Grant Hyatt Hotel Project Govt. suffers mammoth loss due to termination of contract

The much debated Grand Hyatt Hotel Project in Colombo, which allegedly involved financial frauds amounting to billions of tax payers’ money during the previous regime, is now facing yet another hurdle following an order delivered against it at an arbitration tribunal in Singapore.   

Italian contractor Interna Contract Spa, who was awarded the interior package 2 of the Grand Hyatt Project by the previous management, filed an arbitration in Singapore against Sino Lanka Hotels and Spa which is a subsidiary of Canwill Holdings (Pvt) Ltd for unlawfully terminating the contract they had entered into on January 7, 2015- the day before the change of Government. The formal award was delivered by the arbitration tribunal on October 6, 2017 against Sino Lanka Hotels and Spa. The order was to pay a staggering 7,432,062.72 Euros to Interna for the ‘unlawful’ termination of the contract. 

17 contractors had been initially selected and seven parties were shortlisted

the manner in which the contractor in question was selected by Sino Lanka raises many questions

 
Although the lawyers representing the respondent (Sino Lanka) argued that the arbitration venue should be Colombo as per the tender specification and the contract document, at the final award the arbitration tribunal didn’t consider the matter.   

Hence, Sino Lanka, filed an appeal in November 2017 against the arbitration award at High Court of Singapore. Meanwhile, Interna filed an application in the High Court Colombo requesting to enforce the arbitral award in their favour.

 The The respondent company meanwhile asked Colombo High Court to allow them time to make submissions till the appeal verdict is delivered, for which the date scheduled was May 30.   

However, in order to scrutinize the petition more carefully, when the case was taken up on May 30, the High Court of Singapore has informed that the verdict will be delivered on a later date and the next hearing date will be notified to the parties in due course.   

Although the tender and contract documents show that the place of arbitration shall be in Colombo, the reason for the contractor to file arbitration in Singapore was based on the Letter of Acceptance issued on December 22, 2014. According to clause 9 of the Letter of Acceptance (LoA), all disputes arising out of or in connection with the contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said rules and the arbitration venue shall be in Singapore and arbitration proceedings shall be in English.   

Place of arbitration

But sub- clause 20.6 of the tender document dated January 7, 2015, says, ‘a dispute shall be finally settled as per the Arbitration Act No: 11 of 1995 of Sri Lanka and the place of Arbitration shall be in Colombo’. Even the tender specification too states that the place of arbitration shall be in Colombo. When the previous management issued the LoA on December 22, 2014, the venue had been changed from Colombo to Singapore san Board approval. However, the contract document dated January 7, 2015-which was the final- declares that the place of arbitration shall be in Colombo. This is the legally binding document according to CEO Sino Lanka Hotels and Spa. 

When the former Project Consultant Hiran de Silva was asked as to why such changes were made to benefit the contractor, he said that these decisions had been taken by Piyadasa Kudabalage, but he (De Silva) was not responsible for the changes

 
CEO, Sino Lanka Hotels and Spa, D.R.P. Abeysinghe told the Dailymirror , that when the lawyers objected to the jurisdiction of the venue, the arbitration tribunal had given an assurance to look into that matter when they deliver their judgment. However, foregoing the requests made by Sri Lankan lawyers and despite the assurance given by the arbitration tribunal on the jurisdiction issue, the order was delivered against Sino Lanka for terminating the interior decoration contract unlawfully.   

Not only was the adjustment of the arbitration venue changed by Kudabalage without Board approval, but changes had been made to a few more tender clauses in the LoA (dated December 22, 2014) and in the Memorandum of Understanding dated January 7, 2015. It’s learnt that Kudabalage and Project Consultant Hiran de Silva had changed these clauses not to benefit the company they were representing as its MD/CEO and Project Consultant respectively and the Government of Sri Lanka, also the owner of the project, but allegedly instead in the best interest of the Italian contractor, due to personal reasons.   

Meanwhile how Kudabalage brought down the performance guarantee and the delay damages to suit the contractor’s requirements without Board approval has raised eyebrows. According to the LoA and the MoU, the performance guarantee shall be equivalent to 5% of the accepted contract amount, whereas, sub-clause 4.2 of the tender document to which the contractor initially agreed was 10% of the accepted contract amount.   

It was the same with the delay damages as well. Although sub-clauses 8.7, 14 and 15(b) of the tender document state that the delay damages for the work was US $ 50, 000 per day, 

which was accepted by the contractor at the time he submitted the bid, Kudabalage reduced the amount to US $ 25, 000 for each delayed day.   

When the former Project Consultant Hiran de Silva was asked as to why such changes were made to benefit the contractor, he said that these decisions had been taken by Piyadasa Kudabalage, but he (De Silva) was not responsible for the changes. “It was Kudabalage that took all these decisions as the MD/ CEO,” De Silva said.   

Meanwhile it’s learned how the former Board of Directors of Sino Lanka Hotels and Spa- Gamini Senarath (Chairman), Piyadasa Kudabalage (Managing Director/ Chief Executive Officer), N. Hapuhinna (Director), R. Semasinghe (Director representing Ministry of Finance) and Ms C.M.D.N.K. Seneviratne (Director representing EPF) selected prospective contractors based on the evaluations carried out by the Quantity Supervisors without following Government procurement guidelines.

   According to Abeysinghe, had the Government tender procedure been followed and if the tenders were published in local and foreign newspapers, reputed contractors would have had the opportunity to forward bids. As no structured pre-qualification process was followed important factors-which would have unearthed their financial strengths and the projects they were previously involved in-were unavailable, hence there being an inability to carry out an evaluation. The receiving of the company’s credentials from the prospective contractors are also questionable due to the absence of a proper invitation, details about the closing of invitation and submission records, it is learned.   

Not only was the adjustment of the arbitration venue changed by Kudabalage without Board approval, but changes had been made to a few more tender clauses in the LoA and in the Memorandum of Understanding dated January 7, 2015

According to the available documents, 17 contractors had been initially selected and seven parties were shortlisted. Although these documents don’t highlight the process Sino Lanka followed to select the prospective contractors, the former Project Consultant told the  that the list of international contractors was given to them by the top management of Hyatt International.   

Although Hiran de Silva states so, the manner in which the contractor in question was selected by Sino Lanka raises many questions, also bringing under the spotlight the way tender specifications were changed to benefit the contractor-Interna.   

Extending closing dates   

De Silva said that the selected three contractors from Dubai, Singapore and Italy were given to complete mockup rooms as per the specifications of the Interior Designer from Hong Kong. “Based on the evaluation of the quality and the performance criteria, tenders were called from these three parties for the hotel rooms and service apartments’ interior décor,” De Silva said.   

Kudabalage and the Board had extended the closing dates to submit bids on two occasions from August 22, 2014 to September 8, 2014 and then again to September 15, 2014 by bringing five addendums to the tender specification.   

It was found that in addendum no: 3 of August 28, 2014 the type of marble in the bathrooms had been changed to ‘Italian Bianco Venezia’ from the original marble type ‘Botticino (Turkey) which is technically of higher standard compared to the former which is of poor standard. Since Botticino (Turkey) was the type specified in the original tender and marble represents considerable amount of the interior design cost, it is questionable as to who gave orders to change the marble types when all mockup rooms were done using the higher standard marble and that there was no reason to make any changes.   

According to Hiran de Silva, the change of marble type had been done by the Interior Designer, but De Silva could not specify as to why a marble of a lower cost was allowed to be fixed without obtaining the bidding prices. It is said that this was done to the benefit of the contractor.   

When the bidders were requested to submit their discounted bids by October 13, 2014, Kudabalage, who is accused of being involved in many frauds associated with the project, and is now on bail, had accepted the bids that had been submitted after the deadline.

 “The Dubai contractor submitted bids the day after the tender was closed while Interna submitted its bids two days after the closing date,” CEO Abeysinghe said.   
Allegations have been levelled against Kudabalage for passing Singapore and Dubai bidding prices to the Italian contractor, who bade the lowest. The prospective contractors were requested to send their bids via electronic mail to which Kudabalage had access.   

Meanwhile, an e-mail dated January 7, 2015 at 9.40 am the Company Secretary M/S Jacey and Company had forwarded the draft minutes of the board meeting, held on December 16, 2014, to Lasantha Bandara the Chief Financial Officer for the Chairman and Managing Director’s approval had been amended without the Board consent and had been re-sent on January 12, 2015 to benefit the contractor.   

This draft letter had then been forwarded to Hiran de Silva by Bandara on January 7, 2015 at 5.05pm. De Silva had sent the amended minutes to Bandara on January 12, 2015 at 11.41am. As a result a board decision had been amended and stated, ‘The Board advised the MD/ CEO to proceed with the award of the contract to Interna Spa as per the tender conditions and incorporate any deviations or additional conditions arising from the procurement committee negotiations into a Memorandum of Understanding (MoU) which should form part of the contract documents’.   

These drafted board minutes by De Silva and sent by Bandara to the Company Secretary show how this group was manipulating the board minutes to the benefit the contractor. It’s also interesting to find out how the EPF and Treasury representatives in the Board too have agreed to the changes of terms/ conditions of this contract. 

When the present CEO Abeysinghe inquired into these mails from the company Secretaries it was confirmed how the initial draft had been sent back with amendments.

 The reply states as, ‘We note that the draft minutes of the Board meeting held on December 16, 2014 had been prepared and forwarded to Mr. Lasantha Bandara on January 7, 2015 by Achini Atukorala, our representative who was present at the Board Meeting for approval of the Chairman and the MD and was acknowledge by Lasantha Bandara.   

‘On perusal of the said minutes we observe that the main item of business taken up for the discussion had been to award of Contract for Construction, Supplying, installation and remedying defects of interior work of guest rooms, service apartments and selected public areas, which had been recorded as item 3 of the minutes. We note that Option 2 contained in Board paper No: 8/ 2014 dated December 15, 2014 pertaining to the foregoing, considered by the Board has been recorded in the minute forwarded to the company by Ms. Athukorala, as the option chosen by the Board in deciding on the proposed award of interior works.   

‘Minutes returned to Ms. Athukorala from Bandara on January 12, 2015, with certain amendments to the said minute No: 3 had been effected including the substitution of Option 1 indicated in the said Board paper to Option 2 recorded by Ms. Athukorala”.   

Although, the original instructions to tenderers said that the contractor should submit personal guarantee (PG) within 14 days after accepting the LoA, Kudabalage had given eighteen more days to submit the PG. Meanwhile, on contractor’s written request dated January 3, 2015, Kudabalage had allowed Interna to submit the PG upon establishing Letter of Credit (LC) violating the terms of contract. 

 “PG is the first document the contractor submits which proves that the contractor is able to meet the financial liability and committed to honour the provisions of the contract. The contractor cannot demand the employer (Sino Lanka) to open the LC before he submits the PG. The reason for demanding to open LC before submitting PG may be that the contractor has no financial capacity to request a guarantee from a bank without a counter guarantee from the employer. The day the PG was to be submitted on February 6, 2015, Interna has sent a letter to Hiran de Silva informing that arrangements have been made to submit the PG but waiting till Sino Lanka opens LC. This proves that Interna did not have the ability to get a PG if the employer does not open an LC,” Abeysinghe said.   

Having reviewed the entire procurement process, the new Board of Directors had got a forensic audit conducted. The audit revealed that there had been irregularities during the entire process and the legal opinion was to terminate the interior décor contract.   

Meanwhile, Kudabalage and Hiran de Silva are further accused of increasing the compensation Trans Gulf Electro -Mechanical LLC has sought from Sino Lanka for failing to handover the building to finish the mechanical engineering and plumbing work of the project.   

As a result of this, Trans Gulf Electro-Mechanical LLC by letter dated November 20, 2014, the Project Engineer claimed Rs. 188.168 million as compensation for late issuance of construction drawings as they could not finish the mechanical, engineering and plumbing work by November 23, 2014. The Employer had to extend the contract period by 402 days (from November 23, 2014 to December 31, 2015). Later, after a discussion with the Employer on December 4, 2014, Thomas Abraham of Trans Gulf wrote to Hiran de Silva to inform the revised prices which was Rs. 179.179 million.   

Kudabalage, who is accused of being involved in many frauds associated with the project, and is now on bail, had accepted the bids that had been submitted after the deadline

Despite of the said e-mail, Kudabalage by letter dated December 5, 2014 wrote to Trans Gulf promising to pay Rs.195.709 million which is Rs.16.53 million more than the revised price.   

“When all the e-mail correspondences Hiran de Silva, the project Engineer, and Kudabalage had exchanged with Trans Gulf were retrieved after the fall of the previous regime, it came to be known as to how De Silva had got the compensation amount increased to Rs.195.709 million. All these e-mail correspondence are now with us and can be used to show how these officers manipulated prices to their own whims and fancies without considering that this project is fully owned by the State and is a loss to the country,” Abeysinghe said.   

According to the legal opinion taken by the project, the employer therefore is well within its rights to re-negotiate the amounts payable as the claim for prolongation and also it is known that Kudabalage had not obtained Board approval before he issued the Letter of Award on December 5, 2014. 

When contacted the former Managing Director/ CEO P. Kudabalage for a comment on the findings of the malpractices followed by the Board of Directors during the previous regime, Kudabalage declined to make any statement but added that the allegations are baseless. “I have worked 15 hours a day in this project to the best of my ability. I have followed all the government procurement guidelines and the allegations are levelled against us to discredit our good names,” Kudabalage claimed.   
Meanwhile, the former Project Consultant who too is accused of allowing Trans Gulf to manipulate the compensation prices said that he cannot remember as to why the prices were changed by the contractor within few hours and why Sino Lanka did not take any action against the contractor. “As I do not have these documents with me to explain why the contractor reduced the compensation amount and then increased within few hours, there should be a reason for it. If not the former management of Sino Lanka should have not given the approval to the final amount they demanded,” De Silva said.