Pre-procedure for Construction Arbitration
By: LCS & PartnersProvided by World Services Group
Pre-procedure for Construction ArbitrationPublished January 8, 2007 - Taiwan
When the government and a contractor negotiate a construction contract, they usually stipulate in the contract that, in case of any dispute arising from the contract, such dispute shall be submitted to the engineer or the architect for decision before such dispute is submitted for arbitration. This is what is commonly referred to as aˇ§pre-arbitrationˇ¨ procedure. If any of the parties directly submits a dispute for arbitration without going through the aforesaid procedure in advance, shall the arbitral tribunal accept such submission? Or, if the arbitral tribunal accepts such submission and renders an award, can one party seek to revoke or appeal such award, on the ground that the arbitral award is irrelevant with the subject dispute, or that the arbitration procedure violates the agreement between the parties? Such questions are commonly encountered in construction arbitration.
Regarding the nature of a ˇ§pre-arbitration procedureˇ¨, most scholars have opined that it is one form of ˇ§third party mediationˇ¨. That is to say, the parties have stipulated in the contract that an expert with professional construction background shall serve as the mediator for any dispute arising from the contract. However, it does not mean that any dispute arising under a contractual provision providing for such mediation must be submitted for mediation; such mediation is just a ˇ§non-obligatory mediationˇ¨in its nature. Furthermore, even if one is of the opinion that such mediation is anˇ§obligatory mediationˇ¨, the Supreme Court has ruled in one case that even if the parties fail to submit a case for an obligatory mediation at the first instance, but the case has been has been rendered a final ruling by an arbitral tribunal, the appellate court may not revoke such ruling by the arbitral tribunal on the ground that the parties to the subject dispute must have first completed the ˇ§pre-arbitration procedureˇ¨.
The main reason most scholars hold the aforesaid opinion is that the purpose of ˇ§pre-arbitration procedureˇ¨ is to develop an alternative to settle disputes in a more effective way to avoid delaying the construction progress; in other words, its purpose is not to develop an additional ˇ§procedure barrierˇ¨ or ˇ§suspenseful conditionˇ¨. Therefore, if one allows for the revocation of an arbitral decision for a dispute that did not first complete a pre-arbitration procedure, then such result will be in conflict with the original purpose of developing the said ˇ§ pre-arbitration procedureˇ¨, which is to accelerate the dispute settlement process.
However, the opinion of the Supreme Court on the nature of ˇ§pre-arbitration procedureˇ¨ is not completely the same as the scholarsˇ¦ opinions as mentioned above. The Supreme Court interprets the nature of the pre-arbitration procedure pursuant to each contractual provision. As a result, if one fails to study carefully the differences between all relating construction provisions, one might have a misunderstanding which is far away from the opinion of the Supreme Court. The Supreme Courtˇ¦s opinion is analyzed as follows:
1. In the event that all potential disputes are yet to be covered by arbitration agreement:
If both parties stipulate in the construction contract that ˇ§In case of any dispute arising from or in connection with the contract which can not be settled by the engineer, such dispute may be submitted for arbitration pursuant to the procedures as regulated in the Arbitration Actˇ¨, or that ˇ§Before the contractor submits the dispute for arbitration, both parties shall first try to negotiate to settle such dispute; in the event when such dispute fails to be settled by means of negotiation in good faith, the contractor shall give the engineer a written notice stating the captioned dispute and the contractorˇ¦s claim; in the event when the contractor refuses to accept the engineerˇ¦s decision, such dispute shall be reported to the authority in charge; in the event the contractor refuses to accept the ruling made by the authority in charge, then, such dispute may be submitted for arbitrationˇ¨; under either such provision, the Supreme Court holds that because the parties had agreed in the contract that both parties shall define the subject matter of the arbitration agreement through pre-arbitration procedure, as a result, it will violate the arbitration agreement if the parties directly submit the captioned dispute for arbitration in that the subject matter of the arbitration agreement has not existed yet. Therefore, the court may revoke such arbitral award.
2. In the event that all potential disputes have been covered by arbitration agreement:
If the parties have agreed in the construction contract that: ˇ§For any dispute arising from or in connection with interpretations of the contract or matters not stipulated in the contract, such dispute shall be firstly settled by means of negotiation. In the event when the parties can not reach an agreement by negotiation, such dispute may be submitted for arbitration in accordance with the Arbitration Act and its enforcement regulations.ˇ¨ ; or that ˇ§If the contractor refuse to accept the final decision made by the authority in charge, the contractor shall submit such dispute for arbitration in accordance with relevant processing regulations. Such dispute shall not been brought before the court or settled by other means directly.ˇ¨; under each such situation, the Supreme Court is of the opinion that if one of the parties believes such dispute can not be resolved by settlement or mediation, or other simple and easy method, or if both parties agreed that such dispute may be conclusively resolved by arbitration, to avoid the time wasted in the pre-arbitration procedure, submitting the captioned dispute directly for arbitration will not violate the purpose of the parties, that is, to resole the dispute by arbitration. Therefore, even if a dispute has not gone through pre-arbitration procedure, it is possible that the court may not revoke the applicable arbitral award.
At present, construction contracts are still not quite standard in the provisions for pre-arbitration procedure, and it may be hard to determine the nature of such pre-arbitration procedure. However, when interpreting such contract, one should contemplate the wordings which are already regulated in the contract and which express the intentions of the parties, instead of relying solely on abstract explanations of the agreementˇ¦s nature and abandoning the contract wordings. In current disputes arising from construction arbitrations, the contractors usually argue that the pre-arbitration procedure belongs to the non-obligatory conciliation and has no binding effect accordingly while the government argues that failing to execute the pre-arbitration procedure will lead to the defect of the arbitral award itself, and such act will violate the arbitration agreement between the parties if the arbitral tribunal fails to follow the pre-arbitration procedure.
The author believes that to avoid such controversy, the government should do its best to make the construction contract fair and clear, and explicitly regulate in the contract the nature and purpose of the pre-arbitration procedure. Failing to do so may greatly disadvantage by requiring both parties to re-litigate matters.