James M. Hosking, Partner at Chaffetz Lindsey LLP C. Diego Guevara, Associate at Chaffetz Lindsey LLP
Appellate Arbitration Mechanisms: The AAA/ICDR Optional Rules — A New Trend in International Arbitration? I. Introduction On November 1, 2013, the American Arbitration Association (AAA) announced the introduction of its Optional Appellate Arbitration Rules 1 (in this article, the AAA Appellate Rules), a “new optional procedure that enables a streamlined, high-level review of arbitral awards...” 2 The rules permit the parties to opt into a mechanism by which a panel of arbitrators are empowered to “review” an arbitral award and to produce a binding decision upholding or modifying the award. The rules provide for a more expansive review of arbitral awards than the review permitted under the Federal Arbitration Act (FAA) 3 in vacatur proceedings in federal and state courts 4. The AAA
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Optional Appellate Arbitration Rules, Am. Arbitration Ass’n. (effective Nov. 1, 2013), available at http://go.adr.org/AppellateRules [hereinafter AAA Appellate Rules]. Press Release, Am. Arbitration Ass’n, New Optional Appellate Arbitration Rules from the AAA and ICDR Provide Further Arbitration Flexibility (Nov. 1, 2013), available at http:// go.adr.org/AppellateRules (follow “Press Release” hyperlink). 9 U.S.C. § 1 et seq. The FAA is the principal law on arbitration in the United States for both domestic and international arbitration. Chapter 2 of the FAA incorporates the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), June 10, 1958, 330 U.N.T.S. 38. Press Release, supra note 2.
James M. Hosking, C. Diego Guevara
envisions these rules being used for “large, complex cases where the parties agree that the ability to appeal is particularly important.” 5 In theory, parties have always been permitted to contract for some kind of arbitral appellate review mechanism 6, but ad-hoc appellate review mechanisms were rarely encountered in practice 7. This was at least in part due to the fact that until a recent decision of the United States Supreme Court 8, parties could agree to expand the grounds of judicial review available under the Federal Arbitration Act. That option has now been considerably restricted, although the exact scope of the Supreme Court decision remains controversial 9. Driven to some extent by this change in law and also by a perceived need for such rules by corporate arbitration users, the AAA decided to introduce the AAA Appellate Rules. The adoption of the rules was
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Id. Judge Posner explicitly invited parties to take this approach in Chicago Typographical Union No. 16 v. Chicago Sun-Times, Inc., 935 F.2d 1501, 1504–05 (7th Cir. 1991): “Federal courts do not review the soundness of arbitration awards... If the parties want, they can contract for an appellate arbitration panel to review the arbitrator’s award. But they cannot contract for judicial review of that award....” Am. Arbitration Ass’n, Drafting Dispute Resolution Clauses: A Practical Guide 2 (1992) (“Experienced parties and their attorneys rarely write arbitration clauses which allow for appeal of the arbitrator’s award.”) cited in Murray S. Levin, The Role of Substantive Law in Business Arbitration and the Importance of Volition, 35 Am. Bus. L.J. 105, 115 (1997). See Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008). Before the Supreme Court’s decision in Hall Street the US Courts of Appeal split on the issue of whether parties could contract for expanded judicial review of their awards. The issue came up in cases in which the parties had agreed that a court could examine the award for errors of law or fact or both and vacate or modify on those grounds in addition to the grounds listed in the FAA. See 9 U.S.C. § § 10, 11. In circuits where such contracts were found to be valid, the courts of appeal tended to rely on the principle of freedom of contract and on the fact that the FAA did not explicitly preclude such review. See, e. g., Gateway Techs., Inc. v. MCI Telecomms. Corp., 64 F.3d 993, 996–997 (5th Cir. 1995); Hughes Training, Inc. v. Cook, 254 F.3d 588, 590 (5th Cir. 2001). The Supreme Court held to the contrary under the rationale that the language of the FAA indicates that the grounds for vacatur and modification are exclusive and not merely “default” provisions. Hall Street, 552 U.S. at 587. 79
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not made as part of the review of the AAA’s most widely used set of arbitration rules (the Commercial Arbitration Rules) nor of its very popular International Rules (administered by the International Centre for Dispute Resolution). Rather, as will be explained below, the AAA Appellate Rules were introduced as optional rules to apply — only if adopted by the parties — across the full panoply of the AAA’s many sets of rules. In drafting the AAA Appellate Rules, the AAA has sought to provide a cutting-edge arbitral appellate mechanism that borrows from analogous rules offered by other institutions but also includes some interesting new initiatives. This article presents, first, a summary of the conceptual pros and cons of appellate arbitration (Section II). This is followed by a summary of the arbitral appellate rules that existed prior to promulgation of the AAA Appellate Rules (Section III). The article then walks through the key components of the AAA Appellate Rules (Section IV) before making some conclusions about unresolved issues surrounding the application of the rules and offering thoughts on the likely usefulness of the mechanism in the international arbitration context (Section V).
II. Arguments for and against appellate arbitration mechanisms In order to analyze the AAA Appellate Rules, it is necessary to understand the arguments made for and against having an arbitral appellate mechanism. These arguments cover conceptual issues of the nature of arbitration as well as very practical considerations that go to the heart of why parties are attracted to arbitration in the first place.
A. Arguments in favor of appellate arbitral review
A review of the literature indicates the following rationales offered for why appellate arbitral mechanisms exist. 80
James M. Hosking, C. Diego Guevara
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Permitting a second look to fix egregious errors
Irene Ten Cate recently published a comprehensive examination of the purposes of appellate arbitration and the benefits that it might confer. According to Ten Cate’s analysis, commercial arbitration is a model of “pure dispute resolution.” 10 This is because the parties to a commercial arbitration are interested only in solving their own concrete case and they are unconcerned with the “public values” that are implicated in judicial resolution or in certain forms of specialized arbitration such as those arising out of investment treaties 11. Ten Cate notes that, although commercial arbitrators are tasked with interpreting and applying the law of a particular jurisdiction, the nature of commercial arbitration dictates that the arbitrators’ decision is unlikely to have any effect on future cases 12. In addition, commercial arbitrators owe duties almost exclusively to the parties before them, to the exclusion of any “broader legal community.” 13 This contrasts with judicial decisions and investment arbitration, which implicate public policy concerns. In the absence of public policy concerns and ignoring purely strategic considerations, Ten Cate concludes that there is really only one reason to subject commercial arbitration awards to appellate review: error correction 14. She points out that some jurisdictions allow parties to agree to exclude any judicial review of an award 15, while most permit judicial review on only the narrow grounds permitted by the New
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Irene M. Ten Cate, International Arbitration and the Ends of Appellate Review, 44 N.Y.U. J. Int’l L. & Pol. 1109, 1114 (2012) (internal quotation marks omitted). Id. at 1114–15. It should be noted that investment arbitration conducted under the auspices of ICSID is subject to review in the form of an annulment proceeding. Id. at 1114–15 Id. at 1117. Id. at 1111. Id. at 1124–25; see, e. g., LCIA Arbitration Rules, art. 26.9 (effective Jan 1, 1998), available at http://www.lcia.org/media/download.aspx?mediaId=74. 81
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York Convention or, in the case of the United States, under Chapter 1 of the FAA 16. While the finality of arbitration is one of its key distinguishing characteristics, that same strength can be seen as a potential weakness when the stakes are very high. The possibility of receiving an unexpected decision and not having any recourse to correct it may make parties think twice about using arbitration for dispute resolution when they have a lot riding on the outcome. In fact, surveys of arbitration users have found that, by a large margin, the majority of repeat users value the “fairness and justice of the process” over competing attributes of arbitration such as speed, cost, and expertise 17. Interposing an appellate arbitration mechanism as a form of review prior to an award becoming final — and before any judicial review that might be available — therefore provides additional comfort to parties that are “betting the farm.” 18
For academic treatment of judicial review of arbitral awards, see generally Stephen P. Younger, Agreements to Expand the Scope of Judicial Review of Arbitration Awards, 63 Alb. L. Rev. 241 (1999); Kevin A. Sullivan, The Problems of Permitting Expanded Judicial Review of Arbitration Awards Under the Federal Arbitration Act, 46 St. Louis U. L.J. 509 (2002); Dan C. Hulea, Contracting to Expand the Scope of Review of Foreign Arbitral Awards: An American Perspective, 29 Brook. J. Int’l L. 313 (2003); James M. Gaitis, International and Domestic Arbitration Procedure: The Need for A Rule Providing A Limited Opportunity for Arbitral Reconsideration of Reasoned Awards, 15 Am. Rev. Int’l Arb. 9 (2004); Mauricio Gomm-Santos, Quinn Smith, On Dangerous Footing: The Non-Statutory Standards for Reviewing an Arbitral Award, 18 Am. Rev. Int’l Arb. 353 (2007); Kenneth R. Davis, When Ignorance of the Law Is No Excuse: Judicial Review of Arbitration Awards, 45 Buff. L. Rev. 49 (1997); Maureen A. Weston, The Other Avenues of Hall Street and Prospects for Judicial Review of Arbitral Awards, 14 Lewis & Clark L. Rev. 929 (2010). 17 See, e. g., Richard W. Naimark & Stephanie E. Keer, International Private Commercial Arbitration: Expectations and Perceptions of Attorneys and Business People, 30 Int’l Bus. Law 203 (2002) cited in Nana Japaridze, Fair Enough? Reconciling the Pursuit of Fairness and Justice with Preserving the Nature of International Commercial Arbitration, 36 Hofstra L. Rev. 1415 (2008). 18 See generally William H. Knull, III & Noah D. Rubins, Betting the Farm on International Arbitration: Is It Time to Offer an Appeal Option?, 11 Am. Rev. Int’l Arb. 531 (2000). 16
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