. Dealing With "Liquidated Damages" | Meetings & Conventions

Dealing With "Liquidated Damages"

How to ease or avoid penalties with proper contract language

Jonathan T. Howe 2016

to walk or not?
When should a corporate meeting planner walk away from the negotiation table?

Walking is the ultimate rejection of the deal on the table. It is much easier to set forth in advance what your real needs are so you can avoid the necessity of having to leave when your expectations cannot be met. In other words, let the other side know what it is that you absolutely must have. If they cannot provide that, then don't even bother to sit down.

We often see contracts today with so-called "liquidated damages" provisions, which spell out the penalties when a party to the deal does not meet its obligations. Such provisions also mean, in essence, that regardless of what happens subsequent to the breach giving rise to the damages, even if of a mitigating nature, there is no obligation for the nonbreaching party to take any steps to remedy or reduce liability.

In terms of hotel contracts, liquidated damages often refer to the penalty charged to the meeting host for not fulfilling the contracted room block. Conditions that might mitigate liquidated damages if contested in court include:

1. Plaintiff (the hotel) reasonably could have avoided a part or all of the consequences of the defendant's wrongful act;

2. Plaintiff received a benefit as a result of the defendant's wrongful act; and

3. In cases where the nature of the defendant's conduct is material to the damages recoverable, his or her conduct was not as wrongful as the plaintiff claims.

Of course it's best to avoid having to go to court in the first place, and that means anytime there is a liquidated damages clause, an affirmative duty to mitigate should be added to the contract as an offset to the damages claim.

We always insist in hotel contracts that, when it comes to meeting a room-block requirement, there be an obligation on the hotel's part to try to mitigate by providing a credit against damages as a result of their reselling the rooms. The failure to attempt to mitigate does not relieve the other side of its legal responsibilities for breaching the contract; what it does is reduce the amount of damages that can be claimed by the nonbreaching party.

In fashioning the duties to mitigate, it is important to determine how the damages will be calculated. For example, the planner should opt to have attrition or cancellation calculated on the basis of the total number of rooms utilized against the total number of rooms in the block. Hotels, on the other hand, will insist upon a vertical, or day-by-day, calculation; for example, if on Tuesday you are under by 25 rooms but on Wednesday you are ahead by 25 rooms, the hotel will insist on being compensated for the missed 25 rooms on Tuesday.

The hotel might also insist that 100 percent of the contracted rooms be sold in order to provide any mitigation or reduction in liability. Planners might prefer a formula based upon the number of rooms sold against rooms available and use the percentage. For example, if the hotel has 1,000 rooms and the planner is responsible for 600, why not give the planner credit for six out of every 10 rooms that are sold?

In any case, liquidated damages and mitigation clauses should be carefully considered and understood equally by both parties.

Jonathan T. Howe, Esq., is a senior partner of the Chicago and Washington, D.C., law firm of Howe & Hutton Ltd., specializing in meetings and hospitality law. Email questions to him at [email protected]