Sun Travels & Tours Pvt Ltd (“Sun”) has fully paid the arbitration awarded by Singapore arbitration to Hilton International Manage (Maldives) Pvt Ltd (“Hilton”) in relation to Sun’s termination of the Hotel Management Agreement dated February 27, 2009.
According to Sun, it paid the total sum of USD 31,252,874.46 to Hilton, and additionally incurred another USD 5 million as costs of lawyers and experts in the arbitration proceedings.
Irufushi Resort, located on Medhafushi in Noonu atoll was developed into a 221-room, 5-star property by Sun, and opened its doors officially to the guests in August 2008.
By the end of 2008, Hilton stepped forward with a management proposal while Sun had been running the property successfully since its inception.
Hilton Proposes Management of Irufushi
Hilton had indicated the resort was developed at a standard higher than the other “Hilton” brand properties, and added that only a name change of the resort was required as part of the re-branding.
The hotelier first submitted version 1.1 of initial projections on January 30, 2009 projecting an occupancy of 56% in 2010, which was later recouped up to 68% in the version 1.2 initial projections submitted later on February 6, 2009. This figure next shot up to 74% in the revised and final projections submitted on February 26, 2009.
Moreover, the gross operating profit (GOP) originally projected at USD 12.19 million in version 1.1 was next bumped up to USD 16.55 million in version 1.2. This figure then increased to USD 21.81 million in the revised and final projections. Similar changes were made to the 2011 and 2012 numbers as well.
During the negotiations, Hilton had indicated that it would voluntarily walk out if it failed to meet the projected targets.
First Signs of Foul Play
The “Hilton” rebranded Irufushi commenced operations in July 2009. However, when it presented the resort’s annual budget for 2010, Sun was surprised to learn that Hilton had projected the resort would earn significantly less revenue in 2010 than initially disclosed.
Hilton reportedly reduced the average daily rate (ADR) of the rooms from USD 520 in the revised projections, to almost 50% less in 2010 budget.
No Pennies Put!
The agreement was a clear-cut management contract, initially proposed by Hilton, and as such the management rights were handed over to it by Sun on the basis that all operational costs would be borne by Sun.
Sun was also under the belief that it would benefit the profits represented by Hilton in its proposal.
Sun also made it clear that Hilton was not the investor of the resort, and had not spent a single dollar for the development and operation of Irufushi.
Running on Losses and Fumes
Sun reported that Hilton ran the property at an extremely high operating cost during the 3 years of its management. It was also heavily embroiled in fraudulent and wasteful procurement of consumables for the resort at extravagant prices; which in turn caused significant financial losses for Sun.
Hilton may also have paid extravagantly to employment agencies to recruit employees to the resort, thereby driving up the expenditure of Sun.
The hotelier was also found to be in breach of its obligations under the agreement, to carry out regular maintenance; which was the main reason why the property was worn out beyond its age.
Fraud Alert!
Hilton fraudulently misrepresented promising GOP figures to Sun under the management, and as such it promised the following;
- USD 21.80 million in 2010
- USD 24.05 million in 2011
- USD 28.46 million in 2012
However, Hilton failed to achieve “anything close to these figures” while Sun had to rely on its related companies to furnish advances to pay off dues to government bodies and financial institutions.
Sun was also forced to seek rescheduling of the loans it had borrowed for the development of the resort.
The Hands were Forced
Sun said it was forced to terminate the agreement with Hilton since the latter failed to “rectify their breaches of the Management Agreement”, and since Sun incurred significant losses due to Hilton’s mismanagement of Irufushi.
At this point, Sun was technically bankrupt because of Hilton’s fraudulent conduct.
Sun also alleged that following the arbitration award, Hilton exploited the situation by using media, various lobby groups and its overall influence to purport Sun in a negative light.
Hilton had misrepresented its position as the investor of the resort and Sun had kicked it out.
Sun claimed its decision to terminate the agreement and reclaim management was necessary to save the company from bankruptcy and protect its interests while maintaining the image as a world-class hotelier.
While noting that Sun had incurred losses due to Hilton’s mismanagement, it affirmed to continue taking all necessary steps to overcome the losses and explore legal remedies.