Sun claims Hilton's gross misconduct, settles dues

Sun Travels & Tours has fully settled the dues owed to Hilton International Manage (Maldives) Pvt Ltd.

According to Sun, it has paid a total of USD 31,252,874.46 directly to Hilton, which was awarded by the Singapore arbitration relating to Sun's termination of the Hotel Management agreement with Hilton, dated February 27th, 2009.

Sun also said it incurred an additional USD 5.6 million as cost of lawyers and experts in the arbitration proceedings.

Contract owing to Hilton's Preposition

Irufushi Resort, part of the Sun Travels & Tours' portfolio, located on Medhafushi in Noonu atoll is a 221-room, 5-star property developed by Sun. The resort was officially opened in August 2008, becoming the first-ever tourist resort to operate in Noonu atoll.

Towards the end of 2008, Hilton expressed interest in managing Irufushi while Sun had run the property's operations successfully since inception. Hilton indicated the property was at a standard higher than other 'Hilton' branded resorts, and "only a name change to the resort would be required in terms of re-branding".

Contract Entered Fraudulently

Hilton presented its initial projections demonstrating the additional revenue generated from the resort if it ran under the "Hilton" flagship. Hilton presented the intial projections to sun twice, first on January 30th, 2009 and again on February 06th of the same year; owing to Sun's rejection both times.

Hilton then presented a final projection for the resort on February 26th with "much higher revenue forecasts than the initial projections". 

Hilton also disclosed to Sun a set of numbers to demonstrate the revenue generated from another property, which was managed by Hilton at the time.

According to Sun, Hilton had changed the said numbers three times in a span of less than 30 days with the intention to induce "Sun into signing the Management Agreement, by fraudulently misrepresenting to Sun the profits" the resort would generate under Hilton's management.

Sun presented an example of this misrepresentation, noting that Hilton increased the projected occupancy in 2010 from 56% in the first projection sent in January to 68% in the second projection in February.

Moreover, the gross operating profit (GOP) for the same year, originally projected at USD 12.19 million in the first projection was increased to USD 16.55 million in the second projection, which was again inflated to USD 21.81 million in the final projection sent on February 26th, 2009 - without any basis, Sun said.

Sun further said that during the negotiations leading up to the Management Agreement, Hilton had indicated it would "voluntarily walk out" if it failed to meet the projected targets. Sun had relied on this representation from Hilton in entering into the agreement.

Confirmation of Foul Play

The resort was rebranded and commenced operations under the "Hilton" brand in July 2009. 

Sun said it was shocked when Hilton presented the resort's annual budget for 2010, which projected the resort would earn "significantly less revenue" for the year than disclosed in the projections. Hilton had reduced the average daily rate (ADR) of the rooms from USD 520 in the revised projections to almost 50% less in the budget.

Moreover, GOP was also reduced "along the same lines". Sun said this was clear indication that Hilton would not be able to match its projectsion, which eventually turned out as Sun had expected.

Hilton had frequently changed the numbers for its projectsion, which led to Sun believing the hospitality brand used "these numbers without any basis and only as a means to fraudulently induce Sun into signing the Management Contract".

Sun Bore Developmental Expenditure, Not a Dime from Hilton

Sun said the offer to take over management of the resort originated from Hilton, after which the management rights were handed over to Hilton through the agreement on the "basis that all operational costs would be borne by Sun".

Sun agreed to this on the premise that the local hospitality company would be "able to enjoy the profits represented by Hilton in its proposal".

"Hilton is not an investor of the resort. Hilton had not spent a single dollar for the development and operation of the resort. All such expenditure was borne by Sun. Simply put, Hilton took over management of an operating resort with all the facilities and employees, without any requirement to take on any financial burden," Sun said.

Resort Operated at Inflated Costs, Through Deception

Hilton had run the resort at an "extremely high operating cost during" the three years of its management.

Sun also claimed Hilton was consistently fraudulent and wasteful in procurement of consumables for the resort at "exorbitant prices" causing extreme financial loss to the company.

Additionally, Hilton may have paid extravagantly, beyond market rate, to employment agencies to recruit employees for the resort.

Sun also said the resort which was performing well before Hilton took over management, started to make loss because of Hilton's fraudulent conduct.

Hilton was also in breach of its obligations under the Management Agreement to carry out regular maintenance of the resort, Sun added, which also resulted in the property getting worn out beyond its age. Sun bore the cost of these repairs as well.

Hilton fraudulently misrepresented to Sun "very promising figures for GOP under its management"; USD 21.80 million in 2010, USD 24.05 million in 2011, and USD 28.46 million in 2012, but failed to achieve "anything close to these figures".

Sun had to rely on its related companies for advances to pay off the dues to government authorities and financial institutions. Sun was also forced to seek rescheduling of loans borrowed for the resort's development.

Despite Sun facing extreme financial distress, Hilton continued to claim its management fees under the agreement without any deduction.

Sun Was Forced to Terminate Agreement

Since Hilton failed to rectify its breaches to the agreement, on top of which Sun was incurring damages due to Hilton's mismanagement, Sun was "eventually forced to terminate" its agreement.

Sun said it was technically bankrupt by this point due to Hilton's fraudulent conduct throughout the management agreement.

Hilton had exploited the situation after the arbitration award was issued, using the media, various lobby groups and its overall influence "portray Sun in a negative light".

Moreover, Hilton misconstrued the public purporting it financed the development of the property, and Sun "kicked out the investor".

"This was not the case. The fact of the matter is, a property fully financed and developed by Sun, which was at a standard higher than what Hilton was looking for at the time, was handed over to Hilton to manage, and Hilton failed miserably to achieve the figures that they had promised," Sun said.

Sun said its decision to terminate the management agreement and take over the management  of Irufushi was a "necessary one to save the company" at the brink of bankruptcy. It added the step was "absolutely necessary" to protect the interests of Sun and maintain its image as a world-class hotelier.

Though Sun has paid the entire sum awarded to Hilton by the Singapore arbitration, Sun is still bearing the losses it incurred as a result of Hilton's mismanagement and fraudulent conduct.

Sun further affirmed to take all necessary steps to overcome the losses and explore available legal remedies.