Scott Arnold, Justin A. Chiarodo and Christian N. Curran
The American Arbitration Association (AAA) recently adopted optional Appellate Rules which significantly change the resolution of post-award issues. The new Appellate Rules, effective November 1, 2013, permit appeals of arbitration rulings directly to an AAA appellate panel. Given the difficulty in overturning traditional arbitration awards, these new rules could help protect against factually and legally flawed outcomes. However, they also could add both time and expense to an arbitration, limiting the efficiencies and cost savings that often lead contractors to use arbitration provisions in the first place. This alert discusses the new Appellate Rules, and some things to keep in mind when evaluating whether to use them.
New Appeal Grounds
One of the traditional features of arbitration compared to litigation is that arbitrations are designed to reach a final decision sooner. Vacating an arbitration award is extremely difficult and can generally only be done under limited circumstances (e.g., plain and obvious bias of an arbitrator, fraud or corruption, misconduct of an arbitrator, or if arbitrators exceed their powers). See Federal Arbitration Act, 9 U.S.C. § 10. An arbitration panel’s legal or factual errors alone are not traditional grounds to overturn an award.
Addressing some of these limitations, the new Appellate Rules provide an optional appellate proceeding for parties who agree to use the rules-either by stipulation or contract provision-to appeal an award based on two grounds: “(1) an error of law that is material or prejudicial; or (2) determinations of fact that are clearly erroneous.” Appellate Rule A-10.
The Appellate Rules provide that appeals should be resolved within a three-month period. They provide for the appeal to be noticed within 30 days and for a three arbitrator panel selected from AAA’s appellate roster, unless the parties specify that only one arbitrator is needed. The rules state that a properly noticed appeal will toll any federal or state arbitration statutes that specify a timeframe for filing a petition to vacate an award (how this will be enforced in practice is unclear). AAA costs and fees from the underlying matter that gave rise to the appeal must be paid in full before the appeal can be initiated. The appellant is initially responsible for all costs and fees where there is no cross appeal, but this can be shifted if the appellant prevails. Additional costs will include record assembly costs, which can include any record documents from the underlying arbitration.
Once the appeal is initiated, the matter will generally be decided on the parties’ briefs. Though the appellate tribunal may provide for oral argument, the rules suggest that oral arguments will be atypical. Appellate Rule A-15. Appellate Rule A-17 outlines the deadlines for briefing, but extensions can be granted for “good cause.”
Strategic and Cost Implications
Government contractors frequently use arbitration clauses in subcontracts, joint venture agreements, and other contract arrangements, often seeking to promote the efficient and confidential resolution of disputes in an alternative forum. When considering the use of the optional Appellate Rules, contractors should consider both the strategic and cost implications presented. Although the rules allow a contractor to appeal awards based on significant legal or factual errors, the obvious downside risk is the loss of the finality that comes with a traditional arbitral award and the extended time it will take to resolve a dispute. From the cost perspective, any appeal will result in increased costs and the potential for cost shifting if the appellant loses. This includes the potential for an assessment of attorneys’ fees and other related costs. Particularly in smaller programs and disputes, the added costs may not be worth the benefit. In fact, the AAA acknowledged, in its press release that accompanied the rules, that the rules are geared toward “large” and “complex” cases, where an option to appeal may be more attractive to the parties. Given this, contractors should assess their contracts and strategic objectives when deciding to use the Appellate Rules.