AAA’s New Optional Appellate Arbitration Rules Seek to Bridge the Gap Between Arbitration and Appellate Rights.

While many construction industry participants favor the finality of binding arbitration, some are put out by the inability to appeal an unfavorable award (see my previous blog post for more on the limited bases for challenging arbitration awards in court).

Photo by Eric Kilby via Flickr *

Photo by Eric Kilby via Flickr *

The American Arbitration Association® (“AAA”) has announced a new set of rules intended to bridge that gap.  As of November 1, 2013, the AAA has made available for use its “Optional Appellate Arbitration Rules,” the purpose of which was articulated by AAA in its press release:

The objective of arbitration is a fair, fast and expert result that is achieved economically.  Consistent with this goal, an arbitration award traditionally will be set aside by a court only where narrowly defined statutory grounds exist.  Sometimes, however, the parties may desire a more comprehensive appeal of an arbitration award within the arbitral process.  …  In order to provide for an easier, more standardized [appellate] process, the AAA has developed these Optional Appellate Rules.

I greeted news of the Appellate Rules with much curiosity and, truth be told, a fair amount of skepticism: how could AAA marry up a meaningful appellate process with the streamlined nature of arbitration?  And so before reviewing the new rules, I jotted down a list of questions I hoped they would address.  Those questions, and what I discovered upon reviewing the rules, follow:

(1) How “optional” are the optional rules?  Completely.  Per Rule A-1, all parties must consent to the rules, either by contract or by stipulation; otherwise, they simply don’t apply.  The AAA has suggested an arbitration appeals clause for inclusion in contracts:

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 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.

(2) Under what circumstances may arbitration awards be challenged under the new rules?  Per Rule A-10, a party may appeal on the grounds that the underlying award is based upon an error of law that is material and prejudicial, or upon determinations of fact that are clearly erroneous.   This rule effectively means that the appellate arbitrators are authorized to review both questions of law and issues of fact.

(3) If issues of fact can be challenged, what do the rules provide in terms of evidence preservation?  I’ve yet to be involved in a construction arbitration that included a court reporter.  In the absence of a right to appeal an award, why bother, right?  Well, parties adopting the Appellate Rules might want to think twice about skipping the stenographer.  While Rule A-16 does not expressly require a transcript, the absence of one might make it more difficult to challenge findings of fact.

(4)  Other than the hearing transcript, what other materials can be included in the record on appeal?  Per Rule A-16, expert reports, documents admitted as evidence, deposition transcripts or affidavits admitted as evidence and pre- and post-hearing briefs can all be included in the record on appeal.

(5) Are oral arguments allowed?  Only if the appellate tribunal wants them.  Per Rule A-15, and in keeping with the streamlined nature of arbitration, any party can request oral argument within thirty (30) days of service of the Notice of Appeal, but it’s up to the tribunal to determine if oral argument is necessary.  Per AAA’s press release announcing the Appellate Rules, and consistent with Rule A-15(a), “Appeals generally will be determined upon the written documents submitted by the parties, with no oral argument.”

(6) Can the appellate tribunal remand the case for further arbitration hearings?  No.  Per Rule A-19, the tribunal may adopt the underlying award on its own, substitute its own award for the underlying award, or request additional information and notify the parties of the tribunal’s exercise of an option to extend the time to render a decision, not to exceed 30 days.  The tribunal is expressly prohibited from mandating additional evidentiary hearings.

(7) What control over appellate arbitrator selection will the parties have?  Considerable, consistent with AAA’s existing rules for arbitration selection.  Per Rule A-4, the candidates must be selected from AAA’s Appellate Panel, and per Rule A-5, the AAA must send the parties an identical list of 10 candidates.  The parties are encouraged to agree upon the tribunal, and if agreement can not be reached, each party must strike names objected to and rank the remaining candidates.  Per Rule A-5(d) , the parties can request appellate arbitrators with specific qualifications, presumably including candidates with strong backgrounds in construction law, as the case may be.

(8) How many arbitrators will be appointed to the appellate tribunal?  Per Rule A-5(b), a tribunal of three appellate arbitrators will be appointed unless the parties agree to a single arbitrator.

(9) How long will all this take?  Per the AAA’s press release, the Appellate Rules anticipate “a process that can be completed in about three months.”  Here’s a summary of how that schedule is intended to be achieved:

  • The Notice of Appeal, which must be filed within 30 days of submission of the underlying award (see Rule A-3(a)(i)), starts the clock.
  • Unless agreed to by the parties and approved by the tribunal, the appellant’s Initial Brief is due no later than 21 days after service of its Notice of Appeal (see Rule A-17(a));
  • Appellee’s Answer Brief must be served no later than 21 days after service of appellant’s Initial Brief (see Rule A-17(b)), and in the event of a cross-appeal, the Cross-Appeal Brief must be served at the same time;
  • Appellant’s Reply Brief to Appellee’s Answer Brief must be served no later than 10 days after service of the Answer Brief (see Rule A-17(d));
  • Appellant’s Answer Brief to Appellee’s Cross-Appeal Brief must be served no later than 21 days after service of the Cross-Appeal Brief (see Rule A-17(e));
  • Appellee’s Reply Brief to Appellant’s Answer Brief must be served no later than 10 days after service of the Appellant’s Answer Brief (see Rule A-17(f)); and
  • The tribunal’s decision is due 30 days after receipt of the final brief (see Rule A-19(a)).

Assuming this schedule is followed, no additional briefing time is agreed upon, a cross-appeal is asserted, the parties avail themselves of all their briefing rights and no oral argument is allowed, I count a process lasting 103 days (Initial Brief by Day 21, Answer Brief/Cross-Appeal Brief by Day 42, Appellant’s Answer Brief by Day 63, Reply Brief to Appellant’s Answer Brief by Day 73, decision by Day 103).  Oral argument would extend this schedule about a month, the tribunal has the option of taking an additional 30 days to render a decision, and the parties might agree to additional time with the tribunal’s approval.  So let’s call it a three- to six-month process.

(10) How much will all this cost, and which of the parties will be responsible for those costs?  Now we’re getting down to the nitty-gritty.  Per the Administrative Fee Schedule at the end of the Appellate Rules, the appellant must make a non-refundable deposit of $6000 to get the party started, and any cross-appeal would require an identical $6000 administrative fee.   As for the tribunal’s fees, and per Rule A-12, the appellant is responsible for those if there is no cross-appeal; they are split if there is a cross-appeal.  Assuming no cross-appeal, that’s an expensive proposition for the appealing party, particularly if the tribunal consists of three members.  The tribunal’s decision may include a reallocation of any party’s share of fees and costs of the appeal.

To my mind, this fee structure was intended to dissuade frivolous appeals.  A party contemplating an appeal is unlikely to know whether a cross-appeal will be filed, which effectively means the would-be appellant must balance the likelihood of prevailing against the $6000 non-refundable administrative fee and potentially tens of thousands of dollars in tribunal fees.

On the whole, I like the new Appellate Rules.  They preserve appellate rights, feature a streamlined process and establish a fee structure that should ensure only colorable appeals are asserted.  I’m very likely to recommend that my clients give the new Appellate Rules serious consideration in the contract negotiation process.  How about you?

* Photo Credit: this photo and other works by Eric Kilby can be found at the artist’s Flickr Photostream.

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