If a Company cancels a meeting contract, computing the actual losses to the hotel's business can be cumbersome. For that reason, most hotel contracts use the concept of “liquidated damages,” agreeing in advance what the damages will be if the client cancels its obligation.
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 that the hotel is expected to sustain.
Liquidated damages will often approximate the hotel's lost profits, which are the amount that it would have netted had the meeting been held. Sleeping room profits are approximately 75 percent of room rates, while food and beverage profit is approximately 25 percent of revenue, according to industrywide data compiled by Smith Travel Research, one of the industry's leading consulting firms.
When using liquidated damages, it is 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.
Far too many contracts generated by hotels express liquidated damages in terms of a percentage of “something.” Usually, that something is revenue, but often, the “something” is the vague phrase “anticipated revenues,” or “anticipated gross revenues.” Using percentages and such vague concepts is a problem because it is not clear to the parties how much the group would owe if they were to 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.
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 had been tallied.
James M. Goldberg is a principal in the Washington, D.C., law firm of Goldberg & Associates PLLC, www.assnlaw.com. His practice focuses on representing associations, corporations, and independent meeting and event planners. He is the author of The Meeting Planner's Legal Handbook.