Arbitration Rules Now Allow Appeals

By Jill R. Johnson

This is the first of a three-part series.

Arbitration is a popular form of dispute resolution in the construction industry and many standard contracts require its use in lieu of litigation. However, in November 2013, the American Arbitration Association (AAA) and the International Centre for Dispute Resolution adopted the Optional Appellate Arbitration Rules, which permit parties – by advance mutual agreement, usually in a contract – to obtain appellate review of arbitration awards. Simply put, these new rules dilute the finality of arbitration, which is what makes the process so appealing. An arbitration award typically can only be set aside under extremely narrow circumstances involving corruption, fraud or misconduct, or where the arbitrators exceeded their powers. But now, under the new rules, review of arbitration awards is permitted by an AAA appellate panel in situations involving alleged “material and prejudicial” errors of law and/or “clearly erroneous” determinations of fact. In other words, the door swings open wider when it comes to questioning the outcome of the arbitration. In the construction setting, this is particularly concerning.

Arbitrators in construction disputes are not necessarily judges or legal professionals (although they can be), and they sometimes get the law wrong, misapply the law to the facts or commit any other number of errors that impact the outcome of the proceeding. For example, if an arbitrator mistakenly upheld a “pay if paid” clause in violation of a state law that says that these types of conditional payment clauses are unenforceable, until the enactment of these new rules a party negatively affected by this mistake had no recourse other than to ask a court to vacate the award. With the new rules, however, the ability to appeal these types of issues is more clearly defined. To one extent, then, the new rules can be viewed favorably, because they provide an additional avenue of review outside of the extremely narrow grounds previously available under the law. The new rules certainly will be helpful to a party who has been the victim of a mistake of law or fact by an arbitrator.

The right to seek appellate review of both questions of law and issues of fact also could make arbitration more appealing to parties who may have sought to avoid the process in the past because of the complexity of their disputes or wariness of relying on a single arbitrator. On the other hand, an appeal adds an element of uncertainty into the arbitration process. With the availability of appellate review, there will be also be potential additional costs and time that have to be factored into resolving disputes. Everyone who enters into a construction contract should be aware of the option to include these new rules and should consult with counsel on whether to include them.

Jill R. Johnson is a commercial litigator with Chamberlain Hrdlicka (Atlanta), who counsels clients with construction and related disputes. She may be reached at (404) 588-3574 or [email protected].

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