The Appealing Possibility of Appeals in Arbitration

Traditionally, one of the hallmarks of arbitration is finality. However, some parties believe this results in a catch-22: if the arbitrator “gets it wrong,” the award is not appealable and the grounds for vacatur are very narrow. Unfortunately, or maybe fortunately, that is incorrect. Parties can include (or agree to) an optional appellate arbitration process that can provide a mechanism for correcting errors in just a few months—staying true to the efficiency that is the hallmark of arbitration.

Absent appellate arbitration, arbitration awards are final, except for the very limited grounds under which the losing party can seek to vacate an award under the Federal Arbitration Act (FAA) or similar state laws such as evident partiality, corruption, or misconduct. However, prevailing on a motion to vacate is not easy due to the high burden that the movant must satisfy. Therefore, in 2013 the American Arbitration Association’s International Centre for Dispute Resolution (AAA-ICDR) released the AAA Optional Appellate Arbitration Rules (Appellate Rules), bridging the gap between the finality of arbitration awards and the desire for an appeal process.

The pivotal advantage of the AAA Optional Appellate Arbitration Rules is that they can be a mechanism for error correction. The arbitration process, while designed to be efficient and cost-effective, is not immune to mistakes. Errors in understanding or applying the law or the facts can occur, and these missteps may have far-reaching implications for the parties involved. The Appellate Rules provide an opportunity for another set of eyes—those of experienced appellate judges or practitioners—to review the case and rectify awards based on material errors of law or clearly erroneous determinations of fact.

What Are the Benefits of Including an Optional Appellate Arbitration Process in an Arbitration Clause?

The following four reasons highlight some of the benefits of including an optional appellate arbitration process in an arbitration clause:

1. Standardized Process and Clearly Defined Standard of Review
   
   Before AAA-ICDR published the Appellate Rules, parties were left with crafting their own ad hoc appellate arbitration process, which could lead to inconsistencies and uncertainty. The Appellate Rules provide a standardized set of procedures and rules to govern appeals in arbitration, eliminating confusion and offering a streamlined, predictable, and efficient process on which parties can rely.
2. Clear Grounds for Appealing an Arbitration Award with Standards More Similar to Those in Court
   
   Rule A-10 of the Appellate Rules provides clear grounds for appealing an award: (1) an error of law that is material and prejudicial or (2) determinations of fact that are clearly erroneous. This allows for the appellate arbitration tribunal to review an arbitration award on grounds similar to those seen in appellate courts. The potential for an appellate arbitration has the added benefit of encouraging arbitrators to craft their decisions knowing that they may be reviewed by an appellate panel on grounds more robust than the vacatur grounds of the FAA.
3. Managed Time Frames and Lower Cost Than Court Appeals
   
   Parties are not required to part with the “finality” they bargained for when they included an arbitration provision in their contract because the AAA Optional Appellate Arbitration Rules add only about three months to the total time frame of a case. Because the appellate arbitration proceeds on a streamlined schedule, parties are only paying for their attorney fees and the appellate tribunal’s (whether one or three arbitrators) compensation for a short time, rather than the legal fees they might incur for years in a court appeal.
4. Knowledgeable Panel with Significant Appellate Experience
   
   The AAA-ICDR maintains a specific panel of appellate arbitrators for both domestic and international cases who have specific training or experience in appellate review. The panel is composed of over 120 arbitrators, most of whom are retired judges from all over the country.

How Exactly Do the AAA Optional Appellate Arbitration Rules Work?

First, the parties’ contract needs to have an optional appellate provision in the arbitration clause, or the parties need to unanimously agree to the appellate procedure post-contract.

An appellate arbitration provision typically looks something like this:

Notwithstanding any language to the contrary in the contract documents, the parties hereby agree: that the Underlying Award may be appealed pursuant to the AAA's Optional Appellate Arbitration Rules (“Appellate Rules”); that the Underlying Award rendered by the arbitrator(s) shall, at a minimum, be a reasoned award; and that the Underlying Award shall not be considered final until after the time for filing the notice of appeal pursuant to the Appellate Rules has expired. Appeals must be initiated within thirty (30) days of receipt of an Underlying Award, as defined by Rule A-3 of the Appellate Rules, by filing a Notice of Appeal with any AAA office. Following the appeal process the decision rendered by the appeal tribunal may be entered in any court having jurisdiction thereof.

For assistance with drafting an arbitration clause, and potentially adding an appellate arbitration provision, the AAA’s www.Clausebuilder.org is a free online resource and tool that can assist in the drafting process.

Once a final award is issued and one party wants to file an appeal under the Appellate Rules, the following occurs:

1. A party has 30 days from the entry of an award to file an appeal. The current filing fee is $6,000 (paid by the moving party). The grounds for an appeal are (1) an error of law that is material and prejudicial or (2) determinations of fact that are clearly erroneous.
2. If the parties did not agree to either an appointment process for the appeal or the AAA default rank and strike method, three arbitrators are appointed pursuant to the appointment process included in the parties’ clause. While the Appellate Rules default to a panel of three arbitrators, parties can agree to one arbitrator rather than three, or their clause can provide for one rather than three.
3. Ten days from the confirmation of the panel, a preliminary hearing is scheduled, and a scheduling order is entered.
4. The briefing schedule is 21/21/10. Importantly, no time is wasted in filing the appellate brief. The appellate brief must be filed 21 days after service of the moving party’s Notice of Appeal. There is a 30-page limit for briefs and a 10-page limit for replies.
5. The appellate panel issues its decision 30 days from receipt of the last brief, but parties can request oral argument, subject to the panel’s approval, or the panel on its own may decide to hold oral argument. Of the AAA appellate arbitrations that went to decision in 2022 and 2023 to date (so, excluding the 27 percent of the appellate arbitration cases that settled prior to decision), 63 percent were decided on documents only.
6. The appellate panel has three options in its decision: (a) adopt the underlying award as its own; (b) substitute its own award for the underlying award (incorporating those aspects of the underlying award that it is not vacating or modifying); or (c) request additional information and exercise the tribunal’s option to extend the time to render a decision, not to exceed 30 days. Notably, the appellate panel may not order a new arbitration hearing or send the case back to the original arbitrator(s) for correction or further review.

Once the appellate award is issued, it becomes final and binding for purposes of enforcement.

How Widely Is the AAA Appellate Arbitration Process Used, and Is It a Rubber Stamp on the Original Award?

We are still in the infancy stage of the optional appellate arbitration processes because it takes time to advise clients about the appellate arbitration process, incorporate the appellate arbitration process into contracts, and get to an award ripe for an appeal under the Appellate Rules. However, from data that the AAA-ICDR has collected in 2022 and to date in 2023 in cases using the optional appellate arbitration process, 50 percent of the appellate arbitration awards adopted (affirmed) the underlying award, and 50 percent substituted the underlying award with the appellate award in whole or in part. This data suggests that appellate panels are not rubber-stamping the original awards.

Conclusion

In sum, if parties prefer the confidentiality, speed, and efficiency of arbitration but are fearful of the finality (i.e., limited grounds for vacatur), the optional appellate arbitration process could be the option best suited for their needs.