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by Jonathan T. Howe, Esq. | November 01, 2011
Takeaways

Federal courts are more likely to enforce liquidated-damages clauses; state courts vary but are more open to evaluating what the actual damages would have been.

Busy hotels are going to be less inclined to negotiate over this issue than properties more anxious for group business to fill space.

If you can't negotiate away a liquidated-damages clause for handling attrition, consider using a different hotel.

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In a recent post on the Mi­Forum, our industry's listserv, a planner lamented that an overseas hotel -- which belongs to an international chain -- refused to agree to waive attrition penalties if her numbers fell short but the hotel was sold out during her event dates. She said some domestic hotels have taken the same stance. What gives?

Well, more than likely, the contract language provided for "liquidated damages," which specifies the amount each party would pay in the event of a breach or nonperformance of any part of the contract. Such damages usually are delineated when the parties agree that it would be difficult to determine accurately what the actual damages should be. Instead, they agree on a penalty amount, defining circumstances in which the clause would be triggered.

Overarching Concept Traditionally, liquidated damages are payable regardless of what breach occurs. So whether the hotel is sold out or not is immaterial to the hotel's ability to recover the money if a group doesn't meet its numbers.

But a good contract will make sure the host organization is covered if the hotel sells most or all of its rooms on a given night. Planners need to insert a specific provision that gives them credit for rooms sold against the liquidated damages.

In this Case If you get into litigation over liquidated damages, the courts might decline to enforce the clause under the doctrine of "second look." If the court rules the amount to be a penalty (a punishment) and not damages (actual dollars lost by one of the parties), the clause would be considered unenforceable on the grounds of public policy.

Before ruling, the court will try to determine if the amount of liquidated damages is reasonable. An inquiry will look into what the number would have been had the plaintiff been required to prove actual damages.

Furthermore, if one party seems to have acted or negotiated with bad intent, the court might be inclined to consider a liquidated-damage provision unenforceable. But if the parties are on equal footing, have agreed to the amount and the amount is reasonable, the court will enforce it. The courts also favor liquidated-damage clauses that provide for mitigation.

In anticipation of such issues, many liquidated-damages clauses state that the dollar amount is "as damages and not as a penalty." Even so, a court might find the amount to be a penalty.

Another Route If the hotel's contract calls for liquidated damages, try to negotiate that out. The fact a planner had difficulty with this perhaps indicates that things were going well for that hotel.

Is the liquidated-damages clause a wise way to handle attrition? No. You want credit for rooms sold, period. Base the calculation on the percentage of rooms you've blocked against the total rooms available, so you get credit for the proportionate percentage of rooms sold. For example, at a 1,000-room hotel where you're committed for 600 rooms, for every 10 rooms sold, you would get credit for six  

If the hotel is full, you simply should not have to pay attrition. So if you can't negotiate away a liquidated-damage clause, go to another hotel.