Contract Negotiations After COVID-19 Have Taken a Different Turn as Requirements ChangeApril 19, 2021

April 19, 2021

Contract Negotiations After COVID-19 Have Taken a Different Turn as Requirements Change

Photo Courtesy of Judy Payne

Photo Courtesy of Judy Payne

Contracts have always been in a state of flux as planners and hoteliers refine their standard terms to protect their interests. Now, COVID-19 is prompting further changes to these already complex documents and the negotiations based on them.

Several questions loom for planners negotiating for meetings in 2021 and beyond: What level of attendance should be projected, given the uncertain trajectory of the pandemic and the social distancing requirements that may still be in place? To what extent should the buyer’s market created by the pandemic be exploited? And, perhaps most importantly, how should force majeure be adjusted in light of the many conflicts COVID-19 has wrought over this clause?

Answering these questions is among the essential first steps to getting face-to-face meetings back on track this year. Another vital step is finding the best negotiation partners in a post-COVID-19 destination marketplace. “We will pick cities that we find have good rates and safety regulations,” says Judy Payne, CMP, director, meetings and travel with Grapevine, Texas-based GameStop. “And, most importantly, when we talk to our peers, they’ve been finding cities that are working with the planners to find solutions during this COVID time.” Flexibility in the negotiation process is more important now than ever, and planners can, in part, rely on their peers to gain insight into which suppliers are exhibiting the most understanding with the challenges involved in meeting during a pandemic, or during the aftermath of one. This includes contractually agreeing to provide the kind of function spaces that allow for social distancing.

Err on the Side of Caution

Hotels will also need to adjust to the fact that, due to social distancing, a group may look for a meeting space-to-sleeping rooms ratio that is not ideal for the property. “Certainly, what you’re seeing is a reduction in the number of sleeping rooms and an increase in the amount of space that is being taken, with the anticipation that there will still be social distancing,” notes Jonathan T. Howe, founding partner and president of Howe & Hutton Ltd. Planners do well to err on the side of caution and project conservative attendance numbers. He says, “One of the things I’m suggesting is, if you’re booking new business, what is the number [of attendees] that you think would come based on your experience right now? Not your experience in 2019, which was a bumper year.” He continues, “So, what you might want to do is, in your contracts, sort of a reverse [attrition] of not how much you can decrease your room block, but rather how much you can increase it, if you’re lucky and suddenly it looks like you’re going to have more people wanting to come.”

CVBs and hoteliers have been quite aware of the lower numbers expected for face-to-face meetings going forward, and many have been offering attrition penalty-free deals — but by and large, these offers have only applied to meetings booked for last year. In addition, such deals are less attractive to corporate planners whose events have required attendance and do not face potential attrition. And that requirement will not be in place without the elimination or significant reduction in pandemic-related risk (e.g., with the release of an effective vaccine). “Most of our events are going to be corporate learning, education and executive training, with mandatory attendance for employees. So, we can’t require our attendees to participate when the scenario still isn’t 100% safe,” Payne says.

Face-to-face meetings will return, but new health guidelines and other mandates mean contracts — and the negotiating that goes on beforehand — must adjust to meet ‘the new normal.’

Face-to-face meetings will return, but new health guidelines and other mandates mean contracts — and the negotiating that goes on beforehand — must adjust to meet ‘the new normal.’

A Buyer’s Market?

With the drought in meetings business that hotels have undergone, even bookings for groups with reduced attendance due to social distancing will generally be welcome. Indeed, the pandemic has swung the pendulum back to a buyer’s market. “The organization is in a stronger bargaining position than is the property,” Howe says. As a result, “you want to get the best possible deal you can, and the market conditions are going to help you make that decision of how far can you push the other side. They can always say no, and then you make the decision as to whether to pursue it further. You don’t want to upset relationships but, unfortunately, a lot of those relationships are not going to be there because a lot of those people have been furloughed or are seeking out new careers.”

Moreover, the buyer’s market is likely only temporary, so it’s best to take advantage of lower rates and greater openness to concessions while they last. “I think at the beginning it will be a buyer’s market because we’re going to see companies slowly start to ramp up their meetings,” Payne predicts. “Once the floodgates open, there is only so much space that’s available to book, so the rates will climb.”

Some planners are encountering less of a buyer’s market for programs they’re rebooking. “For meetings that we’re rebooking it is not [a buyer’s market]; they’re still adamant and still very difficult to work with,” says Mary Alice Kahanek, CMP, senior manager, live events, with Houston, Texas-based Goodman Manufacturing. “But, for anything new for [this year and next], it’s definitely a buyer’s market.” She gives an example of increased pricing flexibility that may well have been prompted by those market conditions: “We’re booking an incentive trip for [late spring] in Anguilla, and the resort normally charges $30 per person for any F&B event for setup in lieu of a room rental fee. For the first offer, they dropped it to $15, and I didn’t want to pay it because that, to me, is a room rental. And they came back and dropped it to $5, and I agreed to that.”

It’s also worth noting that the combination of the buyer’s market and the fact that many groups will be smaller — perhaps coupled with a larger virtual attendance — will open up new site selection possibilities for some planners. “I think it will be a great opportunity for companies to come in and take advantage of new properties they haven’t seen before — maybe go to higher-tier cities and get some new great deals,” Payne says.

Force Majeure

Apart from rates and concessions, one of the most crucial contractual items to be negotiated going forward is the force majeure clause, specifically in regard to the pandemic. Ideally for the group, the language will broaden the conditions under which a pandemic counts as force majeure. Typically, force majeure clauses include pandemics, “but the caveat is [that the pandemic] makes it impossible or illegal to hold the meeting,” Howe notes. “And we can argue in many of these instances that COVID has made it illegal to hold the meeting as you initially intended to do it, and maybe even in some cases impossible. But, if we have language in there, [such as] ‘inadvisable’ or ‘impracticable’ [to hold the meeting], then you have probably a bit better chance of getting out on the basis of force majeure. But, you have to show that the force majeure is going to be there at the time of the program as a trigger. What we’re seeing is a lot of brinksmanship as to people waiting as long as they possibly can to pull the plug, with the hope that the force majeure event will be occurring over the time of their meeting.”

It should be borne in mind that Centers for Disease Control and Prevention (CDC) recommendations against public gatherings do not establish pandemics as a force majeure if the clause uses the “illegal or impossible” definition. “The CDC recommendations are all recommendations; they’re not the law,” Howe explains. “But if you have something in your force majeure that allows you to escape liability based on recommendations or advisories, then you’re a step ahead.” Thus, including “inadvisable or impracticable” certainly expands the protection the clause offers the group.

“You want to get the best possible deal you can, and the market conditions are going to help you make that decision…” — Jonathan T. Howe, Founding Partner and President, Howe & Hutton Ltd.

Along these lines, Kahanek notes that her updated force majeure clause includes the phrase “reasonably impossible.” She explains, “What concerns my attorneys has been that it may not be totally impossible [to hold the meeting due to the pandemic], but what if it’s 75% impossible, and we can only get 20 people there instead of 80?” While “reasonably impossible” is rather open to interpretation, Kahanek maintains there are some clear case — for example, if half the country is shut down and the attendee base is widespread, or a key airport is closed and alternate airports are many hours away from the meeting site.

Scenarios that prevent a significant number of people from getting to the site may be construed as frustrating the purpose of the meeting. “Most contracts will say this will be a meeting of the XYZ business, and never say what the purpose of the meeting is. So you want to be very clear up front — probably the second paragraph after the parties — as to why you’re holding the meeting,” Howe recommends. “Because when you have a purpose in there, if that purpose gets frustrated for some reason, you have the argument of getting out of the contract on the basis of frustration of purpose.”

When expanding force majeure beyond “illegal and impossible,” it’s also important to remember that those performance terms also apply to the hotel. “Force majeure works both ways,” Howe notes. “We have had situations where the hotel comes back and says, ‘We’re not going to be able to do it; therefore, we’re invoking force majeure,’ and that means the parties go back to basically ground zero.” For example, staffing issues that develop due to the pandemic may make it, not impossible, but only “reasonably” impossible to accommodate a group’s event as it was contracted. The hotel could then attempt to cancel without liability based on the same clause, showing it had exerted its best efforts to replace staff and so on.

Kahanek adds that her updated force majeure clause also stipulates that the events can be foreseen or unforeseen, “because they can come back and say, ‘This was foreseen and you didn’t cancel a month ago.’” She has found that in negotiating contracts for this year, hotels are definitely more agreeable to the updated force majeure language. If “reasonably impossible” is not accepted, “it’s likely I will have to take this one to my executives and say, ‘This is the risk; do you want to take the risk?’ And, if not, then we’ll cancel it altogether.”

She has also found that hotels are currently more agreeable to a longer cancellation window. “I had two incentive trips that were going to Key Largo [last year in the spring]. When I rebooked them . . . the hotel gave me 60-day cancellation [typically, penalty-free cancellation is restricted to about 180 days prior to the meeting date]. So, I cancelled the one in September with no penalty,” she relates. “I understand through my third party that I work with that it seems like hotels are negotiating cancellation terms more favorably, so that is something that I will be doing in the future.”

Cancellations due to the pandemic have unfortunately resulted in conflicts between the parties in many cases, and it is such conflicts that are motivating the evolution of the force majeure clause. Even with a “pretty robust” clause, Payne’s team encountered some difficulties in invoking it for COVID-19. Within the force majeure, she said they were covered under restricted travel, government regulations, corporate travel restrictions and disease. With all four of those things being part of COVID and part of what they had been seeing, she says she felt like they should have been easily released from their contracts. However, she says, she felt like half of their partners released them and the other half continued to fight them, which she says was “really strange because the cities [were] closed, and the convention centers [had] major restrictions. They also [restricted] multi-day events. So all of these things we [fell] under based on the governor’s expectations and guidelines, yet we [were] still having problems getting out of the contracts. They [were] still seeing it as a breach.”

Kahanek also had her share of challenges with cancellations last year. “The hotels that we use on a regular basis in Houston, they’ve been amazing because they know the value of the business and they had no problem postponing or cancelling because they know we’re going to be back. [Cancellations for] hotels that we do for incentives have not gone as smoothly.” Neither did the cancellation for Goodman’s national sales meeting, which had been scheduled during the spring last year. About a month prior, Kahanek tried to invoke force majeure based on COVID-19 lockdown orders. “Every day was a stronger case, and I remember that hotel in Dallas told me, ‘Well, there are no cases here so you can still come’ and I thought ‘It’s just a matter of time.’ To get out of the contract, I even offered them two years: rebook it [to this year], and then in 2023, at your location because [the national sales meeting is] every other year. They would not do that, because they wanted 2021 and 2022. We negotiated with them really hard, I had my executives and attorneys involved, and they pushed me to find a win-win without having to take them to court. A week before the meeting [date], they called and said, ‘We will accept the cancellation as a force majeure’ — and this was when the whole nation was closed down.”

Negotiating can be tough, but the payoff is worth it when both sides agree and everyone is protected. Photo Courtesy of Judy Payne

Negotiating can be tough, but the payoff is worth it when both sides agree and everyone is protected. Photo Courtesy of Judy Payne

Damaged Relationships

Unfortunately, the kind of friction between negotiating parties that Payne and Kahanek describe can sometimes sour relationships. “It damages the partnership along the way,” Payne says. The cause of the friction is not any ill will, but rather the fact that “everybody is fighting for their own best interest at this point because every company is hurting,” she says. When the hospitality industry fully emerges from this crisis, parties will be more aware of the conflicts that can arise over force majeure. “I think people are going to be a little more careful as to what they look at as a performance excuse,” Howe says. The clause should explain, “How can I get out of this contract without liability if XYZ happens or doesn’t happen, and be more specific and protect yourself.” Along with attrition calculation, force majeure is among the clauses that have seen the most evolution, and so refining it further in light of experiences with COVID-19 is to be expected. “For us, the force majeure has always been kind of a living clause,” Payne says. “It’s never something that has just been stagnant; it’s something we look at throughout the year and update based on things that we’re seeing around the world. That’s why we did include the government regulations and disease clauses within our force majeure. I think we’re going to see a lot more detailed negotiating over that clause.”

The industry is also seeing more hybrid meetings in the near future, and thus negotiating any associated on-site technology fees will become even more critical. “A/V and Wi-Fi are already two of the most expensive things, other than air, hotel and food,” Payne says. “But we’re going to see those climbing, and that worries me because, as we have a bigger need for them, we’re going to see bigger rates.”

The emphasis on hybrid events may well be temporary, however, as attendees in general yearn for face-to-face connection. Both Payne and Kahanek report that their companies’ employees are eager to return to meetings as they were held in 2019. While COVID-19 was devastating for face-to-face meetings last year, it has at least led to a careful rethinking of the force majeure clause that can only improve risk management for the face-to-face meetings of the future. C&IT

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