When Finality Is Not Desirable: What Are the Options for Appealing an Arbitral Award in California?
Arbitration awards are generally not subject to an appeal on the merits, which means that they are imbued with a greater degree of finality than court judgments. This is often considered one of the great advantages of arbitration, but there are times when parties may desire to retain the option of appealing a final award. If that is the case, what are the options? This note addresses this question by reviewing the possibilities for appealing a final award when an arbitration is seated in California.
The CAA Versus the FAA
Where an arbitration is seated in the United States and one of the parties is not an American citizen, or if the arbitration is between citizens of two different US states, the Federal Arbitration Act or “FAA” will apply as the default procedural law of the arbitration. With regard to challenges to a final award, the FAA provides an “extremely narrow” set of options.[i] The FAA permits a final award to be challenged on procedural grounds, but“neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitration award.”[ii][iii]
To further tighten the scope of possible post-award challenges, the US Supreme Court ruled in the well-known Hall Street Associates v Mattel case that the limited grounds of vacatur in the FAA “provide the exclusive regimes” for review of an arbitral award and parties cannot expand upon them.[iv] Thus, even if an arbitration agreement purported to grant a federal court a wider level of review, so as to permit an appeal on the merits of a decision, it would be void under the FAA. However, the Supreme Court did explain that “[t]he FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law ...”[v]
As the above quote from Hall Street indicates, state arbitration law may permit an appeal of the merits of an arbitration decision where the FAA does not, and that is certainly true of the California Arbitration Act (“CAA”).[vi] Even though the CAA’s statutory language speaks to only limited grounds for reviewing an arbitral award, California’s state courts have held that parties may contractually expand the scope of review so that the merits of an arbitration award may be appealed.[vii] This, in essence, sets up California’s Superior Courts as an appellate body with the power to vacate an arbitral award if it is erroneous – but only if the parties have agreed to this in advance. The California Supreme Court has emphasized that “parties seeking to allow judicial review of the merits … would be well advised to provide for that review explicitly and unambiguously” in their arbitration agreement.[viii]
Thus, parties looking to seat an arbitration in California and provide for a right of appeal to a court, have a route to doing so under the CAA. Such a choice must be made in advance, and any arbitral agreement needs to expressly exclude the FAA in favor of the CAA, if the former would otherwise apply. Moreover, express language setting up the expanded level of appeal needs to be included in any clause.
An Internal Arbitration Appeals Process
The CAA is not the only option for parties seeking appellate-like review of an arbitral award. Instead of seeking to expand the capacity of a court to review a final award, under some arbitration rules, one can opt for an internal appeals process. A good example of this is the appellate track which the AAA has established, known as the Optional Appellate Arbitration Rules.[ix] These rules allow for a second arbitral tribunal to be established to act as an appellate body, but within the arbitration framework. For this system to apply, however, the appellate rules would have to be agreed to in advance by, for example, including reference to them in the arbitration clause.[x]
The Optional Appellate Rules set forth a scope of permissible review pursuant to which a party may appeal an arbitral award based on “an error of law that is material and prejudicial” or “determinations of fact that are clearly erroneous.”[xi] Prior precedent indicates that arbitrators will apply these standards in a manner “consistent with accepted standards of review routinely used by federal and state courts” and, therefore, will consider that “[q]uestions of law be reviewed de novo (or for correction of errors at law) without any deference to the [first] Arbitrator's analysis (provided the legal issue is not harmless) and … give deference to the Arbitrator's factual findings unless [found] to be clearly erroneous.”[xii]
Parties looking to incorporate the AAA appellate system should note that an appeal must be made within 30 days from the date of the original award.[xiii] Furthermore, a panel of three arbitrators will be appointed as an appellate tribunal, unless the parties agree to utilize a single arbitrator. Where a three-person panel applies, the AAA will appoint the chairperson.[xiv]
Similar to the AAA, JAMS also offers an “Optional Appellate Procedure.”[xv] Unlike the AAA system, an appeal via JAMS must be made within 14 days after the award has become final. Moreover, the JAMS’ appellate panel “will apply the same standard or review that the first-level appellate court in the jurisdiction would apply to an appeal from the trial court decision.” Thus, the JAMS approach allows the parties to mirror the appellate practices of the place of arbitration, but equally, does not provide for a uniform approach to appellate practice like the AAA Appellate Rules. However, similar to the AAA Appellate Rules, the JAMS appellate panel is assumed to be three arbitrators, unless the parties agree to one arbitrator. To invoke these rules, the parties must agree in advance and designate the appellate procedures, in which JAMS recommends including a number of prescriptive elements in the underlying clause.[xvi]
Most Arbitral Rules Permit Review of an Arbitral Award for Incompleteness orComputational and Clerical Errors
Finally, while not the appeal-like processes discussed above, most arbitral rules will permit parties to request an arbitral tribunal to revisit an award for clerical or computational mistakes. For example, the AAA-ICDR Rules state that “[w]ithin 30 days after the receipt of an award, any party, with notice to the other party, may request the arbitrator to interpret the award or correct any clerical, typographical, or computational errors or make an additional award as to claims, counterclaims, or setoffs presented but omitted from the award.”[xvii] One tribunal has explained that the scope of the review is to correct any “slips” in an award and this was in conformity with the plain meaning of the words “correct any clerical, typographical or computational errors.”[xviii]
In addition, Article 39 of the UNCITRAL Arbitration Rules permit review of an arbitral award for failure to address a claim or defense that was put to the arbitral tribunal but which was not ruled upon.[xix] This is a limited ground for review, as this provision does “not permit the tribunal to revisit its final awards … [and] was intended to address instances of obvious omissions where arbitrators have ‘failed to render a complete award’”[xx] The scope of this provision may extend to defenses or issues raised that do not necessarily rise to the level of a proper claim in the arbitration. One tribunal seated in California explained that a claim under Article 39.1 of the UNCITRAL Arbitration Rules does not encompass every argument raised by either party, but might include more than just the specific requests for relief which were omitted from consideration in the final award.[xxi]
Conclusion
Purists may consider that the notion of expanded rights of appeal are anathema to the entire concept of arbitration. Nevertheless, the nature of disputes in the modern global economy can vary greatly, and there are times when parties may wish to provide for the review of an arbitrator’s decision that is more expansive than what is typically permitted. In California, there are different routes which may provide for this outcome, but in most cases, consent to an appellate process must be obtained in advance.
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As one of the few firms in Southern California with an extensive international arbitration practice, Musick Peeler’s International Arbitration Practice Group represents clients in cross-border commercial disputes throughout the world. The Group’s experience includes representation of U.S.-based companies engaged in international business as well as non-U.S. companies conducting business activities in the United States. For more information, contact:
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[i] Protech Minerals, Inc. v. Suzuki, No. C20-0969 TSZ, 2020 U.S. Dist. LEXIS 221719, at *3 (W.D. Wash. Nov. 25, 2020).
[ii] Omnicare, Inc. v. RX Sols., Inc., No. SACV 08-01254-CJC(MLGx), 2009 U.S. Dist. LEXIS 141907, at *5 (C.D. Cal. Jan. 13, 2009) (citing Kyocera Corp. v. Prudential-Bache T Servs., 341 F.3d 987, 994 (9th Cir. 2003) (en banc)).
[iii] Omnicare, at *5 (citing Kyocera Corp., 341 F.3d at 998). Section 10(a)(4) of the FAA provides that a party can seek to vacate an arbitral award when an arbitrator “exceeded their powers”, which some interpret as permitting a limited legal errors, but the Ninth Circuit Court of Appeals has clarified that “a court may only vacate an award that evidences affirmative misconduct in the arbitral process or the final result or that is completely irrational or exhibits a manifest disregard for the law.” To demonstrate manifest disregard, the party seeking to vacate must show that the arbitrator understood the law and disregarded it in reaching his conclusion. Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007).
[iv] Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 590, 128 S. Ct. 1396, 1406 (2008).
[vi] Cal. Civ. Proc. Code § 1286; Cronus Invs., Inc. v. Concierge Servs., 107 P.3d 217, 224 (Cal. 2005);Countrywide Fin. Corp. v. Bundy, 187 Cal. App. 4th 234, 246, 113 Cal. Rptr. 3d 705, 714 (Cal. Ct. App. 2010).
[vii] Oaktree Capital Mgmt., L.P. v. Bernard, 182 Cal. App. 4th 60, 71, 106 Cal. Rptr. 3d 16, 25 (Cal. Ct. App. 2010).
[viii] Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal. 4th 1334, 1361, 82 Cal. Rptr. 3d 229, 251, 190 P.3d 586, 604 (2008).
[x] The AAA provides standard language for incorporating the appellate rules: “Notwithstanding any language to the contrary in the contract documents, the parties hereby agree: that the Underlying Award may be appealed pursuant to the AAA’s Optional Appellate Arbitration Rules (“Appellate Rules”); that the Underlying Award rendered by the arbitrator(s) shall, at a minimum, be a reasoned award; and that the Underlying Award shall not be considered final until after the time for filing the notice of appeal pursuant to the Appellate Rules has expired. Appeals must be initiated within thirty (30) days of receipt of an Underlying Award, as defined by Rule A-3 of the Appellate Rules, by filing a Notice of Appeal with any AAA office. Following the appeal process the decision rendered by the appeal tribunal may be entered in any court having jurisdiction thereof.”
[xi] Rule A-10 of the AAA Optional Appellate Rules.
[xii] 2018 WL 6069222 (AAA).
[xiii] Rule A-3 of the AAA Optional Appellate Rules.
[xiv] Rule A-5 of the AAA Optional Appellate Rules.
[xvii] AAA-ICDR Rules, Article 37(1).
[xviii] MITSUBISHI HEAVY INDUSTRIES, LTD. et al, v. STONE & WEBSTER, INC., 2008 WL 6494532 (S.D.N.Y.)
[xix] UNCITRAL Arbitration Rules Art. 39.
[xx] J. Paulsson and G. Petrochilos, UNCITRAL Arbitration, at p. 355, Kluwer Law International (2017).
[xxi] ICDR Case No. 01-19-0000-3439 (unpublished) [UNCITRAL Rules arbitration administered by ICDR.]
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