by Jonathan T. Howe, Esq. | February 01, 2008

Two new decisions coming out of courts in North Carolina and the District of Columbia offer some interesting reading and lessons for meetings industry contracts.

Tarheel Verdict

In the case decided by the Court of Appeals of North Carolina, the issue at hand was liquidated damages. In a nutshell, an organization had canceled a meeting but refused to pay the price outlined in a liquidated damages clause in the contract, calling the clause unenforceable and the fees unreasonable. So the hotel sued.

In this case, the judge concluded the law was clear -- the two parties had entered into a contract that outlined what would happen if the event was canceled, therefore, the organization owed the hotel money. He determined that no trial was needed on this part of the complaint.

But the judge did decide a trial could be held over the enforceability of the liquidated damages clause. If it was enforceable, the hotel would be entitled to the amount outlined in the contract. It’s important to note that some damages still would be owed the hotel, even if the liquidated damage clause was not enforceable.

The trial court concluded the liquidated damages clause was enforceable, and therefore there would be no need for the parties to present evidence on the issue of how much money was owed the hotel, as that amount was outlined in the contract. In the end, the judge found in favor of the hotel, which was to receive $118,499.03 with interest.

The defendant, the meeting host, appealed that ruling, but the appeal was dismissed for being without merit. The appellate court found the only issue was whether the liquidated damage clause was enforceable. In concluding that it was, then under the basic principles of freedom of contract, the parties have a “broad right to stipulate in their agreement the amount of damages recoverable in the event of a breach, and the courts will generally enforce such an agreement.”

The lesson? If you sign a contract that outlines how much your organization will pay if you cancel your event, be prepared to pay that amount. When a contract is breached, the party in default will be liable to the full extent of the liquidated damage clause. There is no mitigation requirement here; the plaintiff needs only to prove the existence of the clause.

D.C. Dealings

The second case, heard by the District of Columbia Court of Appeals, involved a group that did not reserve or pay for the minimum number of rooms in its block. In the suit, the hotel sought relief from the district’s 14.5 percent sales tax that would be imposed on the group’s attrition fees. The court concluded the fees were subject to the sales tax.

The hotel’s key argument asserted that because attrition fees are only charged when a group fails to meet its minimum room reservations, the district no longer has the authority to tax the fees since no rooms were actually furnished and the hotel only charged the fee for a failure to meet the block.

But the court agreed with the district’s argument that the tax was applicable because the hotel had reserved the rooms for the participants, who did have the right to occupy those rooms even though they did not do so.

Since the hotel measured the attrition fee as lost room revenues, the court concluded it was the same as other lost revenues the hotel might recover, and thus would be bound by the tax law.

Not all jurisdictions levy taxes on attrition and cancellation fees, so it’s important to note that this practice has been upheld in the District of Columbia but might not hold elsewhere.

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] .