American Arbitration Association Adopts Optional Appellate Procedure For Arbitration Award

by Williams Mullen
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Effective November 1, 2013, the American Arbitration Association (“AAA”) adopted an optional appellate procedure for review of arbitration awards. According to the AAA, its new appellate review option provides grounds for review of an arbitration award not limited to the narrow grounds of review specified in the Federal Arbitration Act, or allowed under many states’ laws; and one that can be completed in about three months. The irony is that for many years the AAA has touted the finality of the arbitration process, with the narrow grounds of review as a significant reason to choose arbitration over a judicial proceeding.

The new Rules are entitled, Optional Appellate Arbitration Rules. Utilization of the Rules is by mutual agreement of the arbitrating parties, whether by stipulation or in the parties’ contract. One party cannot invoke the AAA Optional Appellate Arbitration Rules without the agreement of the other party. Failing a stipulation or contract agreement to utilize the AAA appellate procedure, a party may still seek to vacate an arbitration award in the appropriate federal or state court with jurisdiction.

The AAA’s new rules for review of an arbitration award allow for two (2) grounds for appeal:

(1)   an error of law that is material and prejudicial; or

(2)   determinations of fact that are clearly erroneous.

In regard to the first grounds for review, an error of law, many states’ courts, including Virginia, agree that an arbitrator is not generally bound by legal principles, and those state courts will not review an arbitration award for legal error. There are, however, some state courts and federal courts applying the Federal Arbitration Act that will review and vacate an arbitration award for an arbitrator’s manifest disregard of applicable law.

In regard to the second grounds for review under the new Rules, determinations of fact that are clearly erroneous, the courts give great deference to an arbitration award. Unless the party seeking to vacate an award can fit within one of the bases for vacating an award, such as evident partiality of an arbitrator or panel, the likelihood of a court overturning or vacating an arbitration award is slim.

According to the AAA, one of the goals with its new appellate procedure is to provide a standardized process for review of an arbitration award.

Another aspect of the new Rules is the timing of the process. The AAA contemplates that the entire appellate process will be completed within three months. To that end, the new Rules favor the determination of the appeal based upon the written documents submitted by the parties, including appeal briefs. Oral argument may be requested, but only if the appellate tribunal deems oral arguments necessary will there be an oral argument. The appellate tribunal is to rule on the appeal within thirty (30) days of service of the last brief or within thirty (30) days of oral argument.

The appellate tribunal’s decision may: a) adopt the underlying Award, or 2) substitute its own Award for the underlying Award (incorporating aspects of the underlying Award not vacated or modified), or 3) 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 thirty (30) days. The appellate tribunal may not order a new arbitration hearing or send the case back to the original arbitrator(s) for corrections or further review.

The appellate tribunal’s decision shall be deemed a final decision for purposes of judicial enforcement.

The question yet to be answered is whether the AAA’s new Optional Appellate Procedure will be embraced by arbitrating parties, or perceived as an added step in achieving finality in the arbitration process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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