the contract language states that you are responsible for using 80 percent of the contracted room block, the addendum should note that the revised room block is the “contracted room block” for purposes of the attrition fee provision.

2. Negotiating new contracts now

Are there contract provisions that have taken on more importance as a result of current events?

Definitely. The “rights of cancellation” clause should be very specific and inclusive. I call it the “get out of jail for free card.” Today, many non-profits are having an identity crisis; some are being forced to cancel meetings and are finding they are vulnerable.

A “force majeure” provision [see “Terms to Know”] needs to include a “grocery list” of contingencies. It also needs to set a standard of impact that is less than the usual “impossible” or “illegal,” which is the hardest, highest example to meet. In most cases, economic conditions in the current climate won’t qualify under force majeure. The swine flu scare won’t either, even though the president issued a travel advisory. Most standard force majeure clauses would require that travel be declared illegal — something we all learned after 9/11.
Alternative standards could include “commercially impracticable” or “inadvisable.” Commercially impracticable means most business minds would agree that the meeting is impractical. I would add “inadvisable from a safety, health or financial standpoint.” These standards make it easier to invoke protections for the group.

Some groups are now including another component in their force majeure clauses stating that if the group could cancel under the provision but chooses to go ahead with the meeting, the hotel will waive room and food and beverage attrition fees related to a smaller meeting and honor any lower room rates.

If the group has to cancel the meeting for any reason not covered in the contract, the contract should state that cancellation fees be determined on a “sliding scale” basis. Under this “liquidated damages” provision, the farther out from the meeting date the cancellation notice is received by the hotel, the smaller the cancellation fee; the closer the notice is received, the higher the cancellation fee. Cancellation fees can be based on a percentage of total room revenue, total room and food and beverage revenue, total lost profit on rooms, total peak night room revenue or many other options.

In addition to specifying the cancellation fee, you should require the hotel to attempt to resell the rooms and refund to the group any revenue collected by the hotel for resold rooms over the meeting dates. You may also want to include a provision stating that in lieu of paying a cancellation fee, you can contract with the hotel for the same or similar-sized meeting to occur within a certain time frame.

Finally, the provision should state that the cancellation fee is the exclusive remedy for the group’s cancellation for reasons not otherwise permitted under the contract (e.g., force majeure).

What about protection from problems that arise with the properties themselves?

It’s important to include comprehensive language regarding property construction or renovation. Ultimately, site delays should be included as a reason to cancel and should cover any public areas, restaurants, amenities, services, etc. Some hotel chains include mutual cancellation fees, but that’s like comparing apples and oranges. The numbers [the hotel’s losses] have nothing to do with what it costs the group in trying to find new space for its meeting. The decision to cancel should not be mutual; you should retain the right to make the decision based on what is best for your group.

Before the swine flu, labor disputes were the issue we were talking about [in the hospitality community]. When providing for labor problems, you should include other factors besides a strike. In San Francisco, information picketing had an impact on meetings; some groups were forced to cancel events [either because they did not want their attendees forced to make a decision about crossing picket lines or their organization was supporting the picketers].

In today’s difficult economy, you also may face problems arising from bankruptcy and financial difficulties of properties. Closings, ownership changes and property deterioration need to be covered in your contract. In the latter case, you should keep collateral material to prove property deterioration if a dispute arises. Take site visit photos and keep Web site pages to show what the property looked like when you booked it. If your group is particular about a brand, then reference it in the contract, so you’re covered if there is a change in management and a reflagging of the property.

What other best practices do you advise regarding attrition fee provisions?

First, make sure you are comfortable with your total room block. In fact, book ultra-conservatively these days, remembering that it’s always a good problem to go shopping for additional rooms. Usually, you can negotiate a minimum pickup that represents 80-90 percent of the total block. That minimum room pickup number should be stated in the contract.

Next, specify how the attrition fee will be calculated [total rooms used, no matter how they were booked or at what rate, etc.].

Finally, if attrition fees are charged, the contract should require the hotel to provide documentation verifying the fee, including a list of guests during the blocked dates and an accounting of the total number of rooms available for sale during that time.

Groups often struggle with deciding which food and beverage events they will hold at the hotel and how many people will attend each event. You should consider guaranteeing a minimum amount of the total food and beverage revenue generated over the entire period. That gives you flexibility to add, change or cancel events so long as the total number meets the minimum amount. That way, if it doesn’t, you will only pay a fee based upon the difference between your guaranteed minimum amount and your actual revenue amount. The contract should state whether the minimum amount is inclusive or exclusive of tax and service charges.

How do conference center contracts differ?

Conference centers have daily pricing. Obviously, you’re not concerned about rooms, but you do have the same food and beverage issues. Basically, there is the same approach with contracts. Conference center contracts are pretty contained, but I might look at adding a bit more to adapt to current conditions, such as force majeure and indemnification.

We’ve discussed renegotiations based on good relations, but what happens when serious disputes arise?

I prefer to keep contracts pretty open as to how to respond to disputes; otherwise you tie your hands to one form of dispute resolution, e.g. arbitration or mediation. By leaving the dispute resolution method open, all dispute resolution options are open to the parties. There’s a lot of heavy handedness in some hotel contracts, and groups that mainly use volunteers are often not experienced in handling negotiations. We can help them understand how it works, but it’s their decision [whether to go forward with legal action].

What other protections should a group seek to include in contracts?

“Indemnification” is another risk management clause that helps minimize exposure to financial liability. Such clauses are a way of shifting risk to the party that can best control it. With hotel contracts, it is important to protect your group against the negligent acts of the hotel’s officers, directors, employees and agents. Hotels, in turn, will ask you to indemnify the hotel against any negligent acts committed by your group.

If you are concerned with competitive groups or groups that may be considered inappropriate (especially for faith-based and youth events) meeting at the hotel at the same time, you can seek to include a provision prohibiting the hotel from reserving space for such groups without your consent.

Many hotel contracts include a host of miscellaneous or boilerplate provisions at the end of the contract that you should watch for, such as the hotel’s ability to assign the contract to another entity without the group’s consent or whether the prevailing party gets its attorney’s fees paid from the non-prevailing party. When planning an event for any organization, you should consult your attorney regarding any contract before signing on the dotted line so you’re fully aware of the risk, benefits and potential liabilities.

Learn more about meeting planning and the law from Barbara Dunn at the 2009 Connect Marketplace, Aug. 27-30 in Las Vegas. For more information, visit ConnectYourMeetings.com.

Terms to Know

CUTOFF DATE The cutoff date is the date the hotel releases your room block back to general inventory, typically 21-30 days prior to arrival. Hotels may blind cut your block, meaning they may look at your meeting history and internally hold fewer rooms than your minimum stated block. You should consider adding a damage clause to your contract protecting you from blind cutting.

FORCE MAJEURE The French term is defined as a “superior or irresistible force.” The purpose of a force majeure contract clause is to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by the exercise of due care. Typically, force majeure events include Acts of God, superseding governmental authority, civil strife and labor disputes. In the world of meetings contracts, the force majeure clause was catapulted into the spotlight following the events of September 11, 2001. Since that time, the force majeure clause has become the topic of much debate within the industry, centered around: the listing of calamities that could occur, the standard of impact such a calamity has to have on a party’s performance in order to excuse such party from performing the contract, and the net effect if such party chooses to perform the contract despite force majeure.

INDEMNIFICATION To indemnify means to guarantee against any loss or damage that another might suffer. Indemnification provisions in contracts are used to protect both parties against the negligent acts of the other.

Insurance companies indemnify their policyholders against damage caused by such things as fire, theft and flooding, which are specified by the terms of the contract between the company and the insured. Cancellation policies can be purchased for meetings but may not include everything. There are earthquake exclusions in California, snow exclusions for northern cities and hurricane exclusions in Florida. In these cases, special coverage programs may be available, such as Florida’s complimentary Cover Your Event (CYE ) Insurance for events scheduled during the traditional height of the hurricane season (August, September and October). Also, diseases such as SARS are no longer covered by insurance, so planners are advised to include a communicable disease clause in their contracts.

LIQUIDATED DAMAGES When the parties to a contract agree to the payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things specified in the agreement, the sum is called liquidated damages. Liquidated damages are used when the parties are unable to calculate the actual amount of damages. In order to be enforceable, the damages amount must be reasonable and they must not constitute a penalty, i.e., give the party more than they would have received had they performed the contract.

REQUEST FOR PROPOSAL (RFP) An RFP is not a contract. In order to be a contract, there must be an offer made and an acceptance of that offer. RFPs are considered to be invitations to make an offer. What comes in response to the RFP, such as a contract issued by a hotel, is the offer. If the group accepts the offer on the same terms it was made, it becomes contract. Any change to the terms of the offer, e.g., lowering the room rate or increasing the room block, constitutes a counter-offer that must then be accepted by the hotel to become a contract.

Barbara Dunn is an attorney and partner with Howe & Hutton, Ltd., a law firm that specializes in the representation of individuals, firms and organizations in the travel, tourism, hospitality and meetings industries. She has written numerous articles on a wide range of legal issues and is a frequent speaker for Meeting Professionals International (MPI) and its chapters, the MPI Foundation’s Platinum Series programs, SGMP, PCMA, HSMAI, ASAE and its affiliated societies. She was the 2005-2006 Chair of the ASAE Legal Section Council, the first woman to serve in such a leadership role. She is also a member of the Academy of Hospitality Industry Attorneys.