Facts

The Taiwan Area National Freeway Bureau employed Kunghsin Construction Corp as the contractor for work on the Chungshan Freeway. A dispute arose as to whether Kunghsin should be granted compensation for an increase in its construction and administration costs, due to extensions of construction time. The dispute was referred to arbitration and the arbitrators made an arbitral award in favour of Kunghsin. The Freeway Bureau then brought an action before the Taipei District Court to vacate the award on the grounds, among others, that Kunghsin did not follow the pre-arbitration procedure provision under the construction contract before it referred the dispute to arbitration. The pre-arbitration procedure stipulated that any disputes should first be decided by a specialist unit designated in the construction contract. If the specialist unit's decision was not accepted, then Kunghsin should proceed to the next step of the pre-arbitration procedure. The Freeway Bureau alleged that as part of Kunghsin's claims granted by the arbitrators were not set forth in its letter to the specialist unit, these claims were not in compliance with the pre-arbitration procedure and should not be the subject of the arbitration at issue.

Both the Taipei District Court and the Taiwan High Court dismissed the Freeway Bureau's claim. Their findings included the following:

• Non-compliance with the pre-arbitration procedure could not be deemed as no dispute between the parties to the construction contract;
• The arbitration procedure could replace the pre-arbitration procedure (apparently as regards the decision of the specialist unit);
• The pre-arbitration procedure provision should be invalid; and
• The procedural deficiency resulting from non-compliance with the pre-arbitration procedure should not adversely affect the validity of the arbitral award.

Decision

The Freeway Bureau appealed against the Taiwan High Court's decision. The Supreme Court vacated the Taiwan High Court's judgment and remanded the case to the Taiwan High Court for retrial.(1) The Supreme Court held:

"The purpose of the pre-arbitration procedure provision in an arbitration agreement is to give the parties sufficient time to consider and decide, balancing between the two ends of 'accepting the claims' and 'referring the said claims to arbitration', whether to refer and what should be referred to arbitration. The pre-arbitration procedure provision is a valid arbitral provision agreed by the parties on the basis of freedom of contract, with the functions of defining the disputes referred to arbitration and further filtering the suitability of such disputes for arbitration. If a party has not complied with the pre-arbitration procedure before it refers certain disputes to arbitration, such disputes have not yet been defined between the parties and are not disputes that the relevant parties agreed to refer to arbitration; therefore, such disputes can neither be the subject of the arbitration agreement nor be referred to arbitration. The pre-arbitration procedure provision does not affect the parties' rights to seek remedies in accordance with the litigation procedure, and therefore violates neither the principle of fairness nor the public order nor good morals."

Comment

Pre-arbitration provisions are frequently found in government procurement contracts for construction. Although pre-arbitration provisions in different construction contacts differ somewhat, they generally provide that contractors must pursue a series of actions within contractually stipulated periods before they refer disputes to arbitration. Otherwise, the contractors cannot refer such disputes to arbitration. Non-compliance with the pre-arbitration procedure provisions is frequently invoked by government employers who lose the arbitration and seek a court ruling to set aside the arbitral awards against them, and some Supreme Court judgments have addressed this issue. The judgment at hand, however, might be the first Supreme Court judgment clearly to confirm the validity of the pre-arbitration procedure provisions with more theoretical reasoning.
The judgment may be contrasted with an earlier Supreme Court ruling,(2) in which the court held that (i) a contractor who had properly followed the pre-arbitration procedure should be allowed to add to its claim bases in the arbitration proceeding the changed circumstances doctrine, which it had never invoked as a claim basis in the pre-arbitration procedure, and (ii) the arbitrators could legally take into consideration such newly invoked claim basis.

Endnotes

(1) 92-Tai-Appeal-671, decided on April 24 2003.
(2) 88-Tai-Appeal-2695, decided on November 4 1999.