by Jonathan T. Howe, esq. | December 01, 2007

The language of contracts can get pretty convoluted, making it easy for parties to misinterpret meanings. Quite often lately, I have had to define performance guarantees and warranties to my clients, so I thought the time was right to put these explanations in writing.

A Matter of Terms

Many people confuse a “guarantee” with a “warranty.” A warranty is basically a representation or promise that a statement of fact is actually true. To warrant that the spa is open 24 hours a day means “the spa is open 24 hours a day, no exceptions.”

In some circumstances, a warranty will be presumed or implied, and in others, particularly in a commercial setting, the warranty will be explicit and expressed.

A guarantee, on the other hand, is a collateral agreement that assures the performance of one of the parties. When issuing guarantees, you should know you are assuming specific responsibilities beyond what would otherwise be your obligation.

In other words, when the contract is signed, you are guaranteeing that your group will consume a certain amount of food, will spend a certain amount of money or undertake certain responsibilities. The party that makes the guarantee is saying he will answer for the payment of another’s obligation or the performance of another’s duty or liability.

It bears reiteration: A guarantee is a contract that something will be done exactly as spelled out, whether it is done by the signatory or another person or persons.

Guarantee Growth

Many venues now are requiring what some organizations consider to be excessive guarantees for food and beverage consumption and other spending within the venue. These requirements, as with all contract “absolutes,” are negotiable, but what exactly are we negotiating?

In dealing with F&B guarantees, be sure you thoroughly understand what main and peripheral events will be included or excluded. For example, are service fees and taxes included as part of meeting the guarantee obligation? Can ancillary expenditures within the hotel, such as hospitality suites, be used to meet the guarantee? This is not difficult to figure out, but the details deserve full review and scrutiny.

The Tax Man

When dealing with food and beverage, take into account the impact of the Internal Revenue Code on the deductibility of costs. Under the current code, only 50 percent of F&B and entertainment costs are deductible, and then only when served in support of a business meeting. Compare this with other expenses such as rooms, transportation and the like, which are 100 percent deductible as long as they relate to the trade or business of the taxpayer and are ordinary and necessary expenses.

Included in the definition of food, beverage and entertainment, according to the code, are taxes and tips, cover charges, and rent or costs paid for the use of a room for a meal function. The cost of transportation to and from a business meal or business-related entertainment activity generally is not subject to the 50 percent limitation.

Thus, minimizing food, beverage and entertainment expenses can result in tax savings. Hotels don’t really mind if you do this, as long as you spend the money elsewhere. After all, the facility just wants to be able to make a profit off your business, wherever the money is spent.

In sum, reducing F&B costs while increasing your spend in another revenue area will net the same -- or more -- to the venue, but increase the tax benefit to the event organizer.

Jonathan T. Howe, Esq.,is a senior partner in the Chicago, St. Louis and Washington, D.C., law firm of Howe & Hutton Ltd., which specializes in meetings, travel and hospitality law. Legal questions can be e-mailed to him at[email protected] .