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American Arbitration Association
Forum on the Construction Industry
BEYOND NO: APPEALING THE ARBITRATION AWARD
Stanley P. Sklar, Esq.
Melissa L. Levy, Esq.
Bell, Boyd & Lloyd LLC
Chicago, Illinois
May 18-19, 2006
Paradise Point Resort & Spa - San Diego, California
ABA FORUM ON THE CONSTRUCTION INDUSTRY ANNUAL MEETING
2006 American Bar Association
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TABLE OF CONTENTS
Page
I. LIMITATIONS ON JUDICIAL REVIEW...................................................................... 1
A. Federal Arbitration Act, 9 USC Section 10.......................................................... 3
1. Vacatur of Arbitration Awards by the Court............................................. 3
2. Corruption, Fraud, or Undue Means......................................................... 6
3. Evident Partiality or Corruption............................................................... 7
4. Misconduct in Refusing to Postpone the Hearing or to Hear
Evidence Pertinent to the Controversy or MisbehaviorPrejudicing Rights of Parties.................................................................... 8
5. Arbitrators Exceeded Their Powers.......................................................... 9
B. Overview of Judicial Standards for Vacatur of Arbitration Awards.....................11
1. De Novo Review for Errors of Law ........................................................12
2. Clearly Erroneous Standard ....................................................................13
3. Substantial Evidence Standard................................................................14
4. Abuse of Discretion Standard .................................................................15
5. Arbitrary and Capricious Standard..........................................................16
6. Complete Irrationality Standard..............................................................17
7. Manifest Disregard .................................................................................18
8. Public Policy Exception..........................................................................20
II. APPELLATE REVIEW PROCEDURES BY CONTRACT...........................................22
A. To Review or Not to Review, That is the Question.............................................23
B. Contract Issues and Appellate Review of Arbitration Awards.............................25
C. Existing Procedures for Appellate Review by Agreement...................................26
1. American Arbitration Association...........................................................26
2. JAMS Arbitration Appeal Procedure.......................................................27
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3. CPR Institute for Dispute Resolution Rules for ArbitrationAppeal....................................................................................................28
III. CONCLUSION .............................................................................................................30
APPENDIX 1............................................................................................................................31
APPENDIX 2............................................................................................................................34
IV. FAILURE TO DISCLOSE AS A BASIS FOR VACATING AN AWARD....................40
AMERICAN ARBITRATION ASSOCIATION Construction IndustryArbitration Rules and Mediation Procedures ......................................................41
AAA CODE OF ETHICS IN COMMERCIAL DISPUTES 2003REGARDING DISCLOSURE ...........................................................................42
FAILURE TO DISCLOSE MAY LEAD TO REMOVAL FROM THENATIONAL ROSTER OF NEUTRALS ............................................................44
A BRIEF REVIEW OF SOME RELEVANT CASES....................................................45
V. BIOGRAPHIES.............................................................................................................47
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I. LIMITATIONS ON JUDICIAL REVIEW
An arbitration agreement is a contractual commitment by the parties to resolve
issues of fact, law and contract through an alternative adjudicative forum, and accept the
decision of a neutral arbitrator. Stephen L. Hayford,Law in Disarray: Judicial Standards
for Vacatur of Commercial Arbitration Awards, 30 Ga.L.Rev. 731, 741-45 (1996)
(discussing the nature of arbitration agreements and public policy indicated by the
Federal Arbitration Act). The key objective of arbitration is to resolve disputes quickly,
inexpensively, and without the complexity of traditional litigation. Id. See also PHILLIP
L. BRUNNER & PATRICK J. OCONNOR., CONSTRUCTION LAW, 12 (2002); 9 U.S.C. 10
(2003). The longstanding common law rule, as enunciated in the landmark case of
Burchell v. Marsh was that a court will not set aside an arbitration award for error in law
or fact. 58 U.S. 344 (MB) (1855). In describing the narrow limit of allowable judicial
review of final arbitration awards, the Burchell court stated that if the arbitrators have
given their honest, incorrupt judgment on the subject-matters submitted to them, after a
full and fair hearing of the parties, they are bound by it; and a court of chancery have no
right to annul their award because it thinks it could have made a better. Id. at 352.Stanley P. Sklar, Matthew Bender Construction (2003). Under the common law rule, if
the decision was honest and the hearings were fair, an award could not be set aside. Id.
at 12.18[3][b]. Modern arbitration statutes, both federal and state, have codified
arbitration laws in keeping with the common law rule regarding judicial review of an
arbitration award. Id. (citing 9 U.S.C. 10 ; U.A.A. 12; In reTime Constr., Inc., 43
F.3d 1041 (6th Cir. 1995) (citing Michigan's statutory bases for vacating arbitrator
awards in Mich. Ct. Rule 3.602(J)(1)(d)); O&K Glass Co. v. Innes Constr. Co., Inc. , 608
N.W.2d 236 (N.D. 2000); Anzillotti v. Gene D. Liggin, Inc., 899 S.W.2d 264
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(Tex.Ct.App. 1995) (citing Texas' statutory bases in Tex.Rev.Civ.Stat.Ann. art. 237(A)
(Vernon 1973)); Hooten Constr. Co. v. Borsberry Constr. Co., 108 N.M. 192, 769 P.2d
726 (1989);Hazeltown Area School Dist. v. Krasnoff, 156 Pa.Commw. 76, 626 A.2d 675
(1993), reh'g denied, 1993 Pa.Commw. LEXIS 431 (Pa.Commw.Ct. July 13, 1993)
(under a contract that provided for statutory arbitration, the court should have applied the
judgment N.O.V. standard of review and not the standard of judicial review reserved for
awards governed by common law arbitration)).
The Federal Arbitration Act (FAA) has become increasingly applicable as a
limitation on judicial review of arbitration awards. For example, in deciding whether the
FAA governed an award, the Supreme Court of Alabama interpreted the term involving
commerce in the FAA as the functional equivalent of the affecting commerce words
of art used regarding Congress commerce clause power. Serra Toyota, Inc., v. Johnson,
876 So. 2d 1125, 1129 (Ala S. Ct. 2003). The Court went on to say that this power may
be exercised in individual cases without showing any specific effect on interstate
commerce if in the aggregate the economic activity in question would represent a
general practice subject to federal control. Id. (quotingMandville Island Farms, Inc.,
v. American Crystal Sugar Co., 334 U.S. 219, 236 (1948). Likewise, In Roadway
Package Systems, Inc., v. Kayser the Third Circuit considered whether an arbitration
agreement was governed by the FAA where citizens of different states contracted for the
delivery of packages interstate. 257 F.3d 287, 292 (3d Cir. 2001). InRoadway, the Third
Circuit held that, if parties agree to arbitrate a matter that is within Congress reach under
the commerce clause, it is unquestioningly governed by the FAA. Idat 292. Essentially,
if a transaction involved interstate commerce and there is a contract requiring arbitration,
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the Federal Arbitration Act applies. In view of the FAAs broad reach, a discussion of 9
USC 10 (a)-(d) follows.
A. Federal Arbitration Act, 9 USC Section 10
1. Vacatur of Arbitration Awards by the Court
The Federal Arbitration Act places strong limits on judicial review of arbitration
awards. Under section 10(a) of the FAA, the grounds for vacating an award upon the
application of any party to the award are limited to four areas. See 9 U.S.C. 10 (2003).
First, under section (a)(1), is where the award was procured by corruption, fraud, or
undue means. Second, an award may be vacated under section (a)(2) where there was
evident partiality or corruption in any arbitrator. The third case arises under section
(a)(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing
despite a partys showing of sufficient cause to postpone or refusal to hear evidence
pertinent and material to the controversy; or of any other misbehavior by which the rights
of any party have been prejudiced. Lastly, vacatur is available, under section (a)(4)
where the arbitrators exceeded their powers, or so imperfectly executed them that a
mutual, final, and definite award upon the submitted subject matter was not made.
Federal policy favors arbitration and the preservation of the integrity of the
arbitration process. This policy is motivated by the desire to maintain an alternative
adjudicative procedure with increased efficiency, less complexity, shorter proceedings,
and reduced costs compared to the traditional litigation process. One comment notes
the goal of an arbitral proceeding should be a just award rendered in a fair, efficient and
final proceeding. Vacatur litigation inevitably compromises at least some of these goals,
by adding an expensive and potentially protracted second round to the process whether
the motion to vacate ultimately succeeds or not. R. Mills, J. Lani Bader, Thomas J.
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Brewer, and Peggy J. Williams, Vacating Arbitration Awards Study Reveals Real-World
Odds of Success by Grounds, Subject Matter, and Jurisdiction, DISPUTE RESOLUTION
MAGAZINE, Summer 2005, at 26-27. This policy is evident in the limits placed on
judicial review of arbitration awards. For example, the Supreme Court has stated that
courtshave no business weighing the merits of a grievance [or] considering whether
there is equity in a particular claim. if the judiciary does so, it usurps a function which is
entrusted to the arbitration tribunal Major League Baseball Players Assn v. Garvey,
532 U.S. 504, 509-10 (2001) (quoting Steelworkers v. Am. Mfg. co., 363 U.S. 564, 568-
69 4 L. Ed. 2d 1403, 80 S. Ct. 1343 (1960). The Supreme Court has also expressed that
by choosing arbitration, the parties have bargained for the arbitrators construction of the
agreement. Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960).
Likewise, the FAA reflects federal policy in favor of arbitration and the
preservation of the arbitration process. Although there is little legislative history for the
Act, Congress pro-arbitration policy is illuminated by the plain language of the statutes
extremely narrow categories of review and the high level of deference afforded
arbitrators opinions. Additionally, courts have interpreted the language of the FAA
consistent with this federal policy by limiting judicial review and interpreting the statute
narrowly. See Hayford, Supra, at 744-46. A decision by the Southern District of New
York held that to effectuate the federal policy in favor of arbitration, this section is to
be accorded the narrowest of readings. Milcom International V N. V., v. Motorola, Inc.
and Proempres Panama, S.A., 2002 U.S. Dist. LEXIS 5131 (S.D.N.Y. March 28, 2002)
(quotingBlue Tee Corp v. Koehring Co., 999 F.2d 633, 636 (2d Cir. 1993)).
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In addition to providing a slim category of review, the FAA also lacks procedural
requirements that would facilitate judicial review. As the District Court for the District
of Columbia noted an arbitration panel is not subject to the more rigid mechanisms that
courts are. Arbitration panels have great discretion and courts have narrow review of
their actions and decisions. Flight Systems v. Paul Lawrence Co., 715 F. Supp. 1125,
1128 (D. D. C. 1989) (referencing Washington-Baltimore Newspaper Guild v.
Washington Post Co., 442 F.2d 1234 (D.C. Cir. 1971). The FAA does not require
arbitrators to explain their decisions nor does it require the creation of a detailed record of
arbitration proceedings. As a result, records are typically sparse. A high showing is
required to avoid summary confirmation of an arbitration award, and a party petitioning
for review bears the burden of proof. Folkways Music Publishers v. Weiss, 989 F.2d 108,
111 (2d Cir 1993). Considering the high level of deference afforded arbitration awards,
then, overcoming this burden of proof is a particularly challenging task without the
benefit of a complete record of the proceedings. To set aside an arbitration award, the
petitioner must overcome a presumption of validity, and must show an objective basis
supporting his allegation. Stanley P. Sklar, Matthew Bender Treatise on Construction
Law (2003) Chapter 12.18[3][b]. Oftentimes the petitioner cannot make this showing
simply for lack of record. In addition, if a petitioner attempts to rely on newly discovered
evidence, the petitioner must show that the evidence could not have been discovered prior
to the arbitration proceeding. Stone, Inc. v. Liang, 493 F. Supp. 104, 109 (N.D. Ill 1980)
(holding that newly discovered evidence could not be used to vacate under the ground of
fraud under section 10(a) of the Federal Arbitration Act because the evidence was a
matter of public record and therefore discoverable prior to the arbitration proceedings).
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However, while these procedural obstacles and the limited review categories available
may complicate a partys challenge of an award, this procedural structure facilitates the
goals for which the arbitration process is designed: efficiency, speed, and reduced costs.
2. Corruption, Fraud, or Undue Means
The first of the review categories enumerated under the FAA is where the award
was procured by corruption, fraud or undue means. The party raising such allegations
bears a substantial burden of proof. The size of an arbitration award or disparity between
the award amount and the amount claimed, standing alone, is insufficient to show fraud
or bias. Stanley Sklar, Matthew Bender (citingMSP Collaborative Developers v. Fidelity
& Deposit Co. of Md., 596 F.2d 247 (7th Cir. 1979)). Additionally, undue means is not
proven by showing the offering of prejudicial evidence. Matthew Bender Construction
Law (2003) (citing Shearson Hayden Stone, Inc., v. Liang, 493 F. Supp. 104 (N.D. Ill.
1980). affd, 653 F2d 310 (7th Cir. 1981). Vacating an award for undue means
requires a showing of bad faith in procuring the award is required. Shearson Hayden
Stone at 108. Additionally, the petitioner must make specific allegations of bad faith,
fraud, or corruption, as to evidence, not merely allege undue means as to the evidence.
Id. at 109.
An interesting study, analyzing both state and Federal cases in which the
petitioner sought vacatur of an arbitration award, found that corruption, fraud or undue
means was the least frequently asserted allegation, and also the least successful at a 7.6%
success rate. R. Mills, J. Lani Bader, Thomas J. Brewer, and Peggy J. Williams,
Vacating Arbitration Awards Study Reveals Real-World Odds of Success by Grounds,
Subject Matter, and Jurisdiction, DISPUTE RESOLUTION MAGAZINE, Summer 2005, at 26
(limiting review to cases in which vacatur was sought following an arbitration proceeding
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involving an enforceable arbitration clause, not including cases involving labor or
collective bargaining agreements nor decisions involving statutorily mandated
arbitrations involving a less deferential standard of review than the FAA) (hereinafter
referred to as the Mills study).
3. Evident Partiality or Corruption
The second category warranting judicial review under the FAA occurs where
there is evident partiality or corruption in any of the arbitrators. Again, the petitioner
bears burden of proof. To meet this burden, the party challenging the award must
establish facts which indicate improper motives on the part of the Board. The appearance
of impropriety, standing alone, is insufficient. Sheet Metal Workers Intl Assn Local
Union #420 v. Kinney Air Conditioning Co., 756 F.2d 742, 748 (9th Cir. 1985) (quoting
Intl Produce, Inc. v. Rosshavet, 638 F.2d 548, 551 (2d Cir.), cert. denied, 451 U.S. 1017
(1981)). Even repeated rulings by an arbitrator against a particular party to the arbitration
do not meet the burden of proof of evident partiality without the additional demonstration
of some improper motivation. Bell Aerospace Co. v. Local 516, UAW, 500 F.2d 921, 923
(2d Cir. 1974). Courts have found, however, that undisclosed business dealings between
an arbitrator and a party to arbitration meet the showing required to vacate on grounds of
evident partiality. Amerada Hess Corp. v. Local 22026 Fed. Labor Union, A.F.L.-C.I.O.,
385 F. Supp. 279, 281 (N.J. 1974) (citing Commonwealth Coatings Corp. v. Continental
Casualty Co., 393 U.S. 145 (1968), reh. den. 393 U.S. 1112.) Other examples of
determinations of evident partiality or corruption occur where the arbitrator had a non-
business relationship with a party to the arbitration and where the arbitrator had a
personal or business interest in the outcome of the arbitration. Ameralda, 385 F.Supp at
281 (citingHyman v. Pottsbergs Exrs., 101 F.2d 262 (2d Cir. 1939).
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According to theMills et al. study, attempts at vacatur based on an allegation of
evident partiality or corruption in the arbitrators was only sought in 33 of the 182 total
cases examined. The article authors found the number of assertions of this ground for
vacatur to be surprisingly low in light of the fact that this category includes those
assertions pertaining to an arbitrators disclosures of conflicts or potential conflicts.
Additionally, this claim was only successful about 12.1 percent of the time. Mills et al. at
25.
4. Misconduct in Refusing to Postpone the Hearing or to Hear
Evidence Pertinent to the Controversy or Misbehavior
Prejudicing Rights of Parties
The third category under 10(a) is where arbitrators are guilty of misconduct in
refusing to postpone the hearing, upon sufficient case shown, or in refusing to hear
evidence pertinent and material to the controversy, or of any other misbehavior by which
the rights of any party have been prejudiced. In Ceco Concrete Construction v.
Schrimsher Construction Co., Inc., the parties submitted to arbitration; subsequently
Ceco sought to confirm the award and Schrimsher sought to have it vacated based on
section 10(a)(3) of the FAA. The District Court for the Northern District of Georgia
determined that [by] its motion to vacate Schrimsher effectively was seeking a stay of
proceedings pending determination of a related proceeding. Such right to a stay does not
exist under the Federal Arbitration Act. 792 F. Supp. 109, 110 (1992) (citing Volt Info
Sciences v. Leland Stanford Jr. University, 489 U.S. 468, 470 (1988). The Court held
that the arbitrators were correct in their decision not to postpone the proceedings pending
determination of the related administrative proceedings, and went on to explain that
[t]he granting or denying of an adjournment or postponement falls within the broad
discretion of appointed arbitrators. Id. (citing Nyall Storey v. Searle Blatt Ltd., 685
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Supp. 80, 82 (S.D.N.Y. 1988). The court further stated assuming a reasonable basis for
the arbitrators decision not to grant a postponement, the Court will be reluctant to
interfere with the award on these grounds. Creco, Supra, 110 (citing Fairchild and Co.
v. City of Richmond et al., 516 F.Supp. 1305, 1313-1314). Another example of an
allegation which was also insufficient to meet the burden of proof for this ground was
that arbitrators did not set a discovery schedule, hold a preliminary hearing, or require the
parties to submit discovery and documents prior to the arbitration. Flight Systems v. Paul
A. Laurence Co., 715 F.Supp. 1125 (D.D.C. 1989). In addition, a partys argument that
an award represents and evident mistake because the arbitrators did not hear after-
acquired evidence is also insufficient because cases decided under the FAA . . . have not
allowed an arbitration decision to be vacated on a claim of new evidence. Id. at 1128-29.
According to the Mills et al. study, this is the third most frequently advanced
ground for challenging an award, and it is successful in approximately 17 percent of
cases. These cases include those where the petitioner advanced allegations that the rights
of the party were prejudiced because the award was irrational, against public policy, or
arbitrary and capricious. Article at 25.
5. Arbitrators Exceeded Their Powers
Lastly, courts may vacate arbitration awards under 10(a)(4) where the arbitrators
exceeded their powers, or so imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made. This is the one ground for
vacatur under 9 USC 10 that does not require a showing of wrongdoing by the arbitrator
or the arbitration process. Typically, in these cases courts apply the objection to the
award by comparing the arbitration agreement or other documents through which the
parties agreed to arbitrate with the decision rendered by the arbitrator. Amerada, 385
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F.Supp. at 282. TheAmerada court expressly stated ordinarily the complaining party
must show that the arbitrators award is contrary to the express language of the collective
bargaining agreement.Id. at 282. An ambiguity in an arbitrators written opinion is not
sufficient to establish that the arbitrator exceeded his powers. In Kayser v. Roadway
Package System, Inc., the plaintiff, a small package shipper, alleged that the defendant
failed to fulfill his contractual obligations under the Linehaul Contractor Operating
Agreement and terminated the defendants employment. The defendant demanded
arbitration pursuant to his contractual right, and was subsequently awarded significant
damages by the arbitrator. The plaintiff filed suit in the Eastern District of Pennsylvania
to vacate the award on grounds that the arbitrator exceeded his powers by considering the
fairness of the procedures the plaintiff used to notify the defendant of its dissatisfaction
with the defendants performance rather than limiting his decision to the submitted
grounds of whether the termination violated the Linehaul Contractor Operating
Agreement. In affirming the lower courts decision, the United States Supreme Court
stated that, although judicial review is narrowly bounded by the FAA, the scope of an
arbitrators authority is defined and confined by the agreement to arbitrate. Kayser v.
Roadway Package Sys., Inc., 534 U.S. 1020, 1036 (2001). The Court went on to explain
We distill the following principals from our precedents: (1) a reviewing court should
presume that an arbitrator acted within the scope of his or her authority; (2) this
presumption may not be rebutted by an ambiguity in a written opinion; but (3) a court
may conclude that an arbitrator exceeded his or her authority when it is obvious from the
written opinion. Id. at 1039-40.
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TheMills study, in examining cases where arbitrators exceeded their powers, or
so imperfectly executed them that a final and definitive award on the merits was not
made, found this ground for vacatur to be the most frequently successful, succeeding in
20.8% of cases in which it was asserted. Lawrence R. Mills, J. Lani Bader, Thomas J.
Brewer, and Peggy J. Williams, Vacating Arbitration Awards Study Reveals Real-World
Odds of Success by Grounds, Subject Matter, and Jurisdiction, DISPUTE RESOLUTION
MAGAZINE, Summer 2005, at 24. However, this is still a difficult showing to make. For
instance, the Ninth Circuit stated that section 10(a)(4) of the FAA is designed to allow
district courts to vacate an arbitration award that clearly goes beyond the substantive
issues submitted by the parties. Sheet Metal Workers, 756 F.2d at 764.
B. Overview of Judicial Standards for Vacatur of Arbitration Awards
In addition to the applying the grounds for challenging an award as established in
Section 10 of the FAA, courts must also apply the appropriate standard of review in
determining whether to confirm or vacate an arbitration award. Recently, there has been
a trend that contracting parties will contract for expanded or enhanced judicial review of
their arbitration awards. As a result, courts are challenged even more frequently to apply
the appropriate standard of review to such agreements. The parties may, and often do,
choose and designate a level of review to be applied should their award be appealed.
There are several potential standards of review that parties may elect to include in their
arbitration agreements including de novo, clearly erroneous, and substantial evidence. In
addition, there are judicially created standards of review to determine the sufficiency of
an award. These standards include arbitrary and capricious, manifest disregard of the
law, completely irrational, and violation of public policy. These judicially fashioned
standards, though widely recognized, lack uniformity in their application and meaning.
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In fact, in discussing the arbitrary and capricious, manifest disregard of the law,
completely irrational, and drawing its essence from the underlying agreement, the First
Circuit stated This standard of judicial review has taken on various hues and colorations
in its formulations in this and other circuits. The Court went further to say although
these differences in phraseology have caused a modicum of confusion, we deem them
insignificant. We regard the standard of review undergirding these various formulations
as identical, no matter what terms of art have been employed to ensure that the
arbitrators decision relies on his interpretation of the contract contrasted with his own
beliefs of fairness and justice. Advest, Inc. v. McCarthy 914 F.2d 6, 8 (1st Cir. 1990)
(quoting Jenkins v. Prudential-Bache Securities, Inc., 847 F.2d 631, 634 (10th Cir.
1988)). An overview of judicial standards for vacatur of awards follows.
1. De Novo Review for Errors of Law
The first standard of review that a court could potentially apply during the appeal
of an arbitration award is de novo review. Parties electing to incorporate appellate
review into their arbitration agreement may choose this standard of review. Typically,
this standard is reserved for reviewing errors of law. In applying de novo review, an
appellate court is arguably in just as good a position as the trial court to consider
questions of law, but conducts a less thorough review regarding questions of fact.
COMMERCIAL ARBITRATION AT ITS BEST: SUCCESSFUL STRATEGIES FOR BUSINESS USERS
292 Thomas J. Stipanowich & Peter H. Kaskell eds., 2001). The Seventh Circuit once
stated that limiting review to legal errors would be clearly far less searching and time
consuming than a full trial. Chapter Id at 292 (citing Flexible Manuf. Sys. V. Super
Products Corp., 86 F.3d 96, 100 (7th Cir. 1996)). Likewise, in the arbitration context this
standard would allow parties to have a court review errors of law, but largely defer to the
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arbitrators interpretation of the facts. Adding an appellate level review to an arbitration
award inevitably adds costs, but this standard of review reduces the monetary and time
costs somewhat by limiting review to errors of law. This standard may not, however, be
an ideal choice for parties who are electing to use arbitration to avoid strict application of
the law in circumstances where commercial circumstances warrant otherwise or those
parties wishing to avoid the costs. One observer notes As in the public justice arena,
distinguishing mixed question of law and fact, which are subject to the de novo standard,
from purely factual questions, which are not, may produce complex analyses since factual
and legal issues are often closely intertwined. COMMERCIAL ARBITRATION AT ITS BEST:
SUCCESSFUL STRATEGIES FOR BUSINESS USERS 292 Thomas J. Stipanowich & Peter H.
Kaskell eds., 2001). Therefore, this standard of review is most appropriately elected by
parties seeking review for errors of law only, and looking for a strict application of the
law regardless of commercial circumstances.
2. Clearly Erroneous Standard
Another standard, the clearly erroneous standard, is typically applied to factual
determinations reached by trial courts. This standard allows the court to apply its own
interpretation of the fact when, based on the evidence as a whole, the appellate court
positively determines that the trial courts finding was mistaken or unreasonable.
COMMERCIAL ARBITRATION AT ITS BEST: SUCCESSFUL STRATEGIES FOR BUSINESS USERS
293 (Thomas J. Stipanowich & Peter H. Kaskell eds., 2001). The clearly erroneous
standard significantly enlarges the power of courts in reviewing arbitration awards.
Specifically, whereas de novo review allows courts to review and newly address errors of
law, under the clearly erroneous review a court may substitute its judgment for that of
a trial court and upset findings which are unreasonable. COMMERCIAL ARBITRATION AT
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ITS BEST: SUCCESSFUL STRATEGIES FOR BUSINESS USERS 7.7 (Thomas J. Stipanowich
& Peter H. Kaskell eds., 2001). (quotingEthyl Corp. v. EPA, 541 F.2d 1, 35 n.74 (D.C.
Cir 1976)). Critics strongly object to the application of this standard to review because
they believe it would make the court the ultimate decision-making authority rather than
the arbitrators. This level of review, including the searching consideration of factual
issues, is arguably too broad for application to arbitration awards because it undermines
both the finality of the decision and the efficiency for which the process is oftentimes
selected. Id. Additionally, this level of review may require a more extensive record.
However, parties who desire more than minimal review with the court as the ultimate
decision-maker may contract for this standard of review.
3. Substantial Evidence Standard
The substantial evidence standard is another standard that may be applied to the
review of an award and, again, parties may choose this standard in drafting arbitration
agreements inclusive of enhanced or additional review. The term substantial evidence
has been defined by the United States Supreme Court as such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion. Consolo v. Fed.
Mar. Commn et al., 383 U.S. 607, 619-20 (1966) (quoting Consol. Edison Co. v. Labor
Bd., 305 U.S. 197, 229). The substantial evidence standard is distinguished from the
clearly erroneous standard by its application to jury verdicts rather than decisions of trial
courts sitting without juries. The Supreme Court has also stated of this standard that [i]t
must be enough to justify, if the trial were to a jury, a refusal to direct a verdict when the
conclusion sought to be drawn from it is one of fact for the jury. Id. at 620 (quoting
Labor Bd. V. Columbian Enameling & Stamping Co., 306 U.S. 292, 300). This
evidentiary standard questions whether a particular conclusion could have been drawn by
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a reasonable person. Kenneth Culp Davis and Richard J. Pierce, Jr., ADMINISTRATIVE
LAW TREATISE 11.2, 174 (1994). Application of this standard has similar advantages
and disadvantages to the application of the clearly erroneous standard in that it affords
more than minimal review to those who seek it, yet it makes the court the ultimate
decision-maker, and a more extensive record is required so that the court may effectively
examine the arbitrators decision.
4. Abuse of Discretion Standard
The abuse of discretion standard is another available standard of review. This
standard highly deferential to the arbitrators award, and would provide only a very
limited opportunity for judicial review. In fact, this standard is arguably no more
meaningful to a party petitioning for review than the standards of review already
provided by section 10 of the FAA.
Moreover, following the Supreme Courts decision in First Options of Chicago v.
Kaplan, some Circuit courts will no longer apply the abuse of discretion standard in
reviewing a district courts confirmation of an arbitration award. First Options argued
that the Eleventh Circuit was correct in its application of the arbitrary and capricious
standard to the review of arbitration awards that district courts have confirmed, even as
to questions of law, but not to those that set aside awards. The Supreme Court ruled
against First Options stating, we believe, however, that the majority of Circuits is right
in saying that courts of appeals should apply ordinary , not special, standards when
reviewing district court decisions upholding arbitration awards. 514 U.S. 938, 946
(1995).
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5. Arbitrary and Capricious Standard
Some but not all courts have recognized another non-statutory standard arbitrary
and capricious of review in vacating arbitration awards. Generally, this standard carries
a strong presumption that the arbitration award is correct, and permits only narrow
grounds for vacatur where there are no grounds for the arbitrators decision. The
Eleventh Circuit has held that an award is arbitrary and capricious only if a ground for
the arbitrators decision can[not] be inferred from the facts of the case. Raiford v.
Merril Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410, 1412 (11th Cir. 1990) (citing
Siegel v. Titan Indus. Corp., 779 F.2d 891, 894 (2d. Cir 1985) (quoting Sobel v. Hertz,
Warner & Co., 469 F.2d 1211, 1216 (2d Cir. 1972)).
However, the application of this standard varies by the court. The lack of clarity
given to the application of this standard can be problematic. For instance, inBrabham v.
A.G. Edwards & Sons, the court stated outside of the collective bargaining context,
the Fifth Circuit has provided little guidance on the mechanics of the arbitrary and
capricious standard for reviewing arbitration awards. Brabham v. A.G. Edwards &
Sons, Inc., 265 F.Supp. 2d 720, 725 (S.D. Miss. 2003). The Brabham court further
explains that the Fifth Circuit has developed two lines of casesone discussing a
manifest disregard of the law and the other discussing an arbitrary and capricious
standard of review. Apparently, the Fifth Circuit uses the term manifest disregard in
situations where the arbitrators failed to apply controlling legal principles, while the Fifth
Circuit describes an award as arbitrary and capricious when the conclusions are not
inferable from the facts. Id. TheBrabham court went on to disavow the arbitrary and
capricious non-statutory standard, and go on to explain that the test to determine whether
an arbitration award comes from the essence of the agreement is not a separate, non-
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statutory test, but rather part and parcel of the test of whether an arbitrator exceeded his
powers under Section 10(a)(4) of the FAA. Kergosien v. Ocean Energy, Inc., 390 F.3d
346, 353-54 (5th Cir. 2004).
6. Complete Irrationality Standard
The completely irrational standard allows vacatur when an arbitrators award is
completely irrational. See Swift Indus. v. Botany Indus., 466 F.2d 1125 (3rd Cir. 1972).
Again, this standard is highly deferential to arbitration awards, providing only an
opportunity for parties to vacate an award which severely frustrates their expectations.
COMMERCIAL ARBITRATION AT ITS BEST: SUCCESSFUL STRATEGIES FOR BUSINESS USERS
7.7 (Thomas J. Stipanowich & Peter H. Kaskell eds., 2001) pg. 296. The completely
irrational standard first appeared in Swift Industries v. Botany Industries, a 1972
commercial arbitration case. In Swift, the Botany Industries claimed on appeal that the
arbitration award went beyond the scope of the submission and was completely irrational.
The award required a Botany Industries to immediately post a six-million dollar bond as
security for tax deficiencies for which liability was yet to be determined by the tax court.
At the trial level, the district court determined that this bond requirement was not part of
the agreement the arbitrator was construing, which required cash payments for final
determinations of liability. This bond requirement also was beyond the scope of the
parties submissions. The Court held, therefore, that the arbitrator had exceeded his
powers and that portion of the award was invalid. When Swift Industries appealed this
determination, the The Southern District of New York, in the more recentMilcom case,
cites Swiftin stating, An arbitration award will be enforced if its form can be rationally
derived from either the agreement between the parties or the parties submissions to the
arbitrators and the terms of the arbitral award are not completely irrational. Milcom Intl
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V N. V., v. Motorola, Inc. and Proempres Panama, S.A ., 2002 U.S. Dist. LEXIS 5131
(S.D.N.Y. March 28, 2002).
After Swift, other courts have held that an arbitrators award can be vacated if it is
completely irrational. Completely irrational has been defined as an award that fails to
draw its essence from the agreement. Van Horn v. Van Horn 393 F. Supp. 2d 730, N.D.
Ia. 2005) (citing Schoch v. InfoUSA, Inc., 341 F.3d 785,788 (8th Cir. 2003). One
showing sufficient to establish that an award was not derived from the essence of the
agreement was illustrated in the case of Bureau of Engraving Inc. v. Graphic
Communications Intl Union, Local 1B, in which the Eighth Circuit held that if an
arbitrator attempts to interpret an agreement that is silent or ambiguous and does not
consider the parties intent, the arbitrators award fails to draw it essence from the
agreement. 284 F.3d 821, 824 (8th Cir. 2002).
7. Manifest Disregard
The manifest disregard standard is another standard recognized by some courts
as a non-statutory basis for modification or vacatur of an arbitration award. ACandS,
Inc. v. Travelers Cas. and Sur. Co., 2006 U.S. App. LEXIS 1177 (3d Cir. Jan. 19, 2006).
The manifest disregard standard first appeared as dicta in Wilko v. Swan. 346 U.S. 427,
74 S. Ct. 182 (1953) (dictum), overruled in part on other grounds,Rodriguez de Quijas v.
Shearson/Am. Express, Inc., 490 U.S. 477, 109 S. Ct. 1917, (1989). In Wilco, the
Supreme Court stated In unrestricted submissions . . . the interpretations of the law by
arbitrators in contrast to manifest disregard are not subject, in the federal courts, to
judicial review for error in interpretation. 346 U.S. 427, 437. In a later case, the
Supreme Court confirms that it recognizes nonstatutory bases upon which a reviewing
court may vacate an arbitrators award under the FAA, including the manifest disregard
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standard. Roadway Package Sys. V. Kayser, 534 U.S. 1020 (2001). The Supreme Court
reaffirmed this nonstatutory judicial review power in First Options, Inc. v. Kaplan, but
again did not clearly define the manifest disregard standard. 524 U.S. 938, 942 (1995).
Subsequent to its appearance, the manifest disregard standard took on a multiplicity of
different applications, varying by the presiding court. The judicially created standard is
applied in most circuit courts, providing differing degrees of review. One commentator
noted this is the concept that allows varying degrees of judicial review in virtually every
circuit court, even though all but one disclaim the power to set aside arbitral awards that
are otherwise arbitrary and capricious. Phillip Allen Lacovera, The Varying Standards
of Review of Arbitration Awards, New York Law Journal, Aug. 2, 2004. For example,
the Second Circuit held that, to qualify as manifest disregard, the error must have been
obvious and capable of being readily and instantly perceived by the average person
qualified to serve as an arbitrator. Moreover, the term disregard implies that the
arbitrator appreciates the existence of a clearly governing principle but decides to ignore
it or pay no attention to it. Alghanim & Sons, W.L.L., v. Toys R Us, Inc. 126 F.3d 15,
24 (2d Cir. 1997) (citingMerrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d
930, 933 (2d Cir. 1986). The Fifth Circuit has stated that manifest disregard of the law
goes beyond a mere error or misapplication; it must have been an obvious error and the
arbitrator, understanding the law, chose to ignore it. Hon. Pamela Tynes, The Art of
Drafting Arbitration Agreements; Lawyers Can Make Expanded Review of an Award
Part of the Deal, Texas Lawyer, May 2, 2005. The First Circuit enumerates a three part
test, allowing a court to vacate an award as manifest disregard of the law if it was (1)
unfounded in reason and fact; (2) based on reasoning so palpably faulty that no judge or
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group of judges ever could conceivably have made such a ruling; or (3) mistaken based
on a crucial assumption that is concededly a non-fact. Prudential-Bache Sec. Inc. v.
Tanner, 72 F.3d 234,238 (1st
Cir. 1995). As is evident by these cases, although the
manifest disregard standard is widely recognized, it lacks a clear, universal definition,
and the standard may vary somewhat from court to court.
Further complicating the application of this standard is a split among courts
regarding a link between the manifest disregard for the law standard and the FAA.
Similar to the Fifth Circuits take on the arbitrary and capricious standard in which it
determined that test was part and parcel of FAA 10(a)(4), some courts, in interpreting or
applying the manifest standard have discussed it as a variation of or having a nexus to
FAA section 10(a)(4) as well. In his article, Stephen L. Hayford states that the full
range of the link/no link debate is captured by the observation of the Tenth Circuit in
Jenkins v. Prudential-Bache Securities, Inc. that the nonstatutory grounds for vacating
commercial arbitration awards can be viewed either an inherent appurtenance to the right
of judicial review or as a broad interpretation of [section 10(a)(4), which prohibits]
arbitrators from exceeding their powers. 762. Stephen L. Hayford, Law in Disarray:
Judicial Standards for Vacatur of Commercial Arbitration Awards, 30 Ga.L.Rev. 731,
741-45 (1996) (quoting Jenkins v. Prudential-Bache Securities, Inc., 847 F.2d 631 (10th
Cir. 1988)).
8. Public Policy Exception
The public policy exception is analogous to the common law rule allowing courts
to refuse to enforce awards that are contrary to public policy. The United States Supreme
Court has recognized this exception, under which a court may decline to enforce an
arbitration award if it violates public policy or could harm the public interest. United
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Paperworkers Intl Union v. Misco, Inc., 484 U.S. 29, 42 (1987) (determining
enforceability of a labor arbitration award). The First Circuit followed theMisco case in
deciding Boston Medical Center v. Service Employees Intl Union, Local 285, 260 F.3d
16 (1st Cir. 2001). InBoston Medical, a hospital terminated the employment of a union
member nurse following an investigation into the death of an infant that died of septic
shock. The court determined stated . . . the public policy exception is limited to
instances where the contract as interpreted [by the arbitrator] would violate some explicit
public policy that is well defined and dominant, and is to be ascertained by reference to
the laws and legal precedents and not from general considerations of supposed public
interests. Boston Medical 260 F.3d at 16(citing Misco, 484 U.S. at 43). In Boston
Medical, the court instructs that the inquiry is not whether the conduct causing the
dispute was against public policy, but instead whether the enforcement of the award
would violate public policy. Misco at 17-18. The court need not evaluate the merits of
the award, but rather whether enforcement of the award will put one or more of the
parties in violation of a well defined public policy. Haydon at 783 (referencing Stephen
L. Hayford & Anthony V. Sinicropi, The Labor Contract and External Law: Revisiting
the Arbitrators Scope of Authority, J. Disp. Resol. 249 (1993)). In a more recent case
applying the public policy exception, the Third Circuit stated that courts may decline to
enforce arbitration awards that violate well-defined public policy identified by federal
law. ACandS, Inc. v. Travelers Cas. and Sur. Co., US App LEXIS 1177 (January 19,
2006) (holding that the automatic stay provision of the Bankruptcy Act promotes public
policy sufficient to preclude enforcement of an award that violates its terms or interferes
with its purposes) (citing Exxon Shipping Co. v. Exxon Seamans Union, 11 F.3d 1189
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(3d Cir. 1994)). It is important to note, though, that some courts have not followed the
decision of the Misco court, such as the United States District Court for the District of
Hawaii that held inBig Three Industries, Inc. v. ILWU Local 142 that the public policy
exception should be read narrowly, for example refusing to enforce an arbitrators award
where it called for the reinstatement of an employee to a highly regulated industry.
LEXIS 13768, 9 (1987). Where applicable, this exception allows the court the option to
refuse to enforce an otherwise enforceable award if its enforcement would violate a clear
and defined public policy.
II. APPELLATE REVIEW PROCEDURES BY CONTRACT
Before dealing with appeals based upon contract terms, one is faced with two
conflicting thoughts: the first was that the appeal process was contrary to the concept of
finality that one customarily associates with arbitration and the second was the old story
about the client upon being informed by counsel that the judges verdict was announced
and that justice prevailed, told his counsel, appeal immediately. However, when
lecturing before lawyer groups invariably one of the objections raised to the arbitration
process is the lack of the appeal process.
Interestingly enough, the problem of lack of appealability lies not with the process
but with the drafters of the dispute resolution clause who are so focused on making the
deal that they fail to take into account that the arbitration is a matter of contract and being
consensual in nature, the drafters could easily include such a process in the dispute
resolution clause. When they fail to do so, the blame is laid not upon the drafters of the
dispute resolution clause but upon the process itself.
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A. To Review or Not to Review, That is the Question
In a point/counterpoint article published in the ABA Dispute Resolution
Magazine in 1998, Contracting for Judicial Review, AAA Dispute Resolution Magazine,
Fall, 1998), Carroll E. Neesemann took the position that party chosen arbitral review
standards can inspire confidence in the process, and is good for arbitration. Stanley
McDermott took the position that expanded review of arbitration awards is a mixed
blessing that raises serious questions.
Neesemann cited the case ofLapine Technology Corp. v Kyocera Corp. 130 F.3d
884 (9th
Cir. 1997) which upheld a pre-dispute arbitration agreement that specified a
standard for judicial review for an award. The terms of the agreement provided, The
court shall vacate, modify or correct any award: (i) based upon any of the grounds
referred to in the Federal Arbitration Act, (ii) where the arbitrators findings of fact are
not supported by substantial evidence, or (iii) where the arbitrators conclusions of law
are erroneous. It should be noted that the case produced over 15,000 pages of transcript
and 72 boxes of documents and an award containing hundreds of findings of fact and
conclusions. Thus the parties contracted for a judicial review of their nonjudicial
process. Contrast this with Chicago Typographical Union v. Chicago Sun Times, 935
F.2d 1501 (7th
Cir. 1991) denied the parties the right to seek judicial review of the
arbitrators award since federal jurisdiction cannot be created by contract but did
approve the right of the parties for ..an appellate arbitration panel to review the
arbitrators award. Neesemann concludes that despite the split of authority the weight
of authority seems to clearly support the Kyocera approach and cites several cases in
support of his conclusion. As for the basis of his conclusion, that parties can be more
confident that their agreements about the scope of judicial review of arbitral awards will
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be enforced by the courts since the parties can create their own mechanism to
maximize the benefits of arbitration is a conclusion that I suggest is antithetical to
concept that arbitration is to be efficient, economical and most importantly final.
Needless to say, McDermott points out the very issues that give rise to making the
inefficient, more expensive and lacking finality. Some of the practical issues raised by
the appeal process such as the expense associated with a thorough record of the
proceedings, the expense associated with the preparation by the arbitrators of a written
opinion to meet expected judicial scrutiny. Thus it would lead the very virus which is
currently infecting the arbitration process which is over-lawyering the process and
turning from an alternate method of dispute resolution to an alternate method of
litigation, not to mention resolution in a court system already overloaded with cases and
understaffed judicial personnel. Thus the parties find themselves thrust back into the
very forum they sought to avoid by considering arbitration.
In a more recent article published in the ABA Section on Litigation magazine,
Construct! Edward Hennessey reviews the current state of cases relating to judicial
review of arbitration awards (Contractual Standards for Judicial Review of Arbitration
Awards, Edward Hennessey, Construct! Summer 2004), pointing out that there is a
significant difference in the approach of the courts depending upon which circuit may
have jurisdiction over the matter. Thus the issue of finality is based not upon the process
but upon the geographic location of which court will hear the appeal.
In her article, Stepping on the Judiciarys Toes: Can Arbitration Agreements
modify the Standard of Review that the Judiciary Must Apply to Arbitration Decisions
Elizabeth J. Anderson, The Construction Lawyer, Summer 2004, Ms. Anderson reviews
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the current state of the law and concludes that the Third, Fourth and Fifth Circuits permit
parties to expand judicial review under the Federal Arbitration Act, while the Second,
Seventh, Eighth, Ninth and Tenth Circuits refuse to permit the parties to modify the
Federal Arbitration Acts standards for judicial review. Who said forum shopping was
dead?
If one searches for a more even handed approach to the issues, one is drawn to the
Commercial Arbitration at its Best published by the American Bar Association Section
of Dispute Resolution and the CPR Institute for Dispute Resolution. In particular,
Chapter 7 contains several sections entitled, The Arbitration Award: Finality versus
Reviewability. Listing the issues to be considered when considering whether or not to
permit enhanced judicial review by contract are (1) the requirement that there be a full
record of the proceedings which is an additional cost consideration and (2) a reasoned
award stating the basis of the award. Reasoned awards are by their nature an additional
expense to the parties.
B. Contract Issues and Appellate Review of Arbitration Awards
Assuming that the decision for appellate review is made at the contracting stage, it
the responsibility of the drafter of the ADR clause to focus on those issues which have to
incorporated into the dispute resolution clause. Commercial Arbitration at its Best lists
several issues to be considered when drafting such a provision.
1. Should scope of review be limited in terms of issues to be
considered or cost thresholds?
2. What costs are associated with the appellate process and who will
bear those costs such as special filing fees.
3. If the original award provides for the payment of money, how is
that to be secured pending the outcome of the appellate reviewprocess?
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4. What time limitations should be imposed to commence the appealprocess? The length of time of the appeal process?
5. What are the qualifications for the appellate arbitrator?
6. Should their be a standard of review.
7. What and how is the record of the proceedings preserved for thereview process and how is cost allocated?
8. What is standard for the written award from the originalarbitrators should it include statements of reasons, findings of
fact and conclusions of law?
9. Is oral argument part of the appellate review process?
10. On remand, should it go back to the original panel or should a new
panel be constituted to hear the matter de novo?
C. Existing Procedures for Appellate Review by Agreement
1. American Arbitration Association
Currently the American Arbitration Associations excellent publication, Drafting
Dispute Resolution Clauses, A Practical Guide has contractual language for an appeal
process which provides for an appellate panel of arbitrators rather than the judicial
systems which avoids the problem of trying to contractually create jurisdiction in the
court system.
Within 30 days of receipt of any award (which shall not be binding if an appeal
is taken), any party may notify the AAA of an intention to appeal to a second
arbitral tribunal, constituted in the same manner as the initial tribunal. The appeal
tribunal shall be entitled to adopt the initial award as its own, modify the initial
award or substitute its own award for the initial award. The appeal tribunal shall
not modify or replace the initial award except [for manifest disregard of the law or
the facts} {for clear errors of law or because of clear and convincing factual
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errors]. The award of the appeal tribunal shall be final and binding, and judgment
may be entered by a court of competent jurisdiction.
2. JAMS Arbitration Appeal Procedure
As for rules for guidance, there is the JAMS optional Arbitration Appeal
Procedure and the International Institute for Conflict Prevention & Resolution (CPR).
The JAMS Optional Arbitration Appeal Procedure is included in the appendix to
this paper. Under the JAMS procedure, the Appeal Panel consists of three neutral
members unless the parties agree to a single appellate arbitrator. Disclosure requirements
are similar to those disclosure requirements for any arbitration. In the absence of
agreement the Case Manager is authorized to appoint the Appeal Panel.
The party wishing to appeal must do so within 14 days from the date the award
has become final specifying in writing those elements of the award that are being
appealed and a brief statement of the basis for the appeal. A cross appeal meeting the
same requirements must be filed within 7 days thereafter.
The record on appeal consists of the stenographic or other record of the hearings
and all exhibits, deposition transcripts, and affidavits entered into the record, or the
parties may elect to rely on the memoranda or briefs previously submitted in an effort to
deal with those cases where there is no formal stenographic record. Oral argument is an
option provided, and, of course, all fees must be paid in full before the appeal is
scheduled and once the appeal has been filed, the award is no longer considered final for
purposes of seeking judicial enforcement.
The standard of review is established as the same standard of review that the first
level appellate court in the jurisdiction would apply to an appeal from the trial court
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decision and will usually issue its opinion within 21 days from the date or oral argument
with a concise written explanation unless the parties agree otherwise.
The rules can be downloaded from the following site: http://jamsadr.com/rules
3. CPR Institute for Dispute Resolution Rules
for Arbitration Appeal
CPR also provides suggested language for an appeal clause which states:
An appeal may be taken under the CPR Arbitration Appeal Procedure
from any final award of an arbitral panel in any arbitration arising out of
or related to this agreement that is conducted in accordance with the
requirements of such Procedure. Unless otherwise agreed by the parties
and the appeal tribunal, the appeal shall be conducted at the place of the
original arbitration.
Commercial Arbitration at its Best lists the highlights of the appeal procedure.
1. The appeal panel consists exclusively of formal federal judges with
experience in arbitration.
2. The procedure may be invoked whether or not the original arbitration was
conducted under CPR rules.
3. Unless the parties agree to a single appellate arbitrator, the panels will
consist of three appellate arbitrators.
4. The arbitrators in the original proceeding are required to apply the law, a
record of the original proceedings and a written award stating findings of
fact and conclusions of law.
5. Cross appeals are permitted.
6. Unless requested by a party, there will be no oral hearings.
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7. The appellate panel must either affirm, modify or set aside the original
award but it may not remand the case.
8. The grounds for modification or setting aside the award are that the
original award (i) contains one or more material and prejudicial errors of
law of such a nature that it does not rest upon any appropriate legal basis
or (ii) that it is based upon factual findings clearly unsupported by the
record or that the original award is subject to one or more grounds set
forth in Section 10 of the Federal Arbitration Act for vacating an award.
9. If the original award is affirmed on appeal, appellant bears the entire cost
of the appeal including the appellees legal fees and other expenses, unless
the panel decides otherwise. If the original award is not fully affirmed, the
appellate tribunal is empowered to allocate all such costs.
10. If a party appeals the decision of the appellate panel to a court and is
unsuccessful, it bears the opponents costs related to the court proceeding.
11. The appeal procedure is confidential.
12. The parties may agree on an appellate procedure as part of their original
agreement or after the dispute has arisen.
CPR has accomplished a miraculous result by establishing a procedure available
for those who feel compelled to the security blanket of an appeal process but without
encouraging another layer of process by narrowly focusing the grounds for an appeal and
establishing a cost-risk for groundless appeals. It also points out that to minimize an
irrational award, only highly qualified arbitrators should be selected in the first place.
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An interesting variation is a proposal by M. Scott Donahey published in the
Economic Commerce & Law Report, BNA 2001 entitled A Proposal for an Appellate
Panel for the Uniform Domain Name Dispute Resolution Policy. He refers to the CPR
procedures in his article. While dealing with an area unrelated to construction, it is
interesting to note that the concept of appellate review does have proponents in other
areas.
III. CONCLUSION
No article dealing with appealing arbitration awards would be complete without
returning to the article published in the Summer 2005 issue of Dispute Resolution
Magazine titled Vacating Arbitration Award, which was the subject of commentary in
the early portions of this paper. It should be noted that the authors reviewed every case,
state and federal published and unpublished, reported between January 1, 2004 and
October 31, 2004 in which a court decided a motion to vacate an arbitration award based
the federal statutory grounds for vacatur. The cases totaled 182, 120 were state court
cases and 62 were federal court cases. Their study showed that only 37 cases or 20%
were vacated. Interestingly enough, 25.8 % of the state cases resulted in vacatur while
9.7% of the federal cases resulting in vacatur. The authors were surprised that vacatur
based upon evident partiality or corruption of the arbitrators was sought in only 33% of
the cases since this ground encompasses the much discussed topic of arbitrator
disclosures and succeeded in only 12% of the cases (4 to be precise).
In the Commercial Arbitration at its Best, a member of the CPR commission
stated Even if I had Judge Cardozo on my panel, there might be mistakes. We all make
mistakes. The question is, is the opportunity for review worth the time and expense.
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APPENDIX 1
JAMS Optional Arbitration Appeal Procedure
NOTICE
These rules are the copyrighted property of JAMS. They cannot be copied, reprinted or used in any waywithout permission of JAMS, unless they are being used by the parties to an arbitration as the rules for thatarbitration. If they are being used as the rules for an arbitration, proper attribution must be given to JAMS. Ifyou wish to obtain permission to use our copyrighted materials, please contact JAMS at 949-224-1810.
The parties hereby agree to the following Optional Appeal Procedures:
(A) The Appeal Panel will consist of three neutral members, unless the Parties agree
that there will be one neutral member. Upon the filing of an Appeal inaccordance with (B)(i) below, the Case Manager will recommend to the Parties an
Appeal Panel and will make any disclosures that are mandated by applicable lawregarding the candidates for the Panel. The Case Manager will seek the
agreement of the Parties as to the selection of the Appeal Panel members. If theParties do not agree on the composition of the Appeal Panel within seven (7)
calendar days of having received the Case Manager recommendation for theAppeal Panel, the Case Manager will appoint an Appeal Panel.
(B) The Procedure for filing and arguing an Appeal is as follows:
(i) If all Parties have agreed to the Optional Appeal Procedure, any party may
Appeal an Arbitration Award that has been rendered pursuant to the applicableJAMS Arbitration Rules and has become final. The Appeal must be served, in
writing, to the Case Manager and on the opposing Party(ies) within fourteen (14)calendar days after the Award has become final. The letter or other writing
evidencing the Appeal must specify those elements of the Award that are beingAppealed and must contain a brief statement of the basis for the Appeal.
(ii) Within seven (7) calendar days of the service of the Appeal, the opposingParty(ies) may serve on the Case Manager and on the opposing Party(ies) a Cross-
Appeal with respect to any element of the Award. The letter or other writingevidencing the Cross-Appeal must specify those elements of the Award that are
being Appealed and must contain a brief statement of the basis for the Cross-Appeal.
(iii) The record on Appeal will consist of the stenographic or other record of the
Arbitration Hearing and all exhibits, deposition transcripts and affidavits that hadbeen accepted into the record of the Arbitration Hearing by the Arbitrator(s). TheParties will cooperate with the Case Manager in compiling the record on Appeal,and the Case Manager will provide the record to the Appeal Panel. No evidence
not previously accepted by the Arbitrator(s) will be considered by the AppealPanel, unless the basis of the Appeal is non-acceptance by the Arbitrator of
certain evidence or unless the Appeal Panel determines that there is good cause tore-open the record pursuant to the applicable JAMS Arbitration Rules.
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(iv) The Parties may elect to rely on the memoranda or briefs previouslysubmitted to the Arbitrator(s). In the absence of such election, the Case Manager
will obtain the agreement of the Parties on a briefing schedule.
If no agreement is reached, the Case Manager will set the briefing schedule.
Ordinarily, only opening briefs (of no more than 25 double-spaced pages) will beallowed. The briefs may be in the form of a letter.
(v) The Appeal Panel will conduct an oral argument if all Parties request suchargument or may conduct oral argument, in complex cases or unusual
circumstances, on its own initiative.
If there is to be oral arguments, the Case Manager will obtain the agreement of the
Parties on both the date of such argument and the duration, including theallocation of time. In the absence of agreement, the Appeal Panel will set the date
and duration of the oral argument, including the allocation of time.
(vi) All fees for the original arbitration must be paid in full before an appeal willbe scheduled.
(C) Once an Appeal has been timely filed, the Arbitration Award is no longer
considered final for purposes of seeking judicial enforcement, modification orvacating pursuant to the applicable JAMS Arbitration Rules.
(D) The Appeal Panel will apply the same standard of review that the first-levelappellate court in the jurisdiction would apply to an appeal from the trial court
decision. The Appeal Panel will respect the evidentiary standard set forth in Rule22(d) of the JAMS Comprehensive Arbitration Rules. The Panel may affirm,
reverse or modify an Award.
The Panel may not remand to the original Arbitrator(s), but may re-open the
record in order to review evidence that had been improperly excluded by theArbitrator(s) or evidence that is now necessary in light of the Panel's
interpretation of the relevant substantive law. A three-member Appeal Panel willmake its decision by majority vote and, absent good cause for an extension, will
issue the decision within twenty-one (21) calendar days of the date of either oralargument, the receipt of the new evidence or receipt of the record and of all briefs,
whichever is applicable or later. The Panel's decision will consist of a concisewritten explanation, unless all Parties agree otherwise.
(E) If a Party refuses to participate in the Optional Appeal Procedure after havingagreed to do so, the Appeal Panel will maintain jurisdiction over the Appeal and
will consider the Appeal as if all Parties were participating, including retainingthe authority to modify any Award or element of an Award that had previously
been entered in favor of the non-participating Party, assuming it believes that therecord, after application of the appropriate standard of Appeal, justifies such
action.
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(F) After the Appeal Panel has rendered a decision and provided the Parties have paidall JAMS fees in full, JAMS will issue the decision by serving copies on the
Parties. Service will be deemed effective five (5) calendar days after deposit inthe US Mail. Upon service of the Appeal Panel decision, the Award will be final
for purposes of judicial review.
Signed: Signed:
Print Name: Print Name:
For: For:
Dated: Dated:
Signed: Signed:
Print Name: Print Name:
For: For:
Dated: Dated:
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APPENDIX 2
CPR Arbitration Appeal Procedure (1999)
CPR Institute for Dispute Resolution
I. APPEAL CLAUSE
It is suggested that parties wishing to authorize an appeal to the CPR Arbitration AppealTribunal under the Rules of Procedure set forth below include the following language in
their arbitration clauses. The appeal provision should in most circumstances appear inthe basic agreement between the parties. A similar clause can also be inserted in a post-
dispute arbitration agreement.
An appeal may be taken under the CPR Arbitration Appeal
Procedure from any final award of an arbitral panel in anyarbitration arising out of or related to this agreement that is
conducted in accordance with the requirements of suchProcedure. Unless otherwise agreed by the parties and the
appeal tribunal, the appeal shall be conducted at the placeof the original arbitration.
II. RULES OF PROCEDURE
A. General and Introductory Rules
Rule 1. Scope of Application
1.1. The parties to any binding arbitration conducted in the
United States, pursuant to CPR Rules or otherwise, may agree in writing that a party mayfile an appeal (the "Appeal") under the CPR Arbitration Appeal Procedure (the
"Procedure") from an arbitration award (the "Original Award").
1.2 The appeal shall be to a CPR Arbitration Appeal Tribunal
(the "Tribunal") chosen from the panel constituted by CPR to hear Appeals (the "Panel"),consisting of former Federal judges.
1.3 No appeal may be filed hereunder, unless:
(a) the arbitrator(s) (was) (were) required to reach a
decision in compliance with the applicable law andrendered a written decision setting forth the factual
and legal bases of the award; and
(b) there is a record (the "Record") that includes all
hearings and all evidence (including exhibits,deposition transcripts, affidavits, etc. admitted into
evidence) in the arbitration proceeding from whichthe appeal is taken.
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Rule 2. Commencement of Appeal
2.1 An Appeal shall be commenced by written notice to the
opposing party(ies) and to CPR (attention: Panel Management Group), given within thirtydays of the date on which the Original Award was received but the parties, unless the
parties agree on a different period. The notice shall set forth the agreement in writingproviding for the appeal, shall state the elements of the Original Award that are being
appealed and the basis for the Appeal and shall transmit that portion of the Record thatthe appellant deems relevant to the Appeal.
2.2 The opposing party(ies) may serve a cross-appeal by noticein writing to the appellant(s) and to CPR (attention: Panel Management Group) within
fourteen days of receipt of the notice of appeal. The notice shall state the elements of theOriginal Award that are being appealed and the basis for the Appeal. The appellee shall
transmit any portion of the Record deemed relevant by the appellee that was nottransmitted by the appellant.
2.3 Once an Appeal has been timely filed, the Original Awardshall not be considered final for purposes of seeking judicial confirmation, enforcement,
vacation or modification. If the Tribunal affirms the Original Award, it shall be deemedfinal as of the date of the Tribunal's affirmance. If the Tribunal does not affirm the
Original Award, its award on appeal (the "Appellate Award") shall be deemed the finalaward in the arbitration, in lieu of the Original Award. If the Appeal is withdrawn for
any reason (other than a settlement), the Original Award shall be deemed final as of thedate of such withdrawal.
2.4 By agreeing to become a party to an Appeal under theseRules, each party (a) irrevocably waives the right to initiate court action to seek to
confirm, enforce, vacate or modify the Original Award until the appeal process has beencompleted, and (b) agrees that any statutory time period for the commencement of court
actions to confirm, enforce, vacate or modify arbitral awards shall be tolled for the periodbeginning with the commencement of the appeal and ending with the decision on the
appeal under these Rules. Subject to these Rules of Procedure, each party may requestthe Tribunal to affirm, vacate or modify the Original Award on any of the grounds
specified in Rule 8.2 hereof.
Rule 3. Notices
The provisions of Rule 2 of the CPR Rules for Non-Administered
Arbitration (Rev. 2000) (the "CPR Arbitration Rules") shall apply to all proceedingspursuant to these Rules.
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B. Rules with Respect to The Tribunal
Rule 4. Selection of Appeal Tribunal
4.1 The Tribunal shall consist of three members of the Panel,unless the parties agree that it shall consist of one Panel member.
4.2 After CPR has received the notice of appeal and any noticeof cross-appeal, it shall promptly submit to the parties a list of not less than seven
candidates from the Panel (or not less than three candidates if one is to be chosen) whohave been pre-screened for possible conflicts and availability. The list shall be
accompanied by each candidate's biographic information and compensation rate. Theparties shall attempt to agree on the required number of candidates from the list. They
shall promptly inform CPR of any candidates on whom they have agreed. Failingcomplete agreement within ten days, the parties shall submit the list to CPR within an
additional five days, rank ordering the candidates on whom they did not agree.Thereupon, the required number of candidates receiving the lowest combined score shall
be chosen by CPR, which shall also break any tie. Any party failing without good causeto return a rank-ordered-candidate list within the prescribed time shall be deemed to have
assented to all candidates on the list.
4.3 If the Tribunal is composed of three members, they shall
select one of their number as the chair (the "Chair"). The Chair shall be responsible forthe expeditious conduct of the proceedings and for administrative matters, but shall be
equal in voting and all other respects.
Rule 5. Qualifications, Challenges and Replacement of Arbitrator
Rule 7 of the CPR Arbitration Rules shall apply to thequalifications of, challenges to and replacement of members of Tribunals selected
pursuant to these Rules.
Rule 6. Challenge to the Jurisdiction of the Tribunal
Rule 8 of the CPR Arbitration Rules shall apply to any challenge tothe jurisdiction of the Tribunal.
C. Rules with Respect to the Conduct of the Appeal
Rule 7. General Provisions
7.1 Rules 9.1 and 9.2 of the CPR Arbitration Rules shall applyto the conduct of any appeal under these Rules.
7.2 The appellant(s) shall be allowed one opening brief and oneresponse brief. The appellee(s) shall be allowed one brief, except that an appellee who is
also a cross-appellant shall be allowed two briefs. Briefs or memoranda previouslysubmitted may be used. The Chair shall request the parties to agree on a briefing
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schedule. Failing prompt agreement, the Chair shall set the schedule. The Tribunal mayrequest the parties to submit such further briefs or other materials as it may deem
appropriate.
7.3 The Tribunal may request the parties to supplement the
Record initially submitted by the parties as it may deem appropriate in order to fulfill itsfunctions under Rule 8.
7.4 Oral argument shall be held at the request of a party or ifthe Tribunal sees a need therefor. The Tribunal shall set the date, duration and place for
oral argument in consultation with the parties. If the appellant alleges one or more of thegrounds for vacating the Original Award set forth in Section 10 of the Federal Arbitration
Act, the Tribunal may take evidence supporting and rebutting such an allegation.
Rule 8. The Decision
8.1 If the Tribunal finds that it does not have appellate
jurisdiction, it shall forthwith dismiss the Appeal and the Original Award will thereuponbe final.
8.2 If the Tribunal hears the Appeal, it may issue an Appellate
Award modifying or setting aside the Original Award, but only on the following grounds:
a. That the Original Award (i) contains material and
prejudicial errors of law of such a nature that it doesnot rest upon any appropriate legal basis, or (ii) is
based upon factual findings clearly unsupported bythe record; or
b. That the Original Award is subject to one or moreof the grounds set forth in Section 10 of the Federal
Arbitration Act for vacating an award.
The Tribunal does not have the power to remand the award.
These grounds are the following:
1. Whether the award was procured by corruption, fraud or undue means.
2. Where there was evident partiality or corruption in the arbitrators, or any of them.3. Where the arbitrators were guilty of misconduct in refusing to postpone the
hearing, upon sufficient cause show, or in refusing to hear evidence pertinent andmaterial to the controversy; or of any other misbehavior by which the rights of any party
have been prejudiced.4. Where the arbitrators exceeded their powers, or so imperfectly executed them that
a mutual, final, and definite award upon the subject matter submitted was not made.
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8.3 If the Tribunal does not modify or set aside the OriginalAward pursuant to Rule 8.2 above, it shall issue an Appellate Award approving the
Original Award and the Original Award shall be final as provided in Rule 8.6 below.
8.4 A three member Tribunal shall make its decision by
majority vote. The decision shall be set forth in an Appellate Award in writing and shallinclude a concise written explanation, unless all parties agree otherwise. A member who
does not join the decision may file a dissenting opinion, which shall not constitute part ofthe Appellate Award.
8.5 If a party refuses to participate in an Appeal after havingagreed to do so, the Tribunal shall maintain jurisdiction over the Appeal, including
authority to make an Appellate Award.
8.6 The Chair shall cause the Tribunal's Appellate Award and
any dissenting opinion to be mailed to the parties. The Appellate Award or the OriginalAward, as the case may be, shall be final upon receipt by the parties.
D. Miscellaneous Rules
Rule 9. Use of Best Efforts to Avoid Delay
The parties and the Tribunal shall use their best efforts to avoiddelay and to assure that the Appeal will be concluded within six months of its
commencement.
Rule 10. Compensation of the Tribunal
Each member of a Tribunal shall be compensated at an hourly ratedetermined at the time of appointment for all time spent in connection with the
proceeding and shall be reimbursed for any travel and other expenses.
Rule 11. Deposit of Costs
The Tribunal may require each party to deposit with the Chair anequal amount as an advance for the anticipated fees and expenses of its members. Any
such funds shall be held and disbursed in such a manner as the Tribunal may deemappropriate. After the Appellate Award has been rendered, the Tribunal shall return any
unexpended balance from deposits made to the parties. If the requested deposits are notpaid in full within twenty days after receipt of the request, the Tribunal may so inform the
parties in order that jointly or severally they may make the required payment. If suchpayment is not made, the Tribunal may suspend or terminate the proceedings.
Rule 12. Distribution of Costs
In the event that the Tribunal fully affirms the Original Award, the
appellant(s) shall promptly reimburse the appellee(s) (a) the share of the costs of theAppeal theretofore expended by the appellee(s), and (b) the appellee's attorney fees and
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other out-of-pocket expenses related to the Appeal, unless the Tribunal orders otherwise.If the Tribunal modifies or reverses the Original Award, the Tribunal may apportion the
parties' costs of the Appeal, attorney fees and other out-of-pocket expenses among theparties in such manner as it deems reasonable, taking into account the circumstances and
result of the Appeal.
Rule 13. Confidentiality
The parties and the arbitrators shall treat the proceedings, includingthe Record, and the decision of the Tribunal as confidential, except in connection with a
judicial challenge to, or enforcement of, the Original Award and the Appellate Award,and unless otherwise required by law.
Rule 14. Costs with Respect to Judicial Appeal
If following an Appellate Award, a party(ies) seeks judicial review
(or opposes confirmation), that does not result in the vacation or substantial modification
of the Original Award or the Appellate Award handed down by the Tribunal, thatparty(ies) shall promptly reimburse the opposing party(ies) legal fees and other out-of-pocket expenses incurred in connection with the judicial review.
Rule 15. Action Against CPR or Member of Tribunal
Neither CPR nor any member of a Tribunal shall be liable to any
party for any act or omission in connection with any Appeal conducted under theseRules, except for wilful misconduct.
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IV. FAILURE TO DISCLOSE AS A BASIS
FOR VACATING AN AWARD
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AMERICAN ARBITRATION ASSOCIATION
Construction Industry Arbitration Rules
and
Mediation Procedures
July 1, 2003
R-17 Disclosure
(a) Any person appointed or to be appointed as an arbitrator shall disclose to the
AAA any circumstance likely to give rise to justifiable doubt as to the arbitrator'simpartiality or independence, including any bias or any financial or personal
interest in the result of the arbitration or any past or present relationship with theparties or their representatives. Such obligation shall remain in effect throughout
the arbitration.
(b) Upon receipt of such information from the arbitrator or another source, the AAA
shall communicate the information to the parties and, if it deems it appropriate todo so, to the arbitrator and others.
(c) In order to encourage disclosure by arbitrators, disclosure of information pursuantto this Section R-17 is not to be construed as an indication that the arbitrator
considers that the disclosed circumstances is likely to affect impartiality orindependence.
R-18(b) Disqualification of Arbitrator
(a) Any arbitrator shall be impartial and independent and shall perform his or her
duties with diligence and in good faith, and shall be subject to disqualification for
(i) partiality or lack of independence,
(ii) inability or refusal to perform his or her duties with diligence and in goodfaith, and
(iii) any grounds for disqualification provided by applicable law. The partiesm