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RESOLVING CONSTRUCTION DISPUTES IN ASIA

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REPRINTED FROM:CORPORATE DISPUTES MAGAZINE

JUL-SEP 2016 ISSUE

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CORPORATE DISPUTES Jul-Sep 20162 www.corporatedisputesmagazine.com

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www.corporatedisputesmagazine.com CORPORATE DISPUTES Jul-Sep 2016 3

MINI-ROUNDTABLE

MINI-ROUNDTABLE

RESOLVINGCONSTRUCTIONDISPUTES IN ASIA


MINI-ROUNDTABLE

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: [email protected]

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


Hill Construction Consultancy Pte. Ltd.

T: +65 9182 9350


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


Hill International Consulting, Inc.

T: + 971 56 615 6437




MINI-ROUNDTABLE

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



MINI-ROUNDTABLE

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



MINI-ROUNDTABLE

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.”



MINI-ROUNDTABLE

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.”



MINI-ROUNDTABLE

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



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.

MINI-ROUNDTABLE



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,

MINI-ROUNDTABLE



MINI-ROUNDTABLE

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



MINI-ROUNDTABLE

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.”



MINI-ROUNDTABLE

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.”



MINI-ROUNDTABLE

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.



MINI-ROUNDTABLE

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


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


London, UK

T: +44 7540 158 226


David Merritt


Dubai, UAE

T: +971 50 265 8664


Derek Nelson


Singapore

T: +65 9182 9350


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