The high cost of combined contract clauses

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contract clause

An association conference was scheduled for spring 2019 at a Canadian hotel property. The most glaring issue with the association’s venue contract was the fact that it included two clauses related to Food and Beverage (F&B) that, when combined, were detrimental: Sliding Scale and Attrition.

The association’s minimum anticipated spend for F&B was $100,000. This was the Sliding Scale for F&B spend:

  • > $100,000.00 F&B: Meeting room rental charge would be waived, offered complimentary
  • $80,000.00 to $99,999.00 F&B: Meeting room rental charge of $20,000 will be applied
  • $50,000.00 to $79,999.00 F&B: Meeting room rental charge of $40,000 will be applied

Later in the contract was the Attrition clause for F&B which stated:

If the association’s F&B estimated spend was below the minimum F&B spend of $100,000, the hotel would advise the group of additional alternatives to increase the expenditure OR the hotel would subtract the actual F&B revenue from the anticipated F&B spend – and post the balance to the Master Account.

Independently, each of these clauses seems reasonable for the association.

scenario1Scenario 1 shows the impact of considering ONLY the Sliding Scale clause with a reduced F&B spend of only $60,000 – well below their minimum anticipated spend.   In this first scenario, the association would owe the hotel $100,000 in the circumstance that they didn’t reach their minimum anticipated F&B spend.

scenario2Scenario 2 shows the impact of considering ONLY the Attrition clause with a reduced F&B spend of only $60,000. In this second scenario, the association would owe the hotel $100,000 in the circumstance that they didn’t reach their minimum anticipated F&B spend.

However, the proposed contract included BOTH the Sliding Scale and the Attrition clause.

With both clauses included, on a $60,000 Food and Beverage spend, the association would incur $60,000 F&B plus $40,000 meeting space rental AND $40,000 (difference between anticipated and actual spend).

In this third – and actual – scenario, the association would owe the hotel $140,000. Forty percent more than their anticipated spend!scenario3

There are two lessons here:

  1. Do the math. Calculate your costs for EACH clause in the contract. And calculate your costs in worst-case and best-case scenarios.
  2. Consider the contract as a whole. Clauses may make sense independently, but they can be extra-punitive when combined. Take into account all applicable clauses when calculating your costs.

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