Fighting a Stiff Penalty

How a law firm argues it doesn't owe damages for a canceled meeting

Legal2In February, the Hotel Del Coronado in San Diego sued a Washington, D.C.-based law firm, Akin Gump Strauss Hauer & Feld, for breach of contract. At issue: The firm had failed to pay damages for a canceled five-day retreat scheduled for late April. However, the law firm fired back in court, accusing the hotel of unfair business practices and asking a judge to void the contract.

How exactly does the law firm try to talk its way out of paying cancellation fees, something addressed explicitly in its contract? Do the arguments have merit and possible implications for other groups?

Here's the background: Akin Gump signed a contract with Hotel Del in July 2007 for its 2009 retreat, comprising 867 room nights, with nightly room rates ranging from $295 to $895, and nearly $167,000 in guaranteed food-and-beverage service. In spring 2008, the firm upped its room count, but on Christmas Eve, Akin Gump canceled the meeting altogether. When the firm failed to pay cancellation penalties in February, the hotel sued. (A spokesperson for the hotel declined to discuss the matter; a spokesperson for the law firm did not return a message seeking comment.)

According to the group's contract, which was filed with the lawsuit, if the firm canceled within three to six months of the event (as it did), it owed 80 percent of all "liquidated damages," defined as anticipated guest room revenue plus F&B revenue and certain service charges. Minus the group's $40,000 deposit, Akin Gump still owed approximately $386,000, according to the hotel.

The firm's lawyers, Los Angeles attorneys Alan Jay Weil and Jesse J. Contreras, claimed Akin Gump doesn't have to pay for several reasons. First, the lawyers argued the hotel didn't do enough to mitigate its damages, because it didn't exert adequate effort to resell the rooms. Next, the lawyers charged that the hotel can't enforce an "unconscionable" contract in which the requested damages are "far in excess" of the hotel's actual losses and, additionally, go beyond what the firm "reasonably anticipated" it would have to pay at the time the contract was signed. Finally, Weil and Contreras claimed California law prohibits the hotel from taking so much of the firm's money, in light of the real damages suffered by the hotel. In other words, the firm entered into an unconscionable contract that is unenforceable.

Then the firm went on the offensive, accusing the hotel of unfair business practices. The hotel, according to the complaint, could have estimated more accurately what its actual losses would be in the event of a cancellation and instead "insisted upon a liquidated damages provision that it knew was well in excess of the damages it could reasonably expect to suffer and that any payment of the liquidated damages would result in a windfall for the hotel and a disproportionate forfeiture for Akin Gump." The firm made additional complaints, all stemming from the premise that the hotel would unfairly benefit from the firm's payment of cancellation damages.

After reviewing the complaints and contract upon the request of M&C, attorney Jonathan T. Howe, partner of Howe & Hutton in Chicago and an M&C contributing editor, says the firm's arguments are unlikely to prevail in court. He expects the parties will settle. "When you sign a contract and have good legal advice, it's hard to argue later on that you were taken unfair advantage of," he says. It could be even harder for a law firm to argue that it didn't have sound legal advice when signing a contract.

Even if the matter is reviewed and settled by a judge who finds the contract unconscionable and the liquidated damages clause unenforceable, the outcome wouldn't necessarily have an impact on other groups; trial judges don't set legal precedent. However, if the ruling is appealed and an appellate judge affirms the trial judge decision, that ruling could have implications for other groups. But, Howe says, that's an unlikely scenario.

One lesson planners can take from this case is the importance of addressing the issue of mitigated damages in their contracts. The hotel and Akin Gump did not specify what would be required of the hotel in the event of cancellation and what would constitute a reasonable effort by the hotel to resell rooms and meeting space -- one of the key issues in dispute in the lawsuit. Howe recommends that planners and hotels negotiate these details up front, "so both parties are on the same page."