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Liquidated Damages

A Legal Guide to Liquidated Damages in Hotel Contracts

In this video, you’ll learn about liquidated damages in your hotel contracts, how liquidated damages are defined, and how they are executed in the event of a breach in your hotel contract.

Overview

  • The legal elements of a liquidated damage clause are that the parties agree:
    1. One party will be injured if the other does not fully perform;
    2. It would be difficult to determine the amount of the loss suffered; and
    3. The parties agree on an amount or formula for determining the damages that will be paid, rather than requiring the injured party to prove its actual loss.
  • In a liquidated damage clause, the amount that would be owed should be either expressly listed, or capable of calculating at the time the contract is signed.
  • The amount agreed upon should be a reasonable estimate of the loss that would be suffered and should take into consideration the injured party’s ability to reduce or mitigate its loss.
  • Therefore, under the law, a liquidated damage clause does not require the injured party to prove its actual loss or the extent to which it may have mitigated that loss.
  • The amount owed is “damages,” not a penalty. It is designed to be fair compensation for the loss suffered.
  • Liquidated damages are used for both cancellation of the entire event, and when the event is held but the customer does not fill all the rooms reserved (commonly called “attrition” or “performance” damages).

Group Perspective

  • Cancellation fees should be based on a “sliding scale” – the farther out the meeting, the lower the cancellation fee; the closer the meeting, the higher the fee.
  • Specific date parameters should used in the “sliding scale”, e.g. September 1, 2020 vs 180 days prior to the start of the meeting.
  • Specific dollar amounts or a formula to calculate the cancellation fee should be included.
  • If the contract is later amended to change the meeting dates or to reduce the room block, the parties should evaluate whether the cancellation and/or attrition fee provisions should be amended accordingly.
  • As noted above, “penalties” are not enforceable. As such, groups should refrain from referring to cancellation and attrition fees as “penalties” and instead, refer to them as “fees” or “liquidated damages”.
  • In addition to considering whether the clause should provide credit to the group for resold rooms, groups should also consider adding a provision which allows the group to rebook another meeting at the hotel (contract signed and meeting to occur within a particular time frame).
  • Groups should address the possibility of the hotel cancelling the agreement for reasons other than Force Majeure. In such an event, the preferred approach is to refer to the types of damages the group may recover from the hotel as a result of the cancellation such as direct damages (e.g., fees and expenses to secure an alternate hotel for the meeting, to revise marketing materials and website) as well as attorneys’ fees.

Hotel Perspective

  • While resale credit is not required under the law, if a customer insists upon it, the clause must have an agreement on how “resale” is calculated and what credit will be given.
  • The damage amounts are negotiable. If the customer thinks the hotel will resell unused guest rooms, negotiate the amount of damages down, rather than adding “resale.”
  • Hotels would rather receive a lower amount of damages at the time of cancellation than wait months or years for the event dates to pass to calculate resale.
  • Avoid complicated formulas for determining damages. Agree on dollar amounts.
  • Damages do not have to be based on “profit.” If it was easy to determine lost profit, there would be no reason to use liquidated damages.
  • “Mutual” damage clauses, in which the hotel pays the same amount for cancelling the customer as the customer would pay for cancelling the hotel are inappropriate. The damages that the customer suffers if the hotel cancels the event are completely different from what the hotel loses if the customer cancels it.
  • Attrition clauses may either allow the customer to release some rooms from the block without liability (usually by a certain date) or may allow the customer to use and pay for a reduced percentage of the total block (70, 80, 90%, etc.) These allowances are a concession that the hotel is not required to give.
  • If the event is cancelled, the attrition allowance does not apply, as it was only offered if the event was held.