Contract Addenda Risk?: Standard Hotel Mtg. Contractual Language Could Spur Litigation

As more corporations draft standard addenda to hotel meeting contracts, industry consultants warned both buyers and suppliers that they may be at greater risk for litigation. However, buyers said setting up master contract agreements with preferred hotel chains can make the negotiating process faster and safer.

Hospitality industry attorney Steven Rudner of Rudner Law Offices said during the past 18 months he has seen more groups approach hotels with their own addenda than ever before. Of these master contract agreements, a majority have serious flaws buyers could address easily, but 10 percent are flawed beyond repair, he said. Rudner said he has seen problems in such typical meetings contract addenda as non-compete clauses, confidentiality provisions, indemnification, limitation of liability, renovation clauses, attrition and credit clauses and lowest room rate guarantees.

Most of the problems slip through, Rudner said, and both hotels and buyers are signing "Trojan horse" addenda that actually open up the corporation or hotel to greater legal risks. For example, Rudner said 10 "prominent companies" use a specific indemnification clause that states the hotel agrees to waive "any and all claims" against a group for damages "unless and to the extent such claims or liabilities are caused by the group's gross negligence or willful misconduct." While the clause may seem to provide protection, a group simply needs to say it didn't willfully fall short of its room commitments and the hotel cannot claim attrition fees, he said.

"Some of these clauses are intended to not raise any issue or concern on the part of the people that are reading the clauses but they have the effect down the road of having serious implications on the enforcement of the contract on both sides," he said.

Although Rudner was not aware of any recent legal action on the basis of contract addenda, he expected a lawsuit to be filed within the next six months.

"It's going to happen. We have the luxury in this industry of seeing trends evolve before our eyes," Rudner said. "All of the contracts that are being signed with these addenda in the last 18 months, some of them will result in meetings that were cancelled or meetings at which there was attrition. Some of those will lead to litigation and then we'll be fighting about these clauses."

A standard addendum written correctly can be beneficial to a company, Rudner said, and corporations should be able to add individual protections into a contract. However, many of the procurement departments that have taken a greater role in meeting sourcing are not trained in the specialties of meeting terminology and contract needs and even corporate legal departments do not necessarily understand the complexities of event contracting, he said.

"For 15 years, our industry has relied essentially on trust, because it was a relationship-driven business and grounded in the long-term relationships between planners and suppliers. The procurement people are new to this game, and they have just come to the table without that long history," Rudner said.

Corporatre meeting buyers said contracts are best left in the hands of experts, and that although every contract brings legal liabilities, standard addenda are an industry trend.

"You can show a contract to three different lawyers and what you'll get back is three completely different sets of suggestions," said Kari Knoll Kesler, manager of meeting and events at Honeywell Inc. and co-chair of the groups and meetings committee of the National Business Travel Association.

Kesler said strategic contract management is not about the details in a contract, but rather about how to better manage contracts from an industrywide perspective. Rather than focus on correct contract terminology, Kesler said, meeting buyers should focus on why it is important to include addenda and what impact they can have on the corporation.

"Just as standards and templates are great in every other discipline, it's important in this arena too," Kesler said.

Typically, both meeting buyer and the hotel representative with whom they negotiate are not trained lawyers, Kesler said. Templates and standard addenda can help smooth contract negotiations.

Although procurement departments tend to include contract specialists, Kesler said many misconceptions about meeting contracts persist.

"The first misnomer is that every meeting has a contract, but actually they can have up to 12 contracts, 24 contracts, depending on the scope of the meeting. They almost never have just one contract," she said.

Another problem that Kesler sees emerging is that major hotel chains have developed their own standard contracts, only to see meeting buyers attempt to do the same thing.

"This is another point where our goals are not aligned. It's a lot deeper than saying addenda are worded incorrectly," she said.

Timing issues are also "huge" as one fundamental distinction of meeting contracts is that they are time-sensitive, but not necessarily in an intuitive way, Honeywell's Kesler said. Agreements for events two years in the future could be due immediately, while agreements for events two months in the future may be more flexible.

"As we all know, you don't have the space until you sign the contract," Kesler said.

Hospitality industry attorney Jonathan Howe, president and senior founding partner of Chicago-based Howe & Hutton Ltd., said contract issues are always a top concern for meeting buyers, and that he sees an industry trend toward standard addenda.

Lisa Stanford, program administrator for travel and meeting services for Houston-based ConocoPhillips Co. (see story, page 60), said there are two parts to her company's standard contract addendum: legal protections required by the company in all contracts and meetings-specific clauses.

"The second part is to help protect us in case of a cancellation and it deals with rebooking the space within 12 months versus paying a cancellation penalty," Stanford said, adding that meetings-specific clauses"also protect us in case the hotel overbooks and they can't accommodate us. We are then compensated."

ConocoPhillips implemented standard addendum agreements at frequently used properties and hotel chains. Stanford signs an umbrella contract for the year so that subsequent contracts only need event-specific details.

"All terms and conditions apply for every meeting and then all we do is a smaller contract for food and beverage, the specific cancellation dollar amounts and the number of room nights we've committed to, that all we have to look at," she said.

Most hotels have responded favorably to the addendum, but Stanford said she has experienced some pushback.

"If a hotel came back and said 'Absolutely not, we're not going to take any of these,' it would not be a deal-breaker," Stanford said, "but it is our hope that they would take most of what we're asking for."

The standard addendum also levels the playing field in hotel contracts, she said. Since hotels are not in the business of protecting a corporation's interests, meeting buyers should draft clauses that reduce risks for their companies.

ConocoPhillips also assigns a member of its legal department to work with the travel and meetings department.

"She's very familiar with travel and meeting terminology and so when she reviews our contract we don't have to go through that learning curve of bringing her up to speed on what the terminology is," Stanford said.

Tom Chevins, senior vice president of sales and marketing for Omni Hotels, said he has seen an increase in addenda on meeting contracts, but that his hotel chain tries to set up master agreements when possible. Once an addendum is approved by Omni corporate headquarters, he said, it is sent to each property and the sales staff.

"If that's the way our customer wants to do business, that's fine. We just like to look at it in advance and have our legal department look at it, and then not have to go through the process with every hotel," Chevins said.

It's difficult to predict how much time it will take to review a standard addendum, Chevins said, because every company has a different approach. Omni relies on its legal department to protect the chain in contracts.

"I don't know if hotels are the best equipped to modify or craft legal language, and, at the same time, I don't know that on the other side, unless it's coming out of the legal department, they they're the best equipped to do that. When contract language is a problem, it's possibly because there was some modification done to it that was not done by an attorney," he said.

One problematic clause that Chevins said he has seen more often in meeting contracts is a non-compete clause that does not specify who the company views as competitors. Since the competitive landscape for Fortune 500 companies changes rapidly, Chevins said the chain would rather have the corporation be responsible for identifying competitors.