After missing the deadline for substantial completion of the Baha Mar Convention Center in January 2015, Baha Mar President Thomas Dunlap said China Construction America (CCA) started demanding tens of millions of dollars to which it was entitled only on completion of the project, and even submitted inflated invoices – in one case demanding more than $340 million for work which China Export-Import Bank’s own independent project monitor asserted was worth only $76.1 million.
Baha Mar Ltd. knew by early 2013 that CCA was unlikely to meet the construction schedule without “corrective measures”, including boosting its workforce significantly, and despite the developer’s attempts to tie the general contractor to commitments enshrined in contracts and agreements, it is not certain the 44-month timeline was ever possible.
Still, Dunlap explained that it was based on a commitment from CCA – given at a board meeting in December 2014 – that a unanimous decision was made to commence taking reservations for the new hotels and convention center from the public starting March 27, 2015. Failure to meet that commitment cost the developer in excess of $6 million.
With less than $113 million remaining of the $2.5 billion loan from China Export-Import (CEXIM) Bank juxtaposed against a $7.5 million monthly wage bill, a bankruptcy case in Delaware and a lawsuit for about $200 million against CCA in the UK, the future of Sarkis Izmirlian’s resort village is cloudy.
Relations between Baha Mar and China Construction America (Bahamas) have been strained far longer than it would appear in the public arena, if the accusations levied against the contractor by the developer are any indication.
In his first day pleadings, Baha Mar President Thomas Dunlap, who was appointed by the Baha Mar board of directors to represent the phalanx of companies seeking bankruptcy protection in U.S. Bankruptcy Court in Delaware, painted a clear picture of the developer’s attempts to ensure the timelines were met and the standards were kept high.
CCA appeared to have been caught off-guard by the news that Baha Mar had filed for bankruptcy and had subsequently sued CCA in England, and no statement has as yet been issued by the company. Guardian Business understands that a statement from corporate headquarters is imminent.
Baha Mar reported that CCA had agreed to a schedule for the project which anticipated construction completion by November 20, 2014 as well as to liquidated damages for late completion.
As reported by Guardian Business, the developer noted in the supporting documents appended to the bankruptcy filing that although CSCEC (operating through its various subsidiaries) is one of the world’s largest contractors, it had little experience in constructing single-phase resort projects of the size and complexity of the project.
“In June 2011, to address this concern, CCA agreed that it would partner with one or more experienced contractors on the project. No such partnerships ever materialized,” Baha Mar President Thomas Dunlap said.
CCA then agreed to hire more than two dozen top-level personnel from Las Vegas with experience constructing projects similar to the project. Less than a dozen such people were ultimately hired, however, and all but a few of them had left the project within a year.
“Moreover, although CCA required the debtors to obtain approval from the government of The Bahamas for 5,000 worker permits, CCA’s work force never reached that level, even at peak staffing, and on average was substantially lower.
“By early 2013, notwithstanding CCA’s repeated assurances to the debtors, the government of The Bahamas, and CEXIM Bank, it had become clear that, absent corrective measures, CCA would not meet the construction completion schedule. As a result, the debtors demanded that CCA, among other things, increase its manpower to accelerate the work,” Dunlap said.
On May 17, 2013, Baha Mar Ltd. and CCA entered into a memorandum of understanding (“MOU”), witnessed by the Bahamian ambassador for the People’s Republic of China, setting out agreed items, including increasing the amount of labor working on the project, interior finish packages and target construction completion dates. These completion dates included a commitment by CCA that the debtors would receive 100 percent access to, at a minimum, the key ballrooms and meeting rooms of the convention center on or before March 31, 2014.
Dunlap asserted that within a short period after it was executed, however, CCA breached the MOU by failing to increase staffing and management, and by failing to provide the debtors with access to any part of the convention center by March 31, 2014.
On May 16, 2014, Baha Mar Ltd. commenced proceedings to seek relief from the dispute resolution board (DRB”) pursuant to the main construction contract. The DRB issued a decision and opinion on August 13, 2014 in which it ruled, among other things, that CCA had been proceeding in breach of the main construct contract “with respect to the timing and content of the construction schedules” and by “failing to proceed expeditiously with adequate forces sufficient to comply with the [main construction] contract”.
The DRB also ruled that CCA had a continuing obligation to maintain a workforce at the levels demonstrated during the DRB hearings.
Dunlap noted that as of the end of June 2015, both Baha Mar Ltd. and CCA continue to have claims pending before the DRB pursuant to the main construction contract, as well as the November 19, 2014 meeting minutes.
Frustrated negotiations
The Baha Mar president asserted that by September 2014, following months of what he termed “increasingly contentious relations with CCA and CCA’s blatant disregard for the DRB ruling,” it became clear that CCA would not complete the project in time to open by its December 2014 target date.
“The debtors swiftly implemented measures that ensured their ability to operate through at least early April 2015 without generating post-opening revenue or requiring additional liquidity to survive. Among other things, the debtors reduced their existing staff, postponed new staffing hires, and delayed marketing and advertising expenditures slated for its pre-opening launch campaign. Moreover, in extending their budget, the debtors also had to account for additional quarterly payments to CEXIM Bank of $25 million each.
Continued negotiations for an agreed schedule for a revised construction completion date for the project stalled because CCA refused to make any concessions unless and until the debtors accepted responsibility for and made advance payments of the contractor’s backlog of disputed costs and change orders, he said.
In November 2014, in-person negotiations were held in Beijing among CEXIM Bank, Baha Mar and CCA. At the conclusion of those negotiations, meeting minutes were signed on November 19, 2014 among Baha Mar Ltd., CCA and CEXIM Bank (the meeting minutes). The meeting minutes reflected the agreement of the debtors to essentially “buy” dates certain for the construction completion of the project in an effort to mitigate the impact of CCA’s breaches of its commitments to achieve such completion as required by the main construction contract.
Specifically, in exchange for receiving from the debtors a total of $54 million of advances on disputed claims, CCA agreed that “upon January 19, 2015, except for the wedding chapel and elevator tower, the rest of the convention center will be substantially complete and ready for operational start for paying guests”. The contractor also agreed to substantial completion of the project to achieve operational start for paying guests in hotels including amenities by March 27, 2015. To ensure that it met these now-delayed milestones, CCA further agreed to take measures for the “improvement of work productivity” and the “enhancement of on-site management.”
Repeated assurances
Dunlap reported that on December 5, 2014, at a meeting of Baha Mar Ltd.’s board of directors, CCA reassured the board that the project would open on March 27, 2015. In reliance on this reassurance, the board voted unanimously to commence taking reservations for the new hotels and convention center from the public starting March 27, 2015.
“In early January 2015, the developer and the prime minister of The Bahamas met in Beijing with representatives of CEXIM Bank and CCA. During these meetings, CCA representatives confirmed that the project would open on March 27, 2015.
“Following these assurances and already having made advanced payments to CCA totaling $54 million in accordance with the meeting minutes, the debtors began to prepare for their new targeted opening dates,” the president said.
As noted, the developer hired an additional 2,070 employees and staff between January and March 2015 at an aggregate additional cost of more than $4 million per month. In addition, Baha Mar spent substantial funds on a preopening marketing and advertising campaigns, fully stocking their facilities with food and beverage supplies and other inventories, and stocking their vault with the $4.5 million in cash necessary to open the casino.
CCA failed to complete the convention center for the agreed upon opening date of January 19, 2015, but continued to give detailed assurances that the entire project including the convention center would be completed and ready for opening by March 27, 2015.
“Moreover, as was typical throughout the life of the project, I met in person with the president of CCA on multiple occasions each week. At none of these meetings did the president inform me that CCA would not complete the project on time,” Dunlap reported.
The money
Dunlap also explained that, during this time, CCA executives began asking Baha Mar to release retainage amounts – funds Baha Mar is contractually obligated to pay only when the project is “substantially completed” – which amount is currently approximately $70 million.
Additionally, he said, CCA began to submit inflated invoices for work.
For example, the debtors received monthly pay applications from CCA for the period February through May 2015 in an aggregate amount of $343.8 million for work in respect of which CEXIM Bank’s own independent project monitor countersigned at a value stated to be worth only $76.1 million.
CCA failed to complete construction by March 27, 2015 without providing any effective advance notice to the debtors, the president said.
“Upon admitting such failure, rather than provide a new construction completion date, CCA preferred to discuss payment and funding issues. Shortly thereafter, CCA ceased all material work on the project. As a result, the debtors were forced to cancel months’ worth of room reservations and group meeting events and provide numerous customers with vouchers, refunds, and in certain cases were required to find customers suitable accommodations elsewhere, all at a cost in excess of $6 million,” Dunlap said.
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