Tough Topics in Hotel Contracts

Long gone are the days when a handshake over details scribbled on a napkin was enough to constitute a contract for a meeting or event. Today's contracts are long and increasingly complex. Which clauses are most critical? What are common mistakes planners make?

M&C asked five of the most respected meetings-industry attorneys for their insights and opinions on the current state of hotel meeting contracts.

What is the most important clause, and how has your opinion of that changed during the 2000s? 

John S. Foster: All clauses in hotel contracts are important, with some more than others. This has become evident since the 1990s, based on actual cases and controversies in the industry. The most important is the attrition clause, because hotel contracts deal with future performance, and meeting sponsors must deal with a lot of unknowns. The biggest unknown at the time of the contract is exactly who and how many people will attend the meeting.

Before attrition clauses, meeting sponsors were required to use their "best efforts" to attract people to attend and reserve at the headquarters hotel. If they didn't fill all the rooms in the block, the hotel took the unreserved rooms back at the cutoff date and attempted to resell them to others. It was the hotel's responsibility to sell them or eat them after the cutoff. Attrition clauses shifted the risk of low pickup to the meeting sponsors. Now, if rooms are unsold at the cutoff date, the hotel attempts to resell them to others. If they go unsold, the meeting sponsor is liable for paying for them.

Yet, the 2000s have underlined the critical importance of force majeure clauses. The industry now knows that specific occurrences can cause major disruptions to travel that are beyond control of the meeting sponsor or hotelier. To name a few: 9/11, Hurricane Katrina, the SARS epidemic, the eruption of Iceland's Eyjafjallajökull volcano. Contract law provides certain standards that, if they occur, allow one or both parties to suspend or terminate their performance obligations. The standards are impossibility, impracticability and frustration of purpose.

Jonathan T. Howe: The most important clause in the contract is likely the one that takes you to court or arbitration. In other words, there is no one important clause. The contract is taken as a whole, and thus every clause is important depending upon the needs of the hotel and the planner. Contracts have gotten longer, in my opinion, because of bad experiences -- burn me once and you won't burn me again, because I will cover it in my next contract.

But a risk you might encounter at one venue does not mean it is a universal risk. Hurricanes generally do not occur in Iowa. You don't need an Americans with Disabilities clause in Canada. A contingency that the convention center be available does not need to be included in an agreement for a meeting of 50, etc. Cover the essentials, and delete requirements that are not applicable with the scope of the event at hand.

Lisa Sommer Devlin: There is no "most important" clause, as each clause has its own purpose. Some of the key clauses will never change: cancellation, attrition/performance, dispute resolution and recovery of attorney fees.

Force majeure clauses are unnecessary, but when they are included they are very important. If after a contract is signed an unanticipated event occurs that makes it illegal or impossible to perform, the impacted party is automatically excused from its obligations as a matter of law. Thus, you don't need a clause covering this, because the law will excuse you. Many planners believe force majeure clauses are required, but they are not. However, if you do include one, the terms of your clause will apply instead of what the law would cover.

My opinion on which clauses are important has not changed, but there are new clauses that have appeared in recent years that cause problems, such as confidentiality provisions. Groups want hotels to accept confidentiality clauses that are inappropriate and expose the hotel to unreasonable liability. It does not matter to the hotel if the customer is discussing secret formulas or comic books -- the hotel is there to provide a service. If a meeting attendee takes documents into the bar and leaves them where they are discovered by a competitor, why should the hotel be responsible? If a leak of information occurs, how can it be proven that it was the hotel's fault vs. some other scenario?

Groups also ask for the hotel to delete information regarding its attendees after the event, when, in fact, the information provided to the hotel by the attendee is the hotel's information, not the group's. If hotels accept these clauses, they would have to change their privacy policy for each group that checked in, which obviously can't be done.

The solution is not to have sweeping confidentiality clauses. It is for the group and hotel to work together to make sure that secret materials do not leave the meeting room.

Joshua L. Grimes: There are many critical clauses, but probably the most important relates to rates and fees. With hotels following airlines and others in "unbundling" costs, the quoted rate is not necessarily an accurate indicator of how much a group will pay for a hotel room or meeting space. Rates at many meeting properties typically do not include nightly charges for a resort fee, service charges of 20 percent or more, housekeeping fees, porterage fees, meeting room power charges, room set-up fees and new "historic preservation" surcharges. Some or all of these extra fees are charged at most properties. This creates issues for many meeting planners who have limited budgets and also are subject to accountability laws that require all costs to be considered before selecting properties.

It is essential to include a clause in meeting contracts setting forth all of the costs and charges that the venue will impose, with their amounts. This clause also should include a statement that the venue will not impose any additional mandatory charges or costs without the group's prior written consent.

Steven M. Rudner: Attrition and cancellation are the most important clauses, because they come into play most often and lead to the most litigation. During the weak economy, planners got used to hotels agreeing to give credit for rooms resold, and/or to clauses giving credit toward future bookings. Planners seem to have forgotten that the clauses are intended to compensate hotels for the damages they sustain when groups fail to perform, and that hotels are not obligated to give any of what they are paid as damages back to the groups who have damaged them.

Moreover, planners continue to ask for credit for rooms resold in regard to attrition and cancellation damages. The request, when granted, eliminates the certainty that is the primary advantage in a liquidated damage clause, from a group's perspective. The smarter move is to try to negotiate for an increased percentage of permissible attrition, or a lower percentage of damages for cancellation. Of course, getting hotels to agree to that request, along with the request for the resale or rebooking credit, might now be more difficult as the economy has improved.

What mistakes do planners keep making?

Devlin: Planners think their clauses are good just because they have used them for years without a problem. They also tend to insert a clause to address an issue that they have had, such as a paragraph on renovations, making sure none are taking place that would disrupt the meeting, but the clause they use does not really solve the problem. A vague or incomplete clause becomes a problem when an issue arises pertaining to the area it covers. Planners would benefit from having a lawyer review their contracts before they sign them.

Grimes: The biggest mistake I encounter is a failure of all parties -- planners, suppliers, hoteliers -- to read their contracts carefully and consider the details, both before signing and afterward if an issue arises. For example, when I am asked to help a planner challenge an attrition bill, about 75 percent of the time I find that the amount charged by the property is clearly wrong -- either too high or too low -- because the hotel staffer who calculated the amount due inadvertently failed to consider all of the aspects of the bill called for in the contract. And I find that many planners fail to verify the calculation themselves.

A mistake third-party planners often make is failing to understand all of the obligations in their contracts, particularly the "master services agreements" presented by larger corporate clients. Many of these obligations make little sense for planners -- such as a mandatory 5 percent discount on the planner's management fee if the corporate client pays the planner's bill within 120 days.  This is a "quick-pay" discount usually associated with buying quantities of products. However, planners often don't challenge clauses like this out of fear of losing the business. In my experience, these MSAs can be amended for a meeting planner, but planners don't want to ask for changes.

Foster: The biggest mistakes that meeting planners make is not paying attention to the legal nuances and strategic wording that needs to be used in all contract clauses, but specifically those dealing with attrition, cancellation, holdharmless, indemnification and force majeure. All such clauses are not equal. They should be strategically written with specific terms and specific wording. Planners should use legal counsel experienced in the meetings industry to help prepare, review and revise their larger meeting contracts. Remember my longtime words of wisdom: If you ask the other side for terms before a contract exists, it's called negotiating; if you ask for something after a contract exists, it's called begging. The cost of legal services is minuscule compared with the potential damages that can result from a contract dispute.

Howe: A little bit of knowledge is dangerous. Many times planners will include clauses in contracts that are totally inappropriate, are ambiguous or, worse yet, create more problems. While not every contract might require legal review, to do so with a knowledgeable hospitality lawyer is a safety valve against subsequent problems.

Rudner: Not every group requires the same clauses; not every contract should have them. Groups should not just pick up someone else's list of clauses to make sure they are all included in their contracts. Groups should think about their own history and their own needs, and negotiate a contract that addresses those concerns.

We spend a lot of time negotiating confidentiality clauses for groups who are not discussing anything confidential or anything that someone outside of the group would care about. We spend a lot of time dealing with groups who are occupying less than 5 percent of a hotel but want to be assured no one else will get a lower room rate. We spend a lot of time negotiating change of ownership clauses with groups who don't even know who owns the hotel at the time they are purportedly worrying about a new owner. A lot of time could be saved all around if groups negotiated for what they really wanted, rather than what comes from someone else's laundry list. 

Jonathan T. Howe: The third-party process adds exactly that, a third party. Many third parties bring to the table what they consider to be additional clout in their negotiations. Planners who are harried and do not have the time or, in some cases, the expertise on the site-selection end might need to rely on a third party to get the best deal. When presented with that deal and asked to sign it, the planner in turn has to understand what has taken place to justify why the organization should accept what the third party has done. In other words, it adds another layer to the process that might further complicate negotiations. The ability of the third party to thoroughly understand the needs of the organization is extremely important. In many situations, it would appear that the third party did not understand those needs, to the planner's subsequent dismay.

John S. Foster: The rise of third-party planners has both helped and hindered the negotiation process. It has helped planners who are not experts in site selection, giving them an outside source to turn to in the negotiation process. The process has been hindered by third parties who hold themselves out as "contract specialists" instead of "negotiation specialists." Third parties who are not lawyers cannot be contract specialists. Most of them know enough legal theory to be dangerous. This is not helpful to their clients who trust their hotel knowledge to steer them around the contract pitfalls, which most third-party planners are not trained to do no matter how long they have been in the business. I have spent a lot of time digging clients out of contract problems caused by their third-party representatives who thought they knew more than they actually did. My best clients are planners and executives who know a little about legalities but are smart enough not to be their own lawyers.

Lisa Sommer Devlin: It has made it harder. Third parties often demand clauses that are bad business for a hotel, and insist upon them because of the volume of business that they bring to the hotel or the chain. This can ultimately backfire, leading to their business not being desirable to a hotel.

Steven M. Rudner: When negotiating group contracts with third parties, we often hear that the groups won't accept certain clauses, but sometimes it is the third party, and not the group, that has taken that position. I recognize that third parties can add value, but some lose sight of their legal role in these negotiations. They are obligated to act in the best interest of their clients, and not in their own best interests. Sometimes, trying to beat up a hotel during negotiations is done just to demonstrate to the group how tough the third party is. When a third party rejects a clause that the group would have accepted and prolongs or detracts from the negotiation, it is not fulfilling its legal obligation to the group for whom it is working.

Joshua L. Grimes: Third-party planners tend to have more experience negotiating contracts than in-house association and corporation executives, so many meeting sponsors achieve better contracts with competitive pricing and concessions. But this is not always the case, since not all third-party planning companies educate their planners on sound contracting principles and provide continuing education opportunities that keep planners informed of new developments. But in-house planners have the same challenges.
Also, third-party planning companies often have relationships with hotel companies and other vendors that affect their recommendations in venue selection and negotiating concessions. This is not always disclosed to clients, but it should be to ensure that meetings will generate maximum return on investment for the meeting host, and so that clients can comply with their accountability obligations - S.B.