By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar has reached a legal settlement that prevents a former hotel partner seeking specific damages against it for trying to draw down a $10 million Letter of Credit, although arbitration proceedings remain alive.

The settlement, which is designed to end the New York State Supreme Court litigation between Morgans Hotel Group Management and the $2.6 billion Cable Beach developer, does not prevent the former from proceeding with its claim before the American Arbitration Association.

That action, filed on May 23, 2014, involves a financial claim by the Mondrian operator against Baha Mar “for amounts due to it under the Hotel Management Agreement, and as a result of the termination of the Hotel Management Agreement”.

The Cable Beach developer and Morgans signed the management agreement for the Mondrian at Baha Mar on July 31, 2011, but the latter said Baha Mar failed to fulfill several essential conditions.

However, the June 26, 2014, settlement agreement, a copy of which has been obtained by Tribune Business, shows that Baha Mar has worked a deal where it will not be liable for specific damages in the arbitration proceedings related to the Letter of Credit.

Morgans, though, will be able to argue at the arbitration hearing that Baha Mar’s alleged attempts to draw on that $10 million “gave rise to a right to terminate the hotel management agreement”.

Baha Mar can defend this, but the New York court settlement “precludes any damages claim by Morgans against Baha Mar arising directly and exclusively from Baha Mar’s” Letter of Credit Notice.

Morgans had previously alleged that Baha Mar “improperly retaliated” for its decision to terminate the hotel management agreement by seeking to draw down the $10 million ‘Letter of Credit’.

The $10 million, lodged with Deutsche Bank trust Company Americas, represented ‘Key Money’ owed by Morgans to Baha Mar, and which was to be paid to the latter in stages in the run-up to the Mondarin’s opening.

Some $3 million was to be paid 180 days prior to the December 1 opening (June 4, 2014); with a further $3 million paid 90 days out (September 2, 2014); and the final $4 million balance due on the opening date.

Morgans alleged that the ‘Letter of Credit’ had been extended several times from the August 8, 2012, original expiration date, with July 23, 2014, the final agreed timeline.

Under the terms of the June 26 settlement, which was signed by the US attorneys for all parties, the Letter of Credit is to be cancelled by Deutsche Bank and the $10 million returned to Morgans.

Baha Mar is to pay the $29,000 legal fees incurred by Deutsche Bank, and all parties agreed to release the others from any claims and legal remedies.

Morgans’ arbitration claim, though, remains live and it can seek to recover legal fees and court costs associated with both proceedings from Baha Mar.

Their dispute had centred on Baha Mar’s failure to fulfill certain conditions contained in the hotel management agreement.

In particular, the 20-year agreement for Morgans to provide “direction, management and supervision” of the Mondrian property required that Baha Mar obtain a “non-disturbance agreement” from its financiers within six months of the deal’s signing.

Such an agreement, which Baha Mar had to obtain from the China Export-Import Bank, its multi-billion dollar lender, would have allowed Morgans to continue uninterrupted management of the Mondrian even if the developer defaulted and the Chinese institution had to foreclose.

“Baha Mar failed to obtain a non-disturbance agreement or to inform Morgans Management of its failure to do so within six months of the date of the Hotel Management Agreement,” Morgans alleged.

“Instead, Baha Mar repeatedly assured Morgans Management that it would obtain such an agreement and requested additional time to do so.”

Baha Mar subsequently moved on from Morgans’ decision to terminate the 20-year management agreement, replacing Mondrian with SLS Hotels.

That is effectively a ‘like-for-like’ replacement for Mondrian as Baha Mar’s lifestyle hotel brand, as it is an equivalent “five-star luxury operator”.