When an Organization Cancels a meeting contract, computing the actual losses to the hotel's business can be cumbersome. And what happens if the hotel cancels? Most hotel contracts use the concept of “liquidated damages,” agreeing in advance what the damages will be if the client cancels its obligation.

The adversely affected party can always claim its actual damages, which is the total of all expenses incurred as a result of the cancellation. For the hotel, these damages would include costs associated with re-marketing the canceled rooms, and the difference between revenues derived from resold sleeping rooms and meeting space when compared with what the hotel was expecting under the contract.

For the organization planning the meeting or event, if the hotel or venue cancels, the actual damages would include costs associated with looking for a new venue, and any incremental costs at the new property, such as increased room rates and meeting room rental.

Mitigation Expectation

But there can be disputes over whether the victimized party did enough to mitigate its damages, i.e., cut its losses. That's why the parties should agree in advance as to what the damages will be in the event that one party cancels its obligation. When using liquidated damages, it's important to keep in mind that the concept of mitigation, e.g., trying to resell the canceled space to another party, is not applicable unless the parties to the contract agree to a resell clause.

The parties can specify virtually any amount they agree on as liquidated damages, except that the figure cannot be what the law considers to be a “penalty,” that is, an amount in excess of the actual losses a party is expected to sustain in the event of a contract cancellation.

Another way to look at the penalty concept is to provide that liquidated damages will approximate the hotel's lost profits, the amount it would have netted had the meeting been held. According to industrywide data compiled by Smith Travel Research, one of the industry's leading consulting firms, sleeping room profits are approximately 75 percent of room rates, while approximately 25 percent of food and beverage costs account for hotel profit.

Far too many contracts generated by hotels express liquidated damages in terms of a percentage of something. Usually, it's revenue, but often it is the vague phrase “anticipated revenues,” or “anticipated gross revenues.” Using percentages and such vague concepts is a problem because it's not clear to the parties how much the group would owe if they cancel.

Therefore, liquidated damages should always be expressed in dollars and cents and should represent the approximate profit that the hotel would have made if the meeting or event had been held as scheduled. Mitigation — or a resold rooms clause — may be appropriate if the damages amount does not appropriately factor in estimated revenue to be derived from resold rooms. Again, however, if the parties want a resold rooms clause, it's incumbent upon them to put it in the contract.

The use of liquidated damages is most appropriate when trying to ascertain the amount of liability if a group cancels a meeting. The hotel knows in advance how much revenue is expected from sleeping rooms, food and beverage and, sometimes, meeting room rental.

On the Flip Side

Liquidated damages do not apply to a situation in which a hotel cancels its contract; that is because a group would not always know how much of a loss it would suffer in this case, and thus the clause would probably be unenforceable.

However, the absence of a liquidated damages clause does not mean that a hotel can cancel without liability at all, as some might think. All it means is that the group would have to try to mitigate its damages — by seeking another property at which to hold the meeting, for example — and compute its actual losses after all expenses and revenue have been tallied.

James M. Goldberg is a principal in the Washington, D.C., law firm of Goldberg & Associates, PLLC. His practice focuses on representing associations, corporations, and independent meeting planners. He is the author of The Meeting Planner's Legal Handbook.