Source: Robin Roth, Senior Contracts Editor, Conferon, Inc.
E-Specs: July 2, 2001

Here is a nutshell answer. Cancellation is a breach of contract, and in this country contract law does not approve penalizing a party as a remedy. Instead, the remedy is to make the non-breaching party "whole." If a contract clause is judged to be a penalty, the entire contract could be voided. Let us say the breaching party is the group. There are two ways to make the hotel "whole." One way is for the contract to be silent about cancellation. The parties would then go to court to determine the damages owed to the hotel, which would normally be lost profit due to the cancellation, but the hotel does have the duty to mitigate any such damages by using its best efforts to resell canceled rooms and space.

The second way is for the contract to include a liquidated damages clause, which sets the damages, or formula for the damages due, in advance. It is an estimate of the actual losses, but if both parties agree, and the terms are not a penalty (defined in part as the hotel making more from the cancellation than it would have made from holding the meeting), it is an easy solution that avoids having to go to court. Where there is a liquidated damages clause, the hotel normally does NOT have a duty to mitigate, but the hotels generally agree to mitigate in order to avoid the appearance of double-dipping: receiving money both for the resold rooms plus the liquidated damages payment.

(Note: This information is not intended to be "legal advice." A qualified attorney should be consulted to review all contract issues.)