The recent COVID-19 outbreak has propelled hospitality into a new era where digital tools and virtual experiences are more important than ever. It’s also reminded us how important it is to maintain foresight as we write contracts and build contingencies into our plans.
I find that, many times, the most important clauses in a contract—like Force Majeure and the impossibility clause—get overlooked. We should be vigilant and never gloss over these, and more, ever again.
As we move forward to find our new normal, you can expect a lot of things to look different like meetings, business events, and experiences. It’s good to start thinking about how this, paired with a cautious mindset as people slowly return to travel someday soon, will impact your contract clauses.
To help make sure you’re protected in the future, we gathered some tips and lessons learned from being on the front lines. Below, we’ll help you adapt your processes to anticipate various potential futures: let’s play chess, not checkers.
Force Majeure and Impossibility
Force Majeure is a special clause that excuses one party’s obligation under contract when circumstances arise beyond their control. Further, these circumstances must make performance of the contractual obligations commercially impractical, inadvisable, impossible, or illegal.
The COVID-19 outbreak absolutely qualifies for Force Majeure, and we’ve witnessed it first hand with the cancellation of professional sports seasons (man, I miss the NHL right now). The real question is how you can ensure that you’re protected in these situations.
First, you must be specific in your clause. For example, if your event has different types of attendees, like exhibitors and sponsors, as well as attendees and buyers, then specify all parties in your clause.
Specific industries can be affected differently in times of crisis. If your sponsors or exhibitors—aka, your main revenue drivers to make the event possible—have to back out, you’re still on the hook to provide an event for a cohort of attendees flying in from all over the world.
To protect yourself, include a clause in your contract that reads something like: “If 25% of attendees are unable to attend, we reserve the right to use Force Majeure.” Here’s an excerpt of an actual clause we used at Luxpitality to help during the COVID-19 outbreak:
IMPOSSIBILITY
The performance of this Agreement is subject to termination without liability upon the occurrence of any circumstance beyond the control of either party – such as acts of God, war, acts of terrorism, government regulations, disaster, strikes, civil disorder, or curtailment of transportation facilities – to the extent that such circumstance makes it illegal or impossible for the Hotel to provide, or for groups in general to use, the Hotel facilities, or prevent at least twenty-five percent (25%) of group’s guests from participating in or attending its applicable event. The ability to terminate this Agreement without liability pursuant to this paragraph is conditioned upon delivery of written notice to the other party setting forth the basis for such termination as soon as reasonably practical – but in no event longer than ten (10) days – after learning of such basis.
Cancellation
There’s almost no way around a cancellation clause, but you absolutely have the ability to adjust the different percentages outlined in the contract. You want to try to keep the percentages as low as possible for as long as you can.
A lot rides on how far in advance you’re booking—the further out the better. See in the examples below how we scaled the percentages differently. Also, notice how early booking allows for less fallout:.
In the event of a group cancellation occurring 0 to 3 business days prior to arrival, liquidated damages in the amount of one hundred percent (100%) of the Room Night Commitment, seventy percent (70%) of the Minimum Banquet Food and Beverage Revenue, and Total Meeting Room Rental will be due, plus applicable taxes, less the applicable allowed attrition, as stated herein.
In the event of a group cancellation occurring 4 business days to 90 days prior to arrival, liquidated damages in the amount of seventy-five percent (75%) of the Room Night Commitment and thirty percent (30%) of the Minimum Banquet Food and Beverage Revenue will be due, plus applicable taxes.
In the event of a group cancellation occurring 91 to 180 days prior to arrival, liquidated damages in the amount of sixty percent (60%) of the Room Night Commitment and twenty percent (20%) of the Minimum Banquet Food and Beverage Revenue will be due, plus applicable taxes.
In the event of a group cancellation occurring 181 to 365 days prior to arrival, liquidated damages in the amount of zero percent (0%) of the Room Night Commitment and zero percent (0%) of the Minimum Banquet Food and Beverage Revenue will be due.
Rebooking
Sometimes, negotiating a cancellation clause can be difficult. If you’re not having much luck, I recommend tightening up the rebooking.
Let’s say that for some reason you need to cancel your event. Your rebooking clause might state that you still want 100% of the payments or funds to be applied to a future event of equal or greater size.
If you have multiple events, make sure to add that this payment can be applied to any of your future events, not necessarily the exact same event. Last, do your best to schedule your future event out as far as possible, typically within 12 months of the current event date.
Personally, this is one of my favorite clauses. It proves that you and your contract partner are 100% in this fight together! While unforeseen circumstances might derail your plans now, you’re still committed.
Attrition
You want to try and negotiate the allowable attrition: 20% is a great number. Typically, event hotels will be happy to give you 10%, but 30% or more is going to be a hard sell. If you aren’t getting what you want up front, then block a more conservative room block and add to it when you know you need more. And always make sure to add to your block as soon as you can.
Deposit Schedule
This last one is more of a pro tip. If your attendees are paying on their own, you shouldn’t have a deposit schedule because each attendee will essentially pay the deposit in small increments. Remember, you’re still responsible for the performance of the contract though.
There are always going to be unforeseen and unexpected circumstances that disrupt your plans. The only surefire way to protect yourself is to think 10 moves in advance and button up your contracts accordingly.
We’ve been playing the contract game for years at this point, and we’re absolute pros at navigating the waters. If you want to learn more about how we can work together to broker a deal that’s in your best interest, let’s talk today.