Litigating lost group revenue tricky during pandemic
Litigating lost group revenue tricky during pandemic
17 MARCH 2020 8:13 AM

Group business at hotels is taking a hit amid the COVID-19 pandemic. Do hoteliers have any legal recourse to mitigate lost revenue due to cancellations?

REPORT FROM THE U.S.—As the COVID-19 pandemic continues its spread, groups and major events are canceling across the country. Hoteliers are reporting significant losses in revenue as meetings are called off or restricted due to states of emergency both on the federal and state levels, and the implications of broken contracts could have lasting effects, legal experts said.

“It’s going to have a far-reaching impact, on a case-by-case basis. These issues are going to come down to the contract that was entered into and the specific terms,” said Kent Schmidt, partner at law firm Dorsey & Whitney in its southern California office.

As hoteliers look to their insurance policies for relief, legal counsel on both sides will be diving into the force majeure clauses within contracts, sources said. The clause removes liability for natural and unavoidable catastrophes that prevent parties from fulfilling obligations of the contract.

Schmidt said each contract is unique, depending on how the force majeure clause is written. He said he has seen these clauses range in detail from a couple sentences to paragraphs to pages. The key is looking at the language of the clause—which isn’t always straightforward, an issue that could cause lawyers to grapple with such contracts for months to come.

“If you do have a force majeure clause in a contract, you’ve got to define what it is. If you don’t state the kind of event or have language broad enough to include the event claimed, it isn’t covered,” said Jim Butler, founding partner and chairman of the Global Hospitality Group of Jeffer Mangels Butler & Mitchell LLP. The issue then becomes: Does the COVID-19 pandemic fall under a force majeure event as defined in the contract?

“In the event of a force majeure, then what? Is everyone released? Do they get their money back?” Butler said. “The clause is by and large honored for its language. People are going to be unpleasantly surprised at how strictly these terms are interpreted.”

In the absence of a force majeure clause, lawyers will look to the doctrines of impracticability or impossibility. Impracticability excuses the duty if it has become unfeasibly difficult or significantly expensive. Impossibility means that it is virtually impossible to carry out the contract. An example that would fall under impossible is if a hotel contracted to hold an event burned down, Butler said.

“It’s impossible to perform because now there’s no property there,” he said.

The doctrine of impossibility could be triggered on contracts due to declarations by state governments and recommendations by federal officials to ban meetings of a certain number of people according to Department of Health guidelines, Butler said.

“These are questions that will have to be sorted out,” he added.

Timing of cancellations is an important piece to the puzzle, experts said.

“It’s all going to depend on how long this lasts,” Schmidt said. “If an event is scheduled for May and you pull the plug and it can be kicked a few weeks, then that’s going to be a possibility. The question becomes whether the hotel has the right to perform even if it has to be delayed, so they may still be obliged but have to do it at a later date.”

Butler said groups who “cried wolf too early” could be at a disadvantage. For instance, if a meeting was scheduled for 13 March and the group canceled it in January, it could be subject to contractual provisions. Simply put, if it’s impossible to have a meeting today due to legal orders, groups have an argument—but if the event was canceled before such orders were declared, the hotel may have some recourse.

Other implications
The question then becomes: Should hoteliers look to sue or collect fees on broken group contracts? If they do, what could that do for their public image or reputation?

“Particularly with the big hospitality companies, it provides a public relations issue,” said Paul Pautler, a partner in Husch Blackwell’s Kansas City office. “Most of them want to be seen as good corporate citizens. How does that play if they start suing groups because they aren’t traveling or because the WHO or CDC recommends not to travel due to social distancing? It doesn’t play well.”

Schmidt agreed, noting that judges and juries are people, too—and more than likely affected in some way by the pandemic, whether personally or economically.

“There’s a lot of latitude with respect to these contract doctrines. In some states, it can go to a jury; and in others, it will go to a judge,” he said. “You won’t be able to get a jury member who can raise a hand to say they (weren’t affected) by the coronavirus. You’ll be asking jurors who sometimes might be laid off from a job because of it, asking them to award sums of money to a company. They might think, ‘You can weather the storm better than I could.’ There’s an optics issue that applies to this.”

Either way, sources said the pandemic will cause all parties to pay closer attention to force majeure clauses in contracts moving forward.

“The force majeure clauses are sometimes very boilerplate. If it hasn’t been an issue before, companies and groups can get sloppy with the drafting because they don’t worry about something that doesn’t often come up,” Pautler said. “It takes an event like this, and the next time people will pay attention to the wordsmithing. It will bring a renewed attention.”

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