Decisions rendered in an arbitration proceeding are usually final, meaning they are not appealable. Frequently, this is highlighted as one of arbitration’s advantages. Many—if not most—agreements to arbitrate expressly declare that arbitral decisions cannot be appealed. That said, some parties may not be willing to agree to arbitrate unless a decision is subject to appellate review. And in particularly complex or significant disputes, the risk of an erroneous, unappealable decision may be unacceptably high.

Recently, I wrote a blog titled, “A Few Key Concepts in Arbitration Agreements & Disputes.”[i] Principally, that blog addressed this notion: arrangements concerning arbitration are flexible but constrained by applicable substantive and procedural law, in addition to the procedural rules of the relevant forum. Below, I address issues that contracting parties desiring to make an arbitral award subject to appeal should contemplate when drafting agreements to arbitrate.

1. Contracting for Judicial Review.

To provide for appellate review by a court or “expanded judicial review,” an arbitration agreement should be governed by an arbitration law that expressly—or by way of binding judicial precedent—allows for review of erroneous arbitral decisions. If the Federal Arbitration Act (the “FAA”) is found to govern the arbitration agreement to the exclusion of applicable state law, the parties will not have any right to judicial review. The U.S. Supreme Court has ruled that parties to an arbitration agreement governed by the FAA cannot contractually “expand” judicial review beyond the limited grounds involving “egregious arbitral conduct” identified in the FAA. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008). The arbitration law in several states follows federal law on this point. But on the other hand, the Hall Street Court expressly recognized that judicial review may be available under state statutory or common law[ii] and the Supreme court recognizes that contracting parties are free to choose the rules under which an arbitration will be conducted.[iii]

In contrast to the Hall Street decision, high courts in several states have held that applicable state law allows for review of arbitral decisions in certain circumstances. For example, in Nafta Traders, Inc. v. Quinn, the Texas Supreme Court construed the Texas Arbitration Act (the “TAA”) to allow for expanded judicial review. 339 S.W.3d 84 (Tex. 2011). Based on the principle that an arbitrator’s authority derives from the parties’ consent, the Nafta Traders Court found that a contractual provision prohibiting an arbitrator from rendering a decision containing “a reversible error” allowed a party to appeal the underlying arbitration award. Id., 88. According to the Court, if an arbitrator is prohibited from rendering an erroneous decision, a party can attain review of an arbitral decision by filing a “petition to vacate” the award alleging the “arbitrator[s] exceeded their powers.” Id., at 89 (citing TEX. CIV. PRAC. & REM. CODE §171.088(a)(3)(A)). Without a contractual provision permitting expanded judicial review, the Court found, in line with Hall Street, that the “default rule” applicable to the TAA is restricted judicial review. Id., 101.

Interestingly, the Texas Supreme Court observed that Hall Street barred the application of the Nafta Traders analysis in construing the FAA, but also noted it was not bound to follow the U.S. Supreme Court in interpreting the TAA. Id., 91-92. Further, the Nafta Traders Court called into question the soundness of Hall Street for failing to adequately consider that arbitral authority is established by the parties’ consent. Id., 93-101.

In addition to providing express contractual authority for judicial review under a permissive body of arbitration law, parties should contemplate jurisdictional and procedural issues. Their agreement should provide that both parties consent to the jurisdiction of the state court to enforce the chosen arbitration law. The parties should also seek to confirm that the relevant court would in fact exercise jurisdiction and apply the chosen arbitration law. If an appropriate court lacks or declines personal or subject matter jurisdiction or if the chosen law is not applied, the appellate remedy bargained for will likely not be available. Neither the FAA nor the TAA provide an independent basis for a court’s exercise of jurisdiction over a dispute, and other states’ arbitration laws are likely similar in this respect.

2. Private Appellate Review & Optional Appellate Procedures of Arbitral Forums.

As an alternative to judicial review, or as a backstop measure if any contractual judicial review mechanism is ultimately unenforceable, arbitration agreements can provide for appellate review of arbitral decisions by a private appellate review method. To facilitate private appellate review, many institutional arbitration forums, including the CDR, AAA, ICDR, and JAMS have adopted optional appellate rules.[iv] Note, however, that arbitration decisions are only subject to optional appellate rules if the parties agree in advance, whether by contract or a separate stipulation.

3. Adequacy of the Record for Review.

An important issue in connection with any appeal is the adequacy of the record. If the record is not sufficient for review of the essential issues, the right to an appeal is meaningless. Typically, arbitration proceedings are much more informal than trials in court. Often no record is made, and the rules of evidence are not followed. As noted by the Texas Supreme Court in Nafta Traders, courts are bound by procedural law and rules and the parties can only agree to the “kind of review … courts conduct.” 339 S.W.3d 84, 101-102 (Tex. 2011). If an error is not preserved for appeal or is not demonstrated by the record, an award must be presumed correct. Id., 102.

Conclusion

Parties interested in establishing a contractual right to judicial review of an arbitral decision should carefully consider applicable procedural and substantive law. Based on the above and the analysis of the Texas Supreme Court in Nafta Traders, at a minimum, the parties should consider including provisions establishing the below in their arbitration agreements:

1. The application of a substantive body of arbitration law (in addition to any general, contractual choice-of-law clause) that relevant courts have construed as allowing for judicial review.
2. That the arbitrators’ powers do not include the rendering of decisions premised on error.[v]
3. That any arbitral decision shall be subject to appeal and the matters subject to review.
4. Consent to the personal jurisdiction of the court to undertake the review.
5. Procedural mechanisms that allow a sufficient record for appellate review of the award.

Finally, because an agreement for expanded judicial review may not be enforceable in certain cases for several reasons, parties who wish to ensure a right to appeal should consider providing for a private right of appeal in the alternative or as a “fail-safe” measure. Because of the associated complexities, parties would be wise to elect a forum with established appellate procedures and should familiarize themselves with any rules they incorporate by reference.

[i] Available at: https://freemanlaw.com/a-few-key-concepts-in-arbitration-agreements-disputes/ (last accessed Sep. 3, 2024).

[ii] New Jersey’s arbitration statute, for example, expressly allows parties to expand the judicial review of arbitration decisions beyond the default statutory grounds. NJ Rev Stat § 2A:23B-4 (2023). Available at: https://law.justia.com/codes/new-jersey/title-2a/section-2a-23b-4/ (last accessed Sep. 3, 2024).

[iii] Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479.

[iv] See, e.g., Jams Optional Arbitration Appeal Procedures. Available at https://www.jamsadr.com/appeal/ (last accessed Sep. 3., 2024).

[v] The Court suggested, however, that other language indicating intent to subject arbitral decisions to review might be sufficient by noting that “[t]he parties in Hall Street attempted to …” indirectly accomplish a limit on the arbitrator’s authority by agreeing that the court could not enter judgment on an erroneous decision.” 339 S.W.3d 84, at 92 (Tex. 2011).