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RESOLVING CONSTRUCTION DISPUTES IN ASIA
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REPRINTED FROM:CORPORATE DISPUTES MAGAZINE
JUL-SEP 2016 ISSUE
www.corporatedisputesmagazine.com
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Published by Financier Worldwide Ltdcorporatedisputes@financierworldwide.com
© 2016 Financier Worldwide Ltd. All rights reserved.
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www.corporatedisputesmagazine.com CORPORATE DISPUTES Jul-Sep 2016 3
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Wendy MacLaughlin is a senior vice president at Hill International and co-head of International Expert Witness Services. She is a world-class programming expert, with over 20 years of experience in design, construction and planning on major infrastructure projects. Ms MacLaughlin is highly regarded by the barristers and solicitors she has worked with. She has experience as a party-appointed expert and has given evidence to arbitral tribunals on numerous occasions in London, Dubai, Australia and Stockholm.
Wendy MacLaughlin
Senior Vice President
Hill International (UK) Ltd.
T: +44 7540 158 226
E: wendymaclaughlin@hillintl.com
PANEL EXPERTS
Derek Nelson is a senior vice president at Hill International, based in Singapore. He has 35 years of construction industry experience and specialises in the identification and management of contract and commercial risks, the preparation, negotiation and settlement of claims for disruption, acceleration and prolongation and in the investigation, assessment and settlement of such claims presented by others. Mr Nelson is an accredited and certified testifying expert witness, accredited expert determiner and certified mediator.
Derek Nelson
Senior Vice President
Hill Construction Consultancy Pte. Ltd.
T: +65 9182 9350
E: dereknelson@hillintl.com
Muhammed Ehsan Che Munaaim is a senior consultant at Hill International with more than 10 years’ experience in both industry and academia. His areas of expertise include claims analysis, contract administration, quantity surveying, and adjudication. He is also a (part-time) Teaching Fellow in Construction Management and Surveying at Heriot-Watt University Dubai, where he teaches claims, FIDIC contracts and dispute resolution in the MSc in Construction Project Management and MSc in Quantity Surveying programmes.
Muhammad Ehsan Che Munaaim
Senior Consultant
Hill International Consulting, Inc.
T: +971 56 729 0281
E: muhammadehsanchemunaaim@hillintl.
com
Simon Longley is a senior vice president at Hill International, based in Dubai, United Arab Emirates. A chartered quantity surveyor and barrister, he has more than 30 years of experience in construction consulting with a focus on complex, infrastructure and energy megaprojects worldwide. Mr Longley specialises in the strategic leadership, turnaround and recovery of distressed projects, particularly with regard to contract and dispute management for dispute board and other tribunal proceedings.
Simon Longley
Senior Vice President
Hill International Consulting, Inc.
T: + 971 56 615 6437
E: simonlongley@hillintl.com
RESOLVING CONSTRUCTION DISPUTES IN ASIA
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CD: How would you describe the construction dispute landscape in Asia? To what extent are these types of disputes becoming more prevalent in the region?
MacLaughlin: I would describe the construction
dispute landscape as changing. We are seeing
an increasing number of Singapore International
Arbitration Centre (SIAC) arbitrations, particularly
those arising from investment by Asian parties in
resource and infrastructure projects in Australia.
We expect to see disputes referred to adjudication
increase over the next few years, as well as NEC3
arbitrations as that form of contract becomes
prevalent in the region.
Munaaim: Yes, I agree. The construction dispute
landscape in Asia is changing rapidly. We are seeing
bigger, more expensive and complex disputes
arising, which take much longer to resolve. I believe
the reason for this change is simple – construction
projects in Asia are growing, due to the continent’s
sustained advancement and infrastructure initiatives,
and, as a consequence, these kinds of disputes are
being generated. Some developing Asian countries
like Malaysia and Indonesia are spending huge
sums of money on ambitious infrastructure projects
that contain huge contractual and delivery risks.
The scale and complexity of these projects pose
significant engineering challenges which push
the boundaries of our technical capabilities; this
often means that more risks are being passed to
contractors who usually lack the ability to deal with
them effectively and efficiently. This breakdown
results in delays and cost overruns, which, in turn,
if not properly addressed, can escalate into multi-
million dollar mega disputes.
Nelson: The dispute landscape in Asia has
become much more stratified. A number of
jurisdictions either have, or intend to, introduce
statutory adjudication for construction payment
disputes that are seeing a significant reduction
in parties arbitrating subcontractor-contractor
payment disputes during and at the end of a project
in those jurisdictions. There has been a significant
rise in contractor-employer Construction Industry
Payment and Adjudication Act (CIPAA) claims at final
account stage in Malaysia, which is likely to impact
numbers further in that jurisdiction. That said, with
the significant increase in investment in, for example,
power and infrastructure projects across the region
drawing together multinational parties to deliver
technically complex and challenging projects often
in constrained timeframes, the number and value of
international arbitrations has increased significantly
across the main centres in Asia. There has been
a marked increase in foreign contractors entering
certain markets and that is breaking the natural
reticence of local contractors pursuing formal action
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for recovery. Additionally, large government linked
companies and employer organisations are facing
organisations which are less swayed by concerns
over future opportunity and more focused on losses
today. That has contributed to the increase in the
number of large value international arbitrations
across the region.
Longley: The Asia market is picking up with more
large-scale and complex infrastructure, power and
transportation projects being taken forward across
the region. Such developments, however, bring with
them an increased level of claims and disputes, for a
number of reasons. Where project participants have
insufficient capacity and experience of tendering
for and delivering such projects, allied with multi-
national joint ventures as contracting parties, the
diversity of risks that need to be identified and
managed for a project to be successful multiply
greatly. And if project staff on both sides are not
experienced in the administration of complex
projects, issues can quickly escalate into claims
or disputes. When disputes do arise, project staff
may have limited experience of dispute boards,
arbitration or local courts to resolve disputes
efficiently and effectively. So throughout the
construction process there is a huge learning curve
to be had by project participants. The challenge is to
learn quickly to avoid claims and disputes.
CD: What are the main dispute resolution methods that are usually adopted in Asia and how are these generally applied to the construction sector? Can you highlight any recent, high-profile cases which demonstrate how these methods have been applied?
MacLaughlin: In my experience, traditionally
negotiation has been effective enough to negate the
need for expensive dispute resolution processes. If
a dispute is referred to arbitration, the negotiation
process will often carry on in parallel with arbitration
proceedings which often leads to the matter getting
resolved before the substantive hearing, but at
a point in time where the parties have a better
understanding of the merits of their respective
positions.
Munaaim: The trinity of dispute resolution in
Asia is made up of, in ascending order, negotiation,
mediation and arbitration, based on recent
construction projects in India and Malaysia. Here,
there still exists an ingrained culture of non-
confrontation between employers and contractors,
and in most situations both parties want to negotiate
to resolve their disputes amicably because they
know how damaging disputes can be to ongoing
business relationships. If negotiation fails, a neutral
third-party mediator is used to facilitate their
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discussions to reach an amicable settlement.
Arbitration is only used as a last resort, once
all non-confrontational avenues are exhausted.
Although, I must say, the trend is slowly moving
toward confrontational dispute resolution
methods, likely because of the large
amounts of money at stake. Adjudication
is also coming to the forefront, which will
eventually be an intervening mechanism
between mediation and arbitration.
Nelson: Negotiation is the natural
first step to settlement. Understanding,
presentation and substantiation of
entitlement and the consequences of
those issues in terms of time and money
is often poor, which does not aid consensus and
settlement. There is a marked increase in facilitated
settlement through mediation, neutral evaluation
and expert determination on key issues. That can
help parties get to a negotiated position. Access to
statutory adjudication in selected jurisdictions and to
dispute adjudication or review boards more widely
on large international projects can also act to focus
the parties in reaching agreement before referral. A
recent survey showed that international arbitration
remains the preferred final dispute resolution
mechanism for 90 percent of users. A particular
feature of dispute resolution in Asia is the use of
mediation, either on its own or the midst of other
formal dispute resolution processes. Mediation cases
in Singapore through Singapore Mediation Centre
(SMC) have increased by 120 percent between 2012
and 2015. An international mediation centre (SIMC)
was opened in November 2014 and introduced
integrated arbitration-mediation-arbitration services
in collaboration with SIAC, a model particularly
suited to Asian sensibilities and one that found
favour with 78 percent of users of international
arbitration. The numbers of cases being referred
to arbitration across the main centres in Asia
over the last 10 years have increased significantly.
That seems reflective of the significant levels of
investment across Asia and the draw of international
organisations now delivering large complex
projects in the region. Particularly significant are
the number of China International Economic and
Trade Arbitration Commission (CIETAC) arbitrations
in China and the numbers through Hong Kong
International Arbitration Centre (HKIAC), both of
Wendy MacLaughlin,Hill International (UK) Ltd.
“Traditionally negotiation has been effective enough to negate the need for expensive dispute resolution processes.”
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which peaked in 2008/2009 but have since found
favour in particular with Russian organisations.
Numbers through SIAC have shown a steady rise as
it finds favour with parties contracting internationally.
Longley: For the bigger projects the main dispute
resolution mechanisms, often in tiered dispute
resolution procedures, are expert determination,
dispute boards and arbitration. In
addition, in certain jurisdictions, such
as Malaysia and Singapore, there is
statutory adjudication for payment
disputes. Singapore is the centre of
dispute resolution in the region for
arbitration. In addition, Singapore has
recently established an International
Commercial Court. Dispute boards are the
core feature of FIDIC-based contracts and
will likely continue to grow in popularity
and usage. However, unless experienced
DAB practitioners are appointed, there
is the potential for poor decisions. In this regard,
the Persero case, decided in the Singapore courts,
considered the issue of enforcement of a DAB
decision and ruled that there is an ‘inherent premise’
that a DAB decision can be enforced by a partial
award in arbitration, a ruling that has been subject
to much comment and criticism by commentators in
other jurisdictions.
CD: At the outset of a construction project, what considerations should be made with regard to potential future disputes? What components of the contract, such as pre-tender and post contract advice, risk assessments and delay analysis, should parties evaluate?
MacLaughlin: The contractual dispute resolution
clause should suit the manner in which the parties
wish to deal with disputes that may arise during the
execution of the project. This could be using tiers
of dispute resolution that may include any senior
management meetings, early neutral evaluation,
the use of a project DRB, or a direct referral to
arbitration or the courts. Pre-tender advice on those
provisions is essential for the parties to understand
Muhammad Ehsan Che Munaaim,Hill International Consulting, Inc.
“The construction industry is a fertile ground for disputes, given its unique characteristics.”
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the options available and to agree the process that
best suits how their organisation, both at project
and corporate levels, wishes to deal with disputes.
In relation to delay, the parties should consider
carefully the effect of any strict notice requirements
and their ability to comply with these in the fast track
project environment, the appropriate level of project
controls on cost and schedule that will stand them
in good stead in the event that the effect of a delay
event has to be demonstrated for the purposes of
securing extensions of time.
Munaaim: The construction industry is a fertile
ground for disputes, given its unique characteristics.
The best way to deal with future disputes is to
prepare early, although sometimes at considerable
initial cost. This, however, can save future cost and
time when disputes are eventually referred to for
formal resolution under the contract. Contractors
should establish a contract and commercial
department at the outset, which during construction,
is responsible for monitoring potential events which
may escalate into disputes, collating records and
preparing documents for submission for resolution
under the contract. Employers should appoint a
contract administrator in the beginning whose main
role is to monitor events to prevent them from
escalating into disputes during construction. Both
parties must also ensure that their dispute resolution
provisions are appropriately drafted in accordance
with any likely dispute that would arise under their
contract.
Nelson: The practice of putting large
infrastructure projects out to 12 contractors to
tender at a cost of over US$1m each is astonishingly
wasteful. Two-stage selective tendering with a
requirement for detailed planning, programming
and risk assessment up front would leverage
off the contractors’ expertise coupled with early
contractor involvement to collaboratively identify
principal constraints and issues together with their
proposed solutions and management. Identifying
those matters early and aligning the project
delivery across all parties to clearly manage those
sensitivities would give transparency and assist in
the active resolution of the same before they have
the potential to generate potential future disputes.
Ensuring that the contract structure is appropriate
is a given. Applying a project oversight function,
whether through a DRB mechanism or a project
neutral function which regularly reviews issues as
the project progresses, and gives an independent
opinion, or if necessary a decision, is an effective
approach to assisting the parties in addressing
matters when they arise.
Longley: Large and complex projects are now
being undertaken in the region but the market in
some jurisdictions is presently not sophisticated
or experienced enough to deal with them. Tender
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documents are sometimes incomplete or contain
errors and omissions. Employers may seek to have
contractors assume risks that should normally be
carried by the employer. Contractors often give
insufficient consideration to contract terms and
conditions, sometimes leading to the failure to
recognise the greater risk transfers, the introduction
of time-bars – or more usually reducing the time
period for the giving of notice. We also see the
introduction of complex procedural steps to become
entitled to time and or money, among other issues.
Therefore, a first step is for contractors to properly
and fully assess tenders from all aspects – technical,
commercial, contractual, legal, time, cost, and so on
– as well as more specific issues, including cultural,
local legal customs and requirements, worker and
visa rules and regulations, importation requirements
and the like. However, in my experience, contractors
frequently do not sufficiently consider and risk
assess all such issues, instead pricing the work
but leaving contractual considerations and dispute
resolution procedures way down the list of items to
check and risk assess.
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CD: Have any recent regulatory and legislative changes had an impact on dispute resolution practices within Asia’s construction sector?
Munaaim: Some interesting regulatory and
legislative changes have recently taken place
in Asia with respect to dispute resolution. The
introduction of statutory adjudication in Malaysia
by way of security of payment legislation has
provided an avenue for swift and cost-effective
dispute resolution. Hong Kong has also shown
interest in statutory adjudication, with a government
consultation document issued recently. As for
international arbitration, legislation was recently
amended to permit foreign arbitrators and lawyers
to enter Malaysia and participate in arbitral
proceedings without a work permit. With its
common law tradition, low costs, geographical
location and transportation links, Kuala Lumpur will
be an attractive alternative seat for international
arbitration. As for mediation, Singapore introduced
its IMC in 2014 to provide mediation services aimed
at resolving cross-border commercial disputes,
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which complements its international arbitration
centre and increases its dispute resolution offerings
to international parties.
Nelson: The sea change legislation introduced
into Singapore and Malaysia, with interest being
expressed elsewhere, is statutory adjudication.
After a slow start in Singapore, that has had the
effect of changing the local dispute landscape
in both Singapore and Malaysia with a marked
increase in the numbers and value of disputes
being referred. Established in January 2015, the
Singapore International Commercial Court, with 27
‘international judges’ on its bench, is hearing its
first case, which includes a construction dispute,
between an Australian and an Indonesian party in
Singapore. This is the first of its type and it will be
interesting to see how that develops. The ICC Court
of Arbitration announced that it will publish the
names of arbitrators and who the chairman is; that
provides transparency and may affect who parties
choose for their case. In addition, the ICC announced
that it will reduce the fees paid to tribunals that fail
to submit a draft award within three months of the
last substantive hearing or post-hearing submission.
Tardy arbitrators may see their fees reduced from 5
percent to 20 percent or higher, depending on the
length of delay. There is no indication that decisions
on whether to reduce fees will be made public but
the policy does seek to address a particular issue
for parties, an approach which is thought likely to
spread to other institutions. A recent decision in
Singapore’s Court of Appeal, PT Perusahaan Gas
Negara (Persero) TBK vs. CRW Joint Operation, that a
tribunal’s interim or partial award on a respondent’s
obligation to promptly pay the sums in a DAB
decision under the FIDIC Conditions of Contract
for Plant and Design-Build 1999 is immediately
enforceable under the Singapore International
Arbitration Act is set to have a marked impact on
the dispute resolution process for construction and
infrastructure projects where FIDIC is the default
form in use. A claimant can seek enforcement
of the DAB decision through an interim arbitral
award pending final resolution of the merits of the
underlying dispute, which markedly reduces cash
flow issues stemming from a potentially long and
drawn-out arbitration. While the case is only binding
in arbitrations seated in Singapore, the decision is
likely to be persuasive elsewhere.
Longley: Malaysia and Singapore now have
statutory adjudication that addresses payment
disputes, and Singapore has recently established
an International Commercial Court. This latter
innovation could have far reaching effects if it
proves successful in handing down speedy and
authoritative rulings. International contracting parties
desire certainty in the interpretation and application
of provisions, such as contained in the FIDIC suite of
contracts, across jurisdictions. Because arbitration
proceedings remain private, there is no corpus of
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decisions that provides contracting parties with the
certainty they desire. If the International Commercial
Court can fill this void, not only will contracting
parties be able to enter into contracts with greater
certainty as to the interpretation, application and
effect of contract provisions, but the decisions
and awards handed down by dispute boards and
arbitral panels will be also become more
consistent.
CD: In your opinion, how effective are expert panels and dispute review boards (DRB) at resolving construction disputes in Asia? In what circumstances can a well-run DRB assist a construction project?
Munaaim: The Asian manner of
resolving disputes provides a perfect
platform for the use of DRBs, a type of non-
confrontational dispute resolution. The Ertan
Hydroelectric project is testament to that – 40
disputes were resolved at the DRB stage without
further reference to arbitration. There is evidence
to suggest that DRBs are gaining momentum and
are used in Asia, to some extent, especially in large
construction projects. However we have seen, in
some cases, parties still prefer domestic, standard
forms of contract that simply do not provide for the
DRB as a mechanism of dispute resolution and this
may hamper its use. DRBs should be used in large
construction projects and are ideally constituted
at the start of the project in order for the panel
to become accustomed to the characteristics
of the project and the parties involved. Early
implementation allows parties to utilise the full
benefit of the DRB process.
Nelson: DRBs, and similar third-party expert
oversight, are very effective in providing guidance,
opinion or decisions that focus the parties and allow
them to resolve issues early and remain focused on
the delivery of parties’ respective obligations. In light
of the Singapore Court of Appeal’s decision in the
Persero case concerning the enforcement of a DAB
decision through an interim arbitral award, where
that approach finds favour with other tribunals,
that certainty has the potential to underscore DABs
Simon Longley,Hill International Consulting, Inc.
“The International Commercial Court could have far reaching effects if it proves successful in handing down speedy and authoritative rulings.”
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as a quick and interim dispute mechanism with
enforcement teeth.
Longley: In our experience, dispute boards are
very effective at resolving disputes finally, cheaply
and quickly, often meaning contracting parties
can implement decisions during the currency of a
contract – unlike in arbitration where awards often
follow the completion of the project and therefore
cannot affect ongoing project progress. However,
such outcomes are critically dependent on the
parties being able to operate the DAB procedures
effectively and, more importantly, the DAB members
being experienced, qualified and
competent to hand down decisions that
parties’ recognise as being bona fide.
Any shortcomings in these dependencies
can impair the quality of DAB decisions
and give rise to later arbitrations and
court cases, such as in the Persero cases.
Clearly, parties obtaining training, advice
and support in DAB procedures and in
appointing experienced and qualified
DAB members would go a long way
to addressing these sorts of concerns.
Another factor worth bearing in mind is
that effective dispute boards are also able to play a
dispute avoidance role by giving opinions on issues
that could otherwise become disputes.
CD: What general advice can you offer to parties embroiled in a construction dispute in Asia, in terms of managing the process and reaching a timely resolution?
MacLaughlin: Understand the merits of your
dispute, the drivers of each of the parties’ business
decisions in relation to the dispute, and the strength
of the records upon which you are reliant. These
are the key factors in my experience that will
influence how quickly a dispute can be resolved cost
effectively.
Munaaim: Disputes can take months, if not years,
to be resolved, and it is to both parties’ benefit
to avoid disputes if possible. Clients should avoid
going down the formal dispute resolution route,
Derek Nelson,Hill Construction Consultancy Pte. Ltd.
“Disputes are expensive and represent a major distraction from the party’s core businesses.”
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but this is not always possible. I think the involved
parties have to take a step back from the front line
to be able to examine the situation objectively. They
should obtain advice from lawyers and construction
consultants to know where they stand contractually
and commercially, so that they will have an idea of
the possible outcomes of their dispute resolution.
From there, they can manage their expectations,
participate knowledgeably in the process, and work
toward the resolution.
Nelson: Disputes are expensive and represent a
major distraction from the party’s core businesses.
Seeking an early independent opinion or evaluation
can be invaluable. Parties may find themselves in
dispute for years, expending an inordinate amount
of time, effort and money trying to resolve the issues
between them, which in effect only entrenches their
positions. In such cases, an independent review
might reveal that a far lower value of the claim is
capable of support, allowing the matter to be settled
within weeks.
Longley: Obtain early independent advice on the
merits of the issue. Is there a reasonable prospect of
success or not? All too often, a contractor pursues a
weak case, ultimately to the detriment of the project,
management time and expense and potential
relationships and further work opportunities. If an
issue has merits, then engage professional expertise
to draft a robust claim or dispute submission
– either direct employment or consultant. Advice on
dispute board members, procedures or other ADR
mechanisms could also be provided, in addition to
wider training, advisory and expert service offerings.
CD: How do you envisage the outlook for construction disputes in Asia? What trends and developments do you expect to see in the months and years ahead?
Munaaim: I predict that multi-million dollar
disputes will continue to rise. Given its economic
diversification and social infrastructure, many more
megaprojects will be introduced in Asia. Existing and
future megaprojects will generate bigger and more
expensive and complex disputes that simply will
not allow parties to negotiate, and because of this,
I foresee that international arbitration will become
a common feature in dispute resolution in Asia,
given the transnational nature of these projects.
I also envisage other countries, especially those
with common law roots, dipping their toes into
statutory adjudication, which would be a positive
development. Adjudication would filter out disputes
leaving those which are not suited for resolution
through a rigid scheme, to be referred to arbitration.
Hong Kong and Singapore will likely continue to be
the preferred seats for arbitration in Asia, and Kuala
Lumpur will be waiting in the wings as a rival for
these seats.
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Nelson: One size does not fit all. Having a range
of mechanisms appropriate to addressing the nature
and complexity of the issues between parties will
remain key to successfully solving the various
business problems faced by parties on projects.
Those solutions need to be pragmatic. I see an
increase in the use of tiered resolution mechanisms
in more complex projects. Having bid a project, often
against stiff competition, international contractors
are increasingly being squeezed between GLC
employers and a local procurement chain. How
they deal with each is quite different and there is
a real danger that they are left holding liability in
the middle. In certain sectors, dispute avoidance
behaviour is being driven by the oil price and a lack
of cash in the sector, which is unlikely to change
in the near future; conversely, the postponement,
cancellation and termination of projects is fertile
ground for disputes.
Longley: I suspect that until the wider Asian
market has gained experience in the tendering,
award and delivery of major projects there will be
multitudes of disputes that will end up in dispute
boards, arbitration or court for resolution. Far-sighted
parties will seek to improve its chances by obtaining
independent expert advice and support, engaging in
focused training initiatives and undertaking research
in the wider disputes market. However, economic
pressures are likely to mean parties persist with
unrealistic and overly-optimistic expectations and
thus provide the basis for an extensive disputes
market. CD
RESOLVING CONSTRUCTION DISPUTES IN ASIA
www.h i l l i n t l . comE D I T O R I A L PA RT N E R
Hill International
Hill International is a world leader in providing
construction claims and consulting services.
Public- and private-sector clients have engaged
us on some of the world’s largest and most
complex engineering and construction projects.
Over the past four decades, Hill has participated
in over 50,000 disputes valued in excess of
US$100bn. Today, we are the largest construction
claims practice with the most experience and
the greatest depth of resources and capabilities
in the world. We hire the best professionals,
understand our clients’ needs and objectives,
and make a full commitment to each and every
project in which we are involved.
KE
Y
CO
NT
AC
TS Wendy MacLaughlin
Senior Vice President
London, UK
T: +44 7540 158 226
E: wendymaclaughlin@hillintl.com
David Merritt
Senior Vice President
Dubai, UAE
T: +971 50 265 8664
E: davidmerritt@hillintl.com
Derek Nelson
Senior Vice President
Singapore
T: +65 9182 9350
E: dereknelson@hillintl.com
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