Alternative dispute resolution (ADR) provisions in contracts commonly provide for final and binding arbitration of all disputes arising between the parties. Very often parties designate the American Arbitration Association (AAA) as the forum in which disputes will be heard and determined, and specify AAA rules for commercial and other types of disputes to control the process. The parties’ objective in arbitration is a fair, fast, economical, and, in particular kinds of cases, expert result. Parties agree that the decision of arbitrators is final, binding, and may be enforced in judicial proceedings if necessary. Historically, there has been no “appeal” as such from an arbitration decision. Federal and state arbitration laws permit challenges to arbitrators’ decisions only on very narrow grounds that, essentially, go to the fairness and integrity of the process. Arbitrators’ decisions are generally not reviewed by courts for errors in the application of law or in determinations of the facts. However, on November 1, 2013, AAA fundamentally changed the process by implementing new rules to allow for optional AAA appellate review of arbitrators’ decisions based on just such grounds.
The AAA Optional Appellate Arbitration Rules, effective November 1, 2013, allow parties to include, as part of their contractual arbitration provisions, a further provision that the decision of arbitrators may be appealed to a newly established AAA Appeal Tribunal which, specifically, may review those decisions based upon alleged errors of law that are material and prejudicial to a party, and determinations of fact that are “clearly erroneous.” The Appeal Tribunal, comprised of arbitrators selected from a AAA “appellate panel,” may affirm or reverse the underlying arbitration decision, and its decision becomes the final decision in the case.
The newly optional appeal procedure is available only by agreement of the parties. That is to say, it is a matter of contract between the parties. A party may not unilaterally appeal an arbitration decision. The parties’ agreement to allow an appeal under the new rules may be included in the underlying contract that is the basis for the dispute, or by the parties’ “stipulation.” As discussed below, the AAA appellate process is at least arguably counter to the national policy for finality of arbitration awards that is embodied in federal and state laws that have heretofore established the only avenue to overturn arbitration awards. With the optional appeal rules, AAA offers the process to meet parties’ desires to have a “more comprehensive appeal” of an award within the arbitration process itself that could be completed in three months. That said, finality of arbitration is at stake.
The Finality of Arbitration
Parties negotiating contracts have historically enjoyed a degree of flexibility in fashioning the terms of arbitration provisions made a part of those contracts. Federal and state arbitration laws reflecting a national policy favoring arbitration require that arbitration provisions in valid contracts be enforced in accordance with their terms. Parties may, for example, specify the arbitration forum and rules, the way arbitrators are chosen, and what their qualifications should be. They may specify particular procedures for obtaining access to documents or information, and even identify the substantive law under which their dispute will be decided. But federal and state arbitration laws also deal with the finality of arbitration decisions by narrowly limiting grounds upon which a party may challenge a decision of arbitrators rendered in accordance with their agreement. Courts, notably led by the United States Supreme Court, have declared that parties may not by their agreement create judicial appeals from final arbitration decisions that are at odds with the narrowly prescribed statutory grounds upon which an arbitration decision could be overturned (vacated). A “wrong” decision is not among those statutory grounds.
By law, parties may ask courts to vacate arbitration decisions when there are egregious departures from their agreed-upon arbitration -- where the result is the product of corruption, fraud, evident partiality, misconduct, misbehavior, of arbitrators exceeding their powers or making evident material miscalculations, or deciding matters not submitted to them. These are particular grounds, and the only grounds, upon which parties may request a court to vacate an arbitration decision. The grounds do not go to the “merits” of a decision, but rather to the form or the integrity of the arbitration process in which the merits were determined.
Parties have in the past attempted to include in their agreements broader grounds for obtaining judicial review of arbitrators’ decisions. Such attempts have been rejected, however, with the U.S. Supreme Court itself making clear under federal law that parties may not seek by agreement to go beyond the statutory grounds upon which an arbitration decision may be reviewed. To be sure, over the years the notion has emerged that arbitrators could so manifestly disregard the law that controls a particular case that review outside the specific statutory grounds should be permitted. However, the so-called “manifest disregard” basis has been very narrowly applied, and its validity in the face of U.S. Supreme Court pronouncements has not been resolved. In any event, arbitration decisions are rarely overturned on any of these grounds.
What is certain in regard to the finality of arbitration awards, however, is that the standard on which courts may review and, in appropriate cases overturn, them does not include mere errors of law or erroneous fact determinations. Finality of decisions is thus assured to the greatest extent possible, for good or ill in the eyes of a losing party. Arbitrators may make the wrong decision. Nevertheless, there is no “appeal” by which further burden, expense and uncertainty is imposed. Finality is a key consideration for including arbitration provisions in contracts. It is against this backdrop, however, and with the express purpose of creating a non-judicial appeal within the arbitration process, that AAA has created the optional appellate process.
The New AAA Appeal
With an eye to the strict limitations on judicial review of arbitration awards, AAA has described its own newly implemented non-judicial appeal procedure as follows:
The [appellate] rules provide for an appeal to an appellate arbitral panel that would apply a standard of review greater than that allowed by existing federal and state statutes. The appellate rules anticipate an appellate process that can be completed in about three months, while giving both sides adequate time to submit appellate briefs. The rules permit review of errors of law that are material and prejudicial, and determinations of fact that are clearly erroneous.
For parties looking to include a provision for the new AAA appeal process in the ADR provisions of their contracts, AAA has offered the following sample language for use when a standard arbitration clause is also contained in the agreement:
Notwithstanding any language contrary in the contract documents, the parties hereby agree: that the Underlying Agreement 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; the Underlying Agreement 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.
Key aspects of the AAA Appeal are as follows:
- The appeal will be heard and determined by an “Appeal Tribunal” comprised of arbitrators that the parties may themselves appoint, or which AAA will appoint based upon a selection procedure by which the parties may strike and rank references of arbitrators on a list chosen from AAA’s “Appellate Panel.”
- Three appellate arbitrators will be appointed as the Appeal Tribunal unless the parties agree that the appeal may be heard by a single arbitrator.
- The appeal will be determined on the basis of appellate briefs submitted by the parties in accordance with a schedule and page limits established by the rules or the Appeal Tribunal; there will be no oral argument unless requested, and permitted in the discretion of the Appeal Tribunal.
- The Appeal Tribunal may within thirty (30) days “adopt” the underlying award as its own, “substitute” its own award for the underlying award; or request additional information from the parties and extend the time to render its decision.
- The Appeal Tribunal’s decision becomes the final award for purposes of judicial enforcement proceedings. The Appeal Tribunal may not order a new arbitration or remand the case back to the original arbitrators.
- There is a non-refundable $6,000 administrative fee to be paid b the party seeking appellate review. An additional $6,000 administrative fee is to be paid by any party filing a “cross” appeal. These fees do not include the fees or costs of the Appeal Tribunal or the cost of hearing facilities.
The ability of the Appeal Tribunal to address “material and prejudicial” errors of law, and “clearly erroneous” fact determinations by the original arbitration panel is the central feature of the new AAA appeal. For this to happen, however, a sufficient record on appeal must exist. The Appeal Tribunal will not rehear the case. Clearly, the “record” of an arbitration proceeding must, therefore, be sufficient to permit a review of the proceedings. Absent a verbatim hearing transcript, for example, it is unclear to what extent the Appeal Tribunal could fully and fairly review the original proceeding for clear error in fact determinations or the application of law to the facts. The new AAA rules require only that the parties shall cooperate in compiling the record on appeal. Parties may submit hearing transcripts, documentary evidence, and other materials admitted in the original proceeding. No doubt, the quality of the record on an appeal specifically focused on original arbitrators’ application of the law and findings of fact will in many instances be problematic.
The expense of an adequate record will be an additional consideration. These and other considerations suggest that the new AAA appeal process will be most meaningful to parties in large and complex cases, in which the ability to take an appeal is important. AAA’s President and CEO, India Johnson, recently made the point that the new rules were in fact developed with those cases in mind.
Adopting the new Optional Appellate Rules, AAA noted that appellate arbitration is not entirely new, and that parties have for some years developed processes and standards among themselves for conducting such proceedings. The Optional Appellate Rules, according to AAA, now provide an easier, more standardized process. Whether they will further the process, much less encourage it, remains to be seen. As the arbitration process has evolved into ever more complex and expensive proceedings, parties have increasingly expressed concern that the intended fast and efficient ADR mechanism has morphed into simply another form of expensive litigation. Adding an expensive appellate level to the arbitration process, albeit one that is entirely optional and not intended to significantly drag out the process leading to a final result, may be an unattractive prospect as parties and their lawyers negotiate ADR provisions in contracts. As a practical matter, perceived advantages of providing for arbitration as an ADR procedure may well disappear as parties are faced with negotiating for or against an appeal procedure as well. Of course, parties may avoid the issue entirely by settling on an arbitration forum other than AAA.
In the end, AAA may have it right: Some parties may want the opportunity for a comprehensive appeal of arbitrator decisions on disputes arising out of their contractual business relationships. AAA arbitrations are governed by several sets of rules tailored to the particular kind of dispute or circumstances in which disputes arise, including, for example, a dedicated set of rules governing large, complex commercial disputes. The new Optional Appellate Arbitration Rules fit well within that arbitration structure, and parties who choose to specify in their contracts that the large and complex case rules shall apply may well see the available appellate procedure as a desirable extension of the process without regard to whatever further burden and expense it entails or the uncertainty it brings.