Source: Robin Roth, Senior Contracts Editor
E-Specs: March 14, 2006

One of the most frequently asked questions in the area of hotel contracts is what is the meaning of the terms liquidated damages and mitigation? The meaning of these onerous-sounding provisions is not exactly intuitive, nor is how they relate to each other. Encountered most often in the cancellation and attrition clauses, the terms are related in the sense that each has something to do with breach of contract, but they can sometimes be considered contentious relatives when put together.

Liquidated damages means simply charges that are agreed upon ahead of time at the contract stage, as opposed to damages that are awarded later on in court if the contract is breached. For example, if the group cancels for reasons that are not specified in the contract, it constitutes breach of contract in legal terms and the group will owe damages to the hotel. In order to avoid having to go to court to determine the amount of damages, the group and hotel can agree upfront in the contract to a specific formula that will determine the amount due. Nowadays specific group cancellation clauses are drafted as a matter of course, and it is very unusual (and a significant downside) to encounter a hotel contract that does not include these specific terms.

Mitigation means the legal duty that the non-breaching party has to reduce the damages owed by the breaching party. If the group cancels, the hotel has a duty to resell the canceled rooms in order to reduce the damages owed by the group, thereby softening the impact.

The relationship of the two terms (and sometime the catch) is that if there is a liquidated damages clause, the hotel is not legally required to also agree to resell rooms. Mitigation by the hotel is only required if there is no formula or amount agreed to in the contract. In that case, the damages due would be determined after the fact in court. However, without mitigation, if there is a liquidated damages clause the hotel could potentially receive a double dollar amount for the same canceled rooms: first the charges due in the contract and second the revenue received when the canceled rooms are resold. For this reason and in the spirit of good will, hotels more often than not do agree to both liquidated damages and mitigation.

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