Capital Partners - TECOM Commercial Dispute

UNCLAS SECTION 01 OF 02 ABU DHABI 002924

SIPDIS

SENSITIVE

STATE FOR EB/CBA - BEHRENS
STATE PASS USTR FOR DOUG BELL

E.O. 12958: N/A
TAGS: EINV ECON AE
SUBJECT: Capital Partners - TECOM Commercial Dispute

Ref: Abu Dhabi 2772 (Notal)

This cable contains business proprietary information.


1. (SBU) Summary: Embassy has received several Congressional and
USTR inquiries in recent weeks over U.S. firm Capital Partners'
dispute with Dubai's TECOM Investments (a member of Dubai Holding)
as well as inquiries from former Sec HHS Thompson. TECOM executive
Chairman Ahmed bin Byat told Ambassador on July 5 that the key issue
in the Riverwalk dispute was Capital Partner's October 20, 2005
non-payment of a required lease payment for the property. Bin Byat
complained that Capital Partners were pushing a commercial dispute
into the political arena and suggested that if Capital Partners
wanted to pursue the matter further, they would need to take legal
action. The UAE-based counsel for Capital Partners/McKinley Reserve
argued in a separate telcon with Econchief that the fact that TECOM
sold land that it did not control put TECOM in default from the
beginning of the contract. End Summary


2. (SBU) On July 5, Ambassador and Econchief met with Ahmed bin
Byat, the Executive Chairman of TECOM Investments to follow up on
discussions related to the ongoing commercial dispute between TECOM
and U.S. company Capital Partners. At the U.S. company's request,
Ambassador had raised the dispute with UAE Vice President/Prime
Minister and Ruler of Dubai Sheikh Mohammed bin Rashid Al-Maktoum on
July 1. Embassy and Consulate General officers have previously been
involved in attempting to resolve this commercial dispute. Bin Byat
gave TECOM's position on the dispute and correspondence between
TECOM and Capital Partners related to the dispute. On July 9,
Econchief discussed the meeting with Capital Partners/McKinley
Reserve's UAE based counsel, David Stockwell.


3. (SBU) Bin Byat explained that Capital Partners had failed to make
a required payment on its lease of the land on October 20, 2005
despite being given an extension to make a payment. He provided
Ambassador with an e-mail exchange showing that the CFO of Capital
Partners, Robert Sutton, agreed that "all other provisions of the
Lease and Development Agreement" of June 15 applied with the
extension to October 20, 2005. Bin Byat also provided a copy of a
letter dated October 20 from TECOM to Capital Partners stating that
TECOM "hereby gives you notice of termination of the Development
Agreement as your failure to make payment under the terms of the
Lease is a breach of Clause 23.9 of the Development Agreement which
states that "TECOM may terminate this Agreement on immediate written
notice to the Developer where the Developer has failed to pay any
installment of the Rent due under any of the leases."


4. (SBU) Bin Byat explained that Capital Partners, a Dubai Free Zone
Enterprise, was "kind of vague" on its sources of financial support.
TECOM, therefore, had wanted to ensure that Capital Partners could
make its payments. Although TECOM had lost trust in Capital
Partners, he explained, Bin Byat said that TECOM had remained
willing to work with the U.S. investors backing the project. In
fact, he noted, that TECOM had worked to identify alternative
investment locations and offered the investors a substantial
discount on any future investment, to match the amount that Capital
Partners claimed to have invested in Dubai. He acknowledged that
these negotiations subsequently broke down. In a subsequent Telcon
with Econoff, Stockwell explained that - in the company's view -
these alternative plots offered were not comparable to the Riverwalk
site. Despite that fact, when McKinley Reserve expressed interest
in two tower blocks that had been presented as opportunities, TECOM
withdrew them from consideration. (Note: McKinley Reserve/Capital
Partners has engaged Dubai Attorney -- and former U.S. Consul
General -- David Stockwell as a local legal representative).


5. (SBU) Bin Byat acknowledged that there was an archeological site
on the original site Capital Partners was planning to develop, but
argued that the issue was one of non-payment rather than ownership
of an archeological site, since TECOM was selling "built up area"
not land and that TECOM compensated Capital Partners for land with a
greater built up area. Stockwell later explained that this was a
major issue, since it demonstrated that TECOM was in default of the
agreement from the day of its signature. TECOM, he noted did not
have ownership of the land that it was providing to Capital
Partners, and it would be irresponsible for Capital Partners to have
made an additional payment until this issue had been resolved.
(Note: In Charles Mulcahy's October 19 e-mail to CG Dubai
requesting assistance in securing an extension of the payment date
for 30-60 days after October 20, he does not mention the
archeological site noting that "The Capital Partners project in
Dubai is moving ahead on a positive basis. Several sales have
occurred concerning the property, however, representatives of the
company have experienced difficulty raising the necessary project
financing, as the current legal structure in Dubai does not provide
the type of securitization of investment interest customary for U.S.
investors. Capital Partners has a major $25 million payment due to
TECOM on Thursday, October 20, 2005. Because of the inability to use
customary financing vehicles, payments to TECOM have been based upon
resources of Capital Partners and various sales involving the
property. Capital Partners will need an extension of the payment
date beyond October 20, 2005 for approximately 30-60 days." He goes
on to write that "Capital Partners has fulfilled all of its
obligations concerning the TECOM agreement, however, the sales of
various parts of the property require some additional time to
provide the necessary cash flow." End Note.)


6. (SBU) Bin Byat also said that TECOM had "no interest in working
with this group any more," and that the original parcel of land was
gone. He suggested that, should Capital Partners/McKinley Reserve
wish to pursue this matter further, they would need to take legal
action.


7. (SBU) On July 16, Charles Mulcahy, the Senior Advisor to McKinley
Reserve, sent bin Byat a letter again proposing to settle the
dispute without resorting to legal action, and requesting a response
by August 7. The substance of the proposal is that:
-- After the title (ownership) problems have been resolved with the
various government entities in Dubai, the RiverWalk property would
be sold by the Government of Dubai/TECOM and MKR/CP at a mutually
agreeable price and terms.

-- The proceeds of the sale would be distributed 50/50 between the
Government of Dubai/TECOM and MKR/CP. MKR/CP is willing to consider
any reasonable proposal of the Government of Dubai/TECOM
including a payment below the above referenced 50/50 split.

-- This proposed solution would end the dispute; and, the Government
of Dubai/TECOM and MKR/CP would both move on to other matters.


8. (SBU) Comment: Congen and Embassy will continue to monitor the
dispute and will remain in contact with the U.S. firm. In an effort
to increase foreign investment in the local property market, Dubai
recently announced plans to set up an escrow account, whereby
investors' deposits would be placed in escrow and only turned over
to developers when contractual conditions were met. It is not clear
whether this would extend to investors who are also developers, such
as Capital Partners. End Comment.

SISON