New York Appellate Court Affirms Decision to Deny Motion to Compel Arbitration in Multi-Billion Dollar Construction Dispute

BML Properties Ltd. v. China Construction America Inc., et al., 101 N.Y.S. 3d 597 (N.Y. App. Div. 2019)

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R. Zachary Torres-Fowler
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Ryan R. Deroo

On July 2, 2019, a New York appellate court upheld a lower court ruling by Justice Saliann Scarpulla, denying a state-backed Chinese contractor’s attempt to compel international arbitration arising out of a dispute involving the construction of the multibillion Baha Mar mega-resort in the Bahamas.  As a result of the ruling in BML Properties Ltd. v. China Construction America Inc., et al., 101 N.Y.S. 3d 597 (N.Y. App. Div. 2019), aff’ing No. 657550/2017 (N.Y. Sup. Ct. Jan. 24, 2019), the $2.25 billion lawsuit alleging “one of the largest construction-based frauds in this hemisphere” will remain in the New York courts.  As explained below, for those in the international construction industry, the case will be worth following.

The dispute stems from the construction of the Baha Mar resort located in Nassau, Bahamas.  After nearly seven years of construction, the multibillion dollar mega resort is home to three luxury hotels, the Caribbean’s largest casino, a convention center, spa, golf course, and all the accompanying infrastructure required for the 1,000 acre project—built from the ground up.  However, following significant construction delays, the project collapsed and was forced into bankruptcy in 2015.  As a result, BML Properties Ltd. (“BML”)  appears to have lost its entire $845 million investment in the project and incurred hundreds of million in additional losses. [1]

In a lawsuit filed by BML against China Construction America, Inc. and its affiliates (“CCA”), CCA allegedly concocted a multi-year scheme to fraudulently delay the project and increase construction costs in an effort to extort money from BML.  According to BML, CCA failed to accurately monitor and falsely reported on the project’s progress and, as a result, prevented BML from predicting and preventing project risks to its equity investment.  Further, BML claims that CCA misrepresented the experience levels of its workforce and even intentionally damaged or disabled life-safety, security, and electrical supply systems in an effort force BML to accept “sham” construction claims.

In response to BML’s complaint, CCA sought to compel ICC arbitration.  BML objected and argued that the court could not compel arbitration because its original contract with CCA required all disputes to be resolved before the New York courts, under New York law.  CCA, however, disagreed, citing a subsequent contractual amendment mandating ICC arbitration between CCA and an entity called Perfect Luck Assets Ltd. which had purchased all of the project’s assets through a receivership process in September 2016—effectively causing BML to lose the entirety of its equity investment in the project.  Importantly, BML was not a party to the contractual amendment.  Nevertheless, CCA argued that BML should be bound by the arbitration clause because it either (i) acted in a way that evidenced an intent to be bound, or (ii) received a direct benefit from the contract containing the arbitration clause.

The court disagreed.  Although the New York courts have compelled arbitration against non-signatories in “limited circumstances,” Justice Scarpulla noted that the amendment post-dated the events at issue and that BML was not even aware of the amended until after it was produced in the litigation.  According to Justice Scarpulla,  BML Properties neither intended to be bound by the arbitration clause nor received any benefits from the amendment and, as a result, held that arbitration clause was inapplicable.  Following Defendants’ appeal, the appellate court affirmed in a summary opinion, holding that Plaintiff was not a party to the agreement containing the arbitration clause and denying the motion to compel arbitration.

Given the sheer magnitude of the dispute and the extent of the alleged fraud, the Baha Mar resort litigation will continue to draw the interest of the international construction industry.  Indeed, the failed project indicates the challenges international construction firms face as they attempt to finance and construct large-scale infrastructure and development projects overseas in the face of significant language and cultural barriers, less stringent regulations, and the increased potential for fraud.

Further, the recent decision is of note for practitioners in the field of international arbitration.  Specifically, as of 2019, Justice Scarpulla was assigned to handle all commercial international arbitration matters filed in New York’s Commercial Division courts in an effort to solidify the state’s position as a premier hub for international arbitration.  As a result, Justice Scarpulla will have an outsized role on New York jurisprudence as it applies to international arbitration.  In this instance Justice Scarpulla’s opinion was clear:  there must be an agreement to arbitrate before arbitration is proper.  However, parties involved in international arbitration should continue to monitor her decisions going forward, as they may provide valuable insight regarding how she will interpret relevant agreements in the future.

[1] For more details concerning the Baha Mar project see Jennifer Lett, Bahamas Mega-Resort Stands Empty, Casualty of Dispute with Chinese Partners, N.Y. Times (Feb. 2, 2016).

To view the full text of the court’s decision, courtesy of Bloomberg Law, click here.