Almost a year into dealing with the pandemic, meeting planners continue to struggle with revamping their hotel contracts for postponed and new events, as well as how to get out of contracts without liability. The following advice from hospitality contract attorney Jonathan T. Howe, founding partner of Chicago's Howe & Hutton law firm and Northstar Meetings Group's longtime legal expert, should help clear up questions about force majeure and other clauses. See more from Howe on cancellation here.
How do you define force majeure and how would you change the approach?
Force majeure is an incident that prevents performance by either party, over which neither party had any control. So a hurricane, a tornado, the destruction of the property, a fire — those things would be a true force majeure. What we’ve got now is a bastardized force majeure situation, which now includes a whole laundry list of factors.
But the question we have to ask is, has the situation made performance impossible or illegal? That’s going to depend on where you’re going to have your program. It’s going to depend on what the circumstances are. It’s going to depend on what the facility, the vendor, the venue have available in order to meet its requirements under the contract. What will allow you to escape liability for nonperformance, which you’ve enumerated in the contract? So we go back and we have to peel the skin off the onion.
Another problem here is the fear or the reluctance of people to go to the meeting. And you have to explore what governmental action is in place. Does the destination require visitors to be quarantined for 14 days? You’ve got to evaluate all of the factors.
Now that we've been dealing with issues as they relate to Covid-19 for a while, what we've been talking about as being force majeure clauses really aren't force majeure clauses; they're basically trying to define how an organization can get out of a hotel contract without liability. Right? And so what I prefer to see are separate clauses that deal specifically with the issue. How the heck do I get out of this without liability? Or how am I able to renegotiate this?
You need to look at your event. And you have to spell out decision points along the way. What are the key times for making decisions? What are the times you have to have your exhibitors lined up? And then when is my drop-dead date? If I don't have everything in line by this date, or I am unsure, as of this date, I want to reserve the right to bail. And so what we have now instead of saying force majeure, or saying cancellation, we might say something like this, "If a pandemic exists on May 1, 2021, for the meeting scheduled for November of 2021, I reserve the right to get out of the contract or to change the dates of the event." So we're realistically looking at what the decision dates are. That's been the missing aspect of this whole thing: What are the key dates relative to making decisions and what are those decisions going to be as we go forward?
Are planners putting in new attrition clauses or new attendance numbers that they’re expecting, or things like that?
I wish I were seeing more of that, but unfortunately you’ve got a lot of people who are just breathing a sigh of relief that they’re off the hook for the original program that they’ve postponed, and basically are not making any changes in what the dynamics are. You have to look at it realistically. Your group is not going to be the same size as it was anticipated for this year.
"What assurance do you have that when it comes time for performance that the hotel is going to be solvent or even open, and that your deposit won’t have gone into the bankruptcy estate, leaving you with no claim to retrieve that money?"
Let me go back to the hotel standpoint. Are they really going to be able to service you in the same way? One thing that I’m cautioning everybody on, you’ve put down deposits and a lot of times you’re leaving that deposit with the property. Well, what assurance do you have that when it comes time for performance that the hotel is going to be solvent or even open, and that your deposit won’t have gone into the bankruptcy estate, leaving you with no claim to retrieve that money? I’m suggesting one of the things you want to look at, if you have deposits or requests for deposits, you get them returned or you have some safeguard put into play, such as putting that money into an escrow account, which would allow the event to be funded only if performance occurs. If performance does not occur because of a default or bankruptcy on the part of the venue or the supplier, that money will be returned to you.
In contract wording, can the word pandemic cover it all?
Well, the word pandemic can cover it, but again, what does the pandemic do? Does it make performance impossible? Does that make it illegal? Do you have another provision in your contract that says, because of the pandemic, if 45 percent of my people who would be attending can’t get there, we’re excused from liability? It really goes back to how the clauses are worded and which conditions activate them. Each contract, each force majeure, each escape liability with some condition occurring needs to be reviewed very closely.
I don’t know how many force majeure clauses we have reviewed in the last several months. Unfortunately, with a lot of them, cancelling without liability is going to be a stretch. With some, it’s going to be a slam dunk, but it all depends on what the clause provides, how you interpret it, what the impact is. This is not a situation where you get a win-win.
What we have in this industry is a development of a partnership with the parties, with whom we do business. And that partnership is based upon two concepts. We share rewards and we share in risks. Today we’re sharing a lot of the risks and we know that under these circumstances today, nobody’s going to be in a winning proposition. It’s a question of how do we minimize the damage to the relationship coupled with the economic damage that’s going to grow.
This is when those relationships become so important. But many of those people we have relationships with are on furlough or they have been let go. So we have another dynamic: Who do we contact?
Is an impossibility clause the same as a force majeure clause? Is it just different terminology?
All force majeure clauses have to be read as two sections. You have to have the force majeure event. Then you have to evaluate whether that event meets the qualifications for cancellation.
After 9/11, force majeure was only there if your event was in the Twin Towers or if you were at the Marriott hotel that was at the base of the Twin Towers. But the Essex House was open. The Plaza was open. The Waldorf was open. So events were not impossible. But planners said, wait, the airlines shut down. We were all shut down by government action there. Well, you still had trains and cars and buses that you could use to get to the event. The neat thing about 9/11, if there was a neat thing about it, was the reaction and the reality check. The industry said, look, we understand people are not going to travel. They’re not going to want to leave home. That emotional response was there. And so there were a lot of accommodations made at that time.
Planners shouldn’t be putting the term "Covid-19" in their new agreements, should they? Should they refer to specific illnesses or pandemics? What are you recommending?
We know we’re always going to be faced with the potential of some kind of disease or factor which would make performance impossible or undesirable under the circumstances. I would never put in "Covid-19," because I don’t know if it is still going to be around or how it’s going to be labeled. It’s like saying in a contract, "I’ll get possession of the Emerald ballroom." Well, the Emerald ballroom could suddenly become the Ruby ballroom. Sometimes being too specific puts your organization into a box.
"[After 9/11] the industry said, look, we understand people are not going to travel. They’re not going to want to leave home. That emotional response was there. And so there were a lot of accommodations made at that time."
Be very careful with the contract terms, especially the revised contract terms. Just taking your current contract and pushing it forward is probably going to do you more harm than good, because the guarantees you have in that contract -- the room block and F&B pickup and all the rest -- is not necessarily going to be applicable. If you’re going to reposition the program, you want to look hard at what the block is, what your guarantees are and what the ripple effect is.
In a lot of situations we might be willing to say we want the same rates we got this year. Let me tell you something I think is going to happen: The rates next year are going to be a little bit lower just in order to get people to come to the event. The pendulum has quickly and rapidly shifted from a seller’s market to a buyer’s market. Yes, we’re going to have hard-ball negotiating still. That’s part of the game. But the key element here is looking at all of the situation, making your judgments based upon the best information that you have. And have your contracts reviewed very carefully as to anything you’re going to do in the future.
A lot seems to depend on how each side is defining words like impracticable, impossible, implausible, illegal or improbable. There doesn’t seem to be an all-encompassing term for this.
Unfortunately, no, there is not. If I put in my contract, for instance, what the purpose and the reason for the meeting is and I have that it would make it impracticable for me to hold the meeting because that purpose no longer can be fulfilled, I’m in a lot stronger position than I would be if I just said we’re going to have a meeting. Let me give you an example: If you have a program that is dependent upon Speaker A being there, you would put in your contract that the whole purpose of this program is to hear Speaker A, and that should Speaker A become unavailable, we reserve the right to cancel without liability. In that instance, you’ve hit a home run if Speaker A doesn’t show up.
We’ve got to think about what the purpose of the meeting is and let that be part and parcel of the agreement, if we’re going to have a commercial-impracticability or frustration-of-purpose opportunity to cancel without liability. Or to at least have an argument that we can get out without liability. (Read more about frustration-of-purpose clauses here.)
How do you see contracts changing going forward?
I often get the question, why have contracts gotten so long? And the reason is because they’re based upon bad experiences. Right now, we’re all going through a bad experience with Covid-19 and we’re going to try to address it, which is going to be in a way that’s most favorable to us.
The problem is, for a contract to be valid, it has to be mutual. In other words, the other party has to agree to it. But there’s no such thing as an ideal contract, because that ideal contract for you is not going to be the ideal contract for the other guy. So we’re going to be making adjustments to try to come up with some kind of compromise, some kind of middle ground that will address from both sides how we deal with these situations.
One thing we’re seeing now is a lot of contracts saying that if you’re going to cancel, you will rebook the program with this property. Or you have the right to rebook it in a certain amount of time. And a percentage of your cancellation fee or all of it would be applied against the future event.