In our previous article (https://rostamilaw.com/news) we wrote about the differences between arbitration and litigation to resolve disputes arising from commercial agreements. One of the significant differences between the two processes is the right to appeal an initial award or judgment. In litigation, a party has the right to appeal a judgment of a trial court on any basis including when a material fact was mistaken or an issue was determined by incorrect law. However, the right to appeal an arbitration award is very limited. For agreements governed by the Federal Arbitration Act (“FAA”) and the New York Convention, and many state laws, a party can appeal the award in a federal or state court only if it has sufficient evidence that the award was obtained by corruption, fraud, evident partiality, or where the arbitration panel exceeded its powers. The very limited scope of appeal is based on the belief that entities have accepted the risk of an arbitrator panel’s mistake of fact or law for a quick, less expensive and conclusive resolution to their dispute. However, in practice, parties seldom take this risk into consideration when agreeing to arbitrate disputes. The consequences of accepting such a risk for issues that are fundamental to a business—such as ownership of intellectual property or trade secrets—could be devastating.
The United States Supreme Court has addressed the question of whether parties may contractually expand the scope of judicial review under the FAA, and the prevailing view is that the grounds for vacating an award under the FAA are exclusive and cannot be supplemented by private agreement. The same principle applies under many state statutes or common law principles.
However, since arbitration is a creature of contract, parties have the right to select the law of a state jurisdiction to govern their arbitration agreement. A handful of states permit parties to contract for a more expanded scope of judicial review of an arbitration award. New Jersey law provides that parties have the right to expand the scope of judicial review of an arbitration award by expressly providing for such expansion in a record. This broad language gives New Jersey parties significant flexibility to define the grounds on which a court may review an arbitration award, so long as the expanded scope is clearly documented in the arbitration agreement. In Alabama, California, and Texas, parties can expressly agree that a court may consider whether the arbitrator committed legal error —that is, whether the arbitrator applied the law incorrectly. This standard goes beyond the narrow grounds available under the FAA and most other state laws, but it is typically limited to errors of law rather than findings of fact.
It is important to note that even in states that permit expanded judicial review, the parties’ agreement must clearly and unambiguously reflect their intent to expand the scope of review. Vague or boilerplate arbitration clauses are unlikely to be interpreted as providing for expanded appeal rights. Parties should use specific language referencing the applicable state statute and expressly stating the grounds on which judicial review may be sought.
In addition to state-law options, parties may also consider contractual appellate arbitration. JAMS, one of the largest private alternative dispute resolution providers in the United States, offers an Optional Appellate Arbitration Procedure. Under this procedure, a party may appeal an arbitration award to a new three-arbitrator appellate panel. The appellate panel reviews the award for errors of law that are material and prejudicial, and for determinations of fact that are clearly erroneous. The JAMS appellate process provides a structured, private means of review without resorting to the courts, and it may be particularly attractive in complex commercial disputes where the stakes are high and the risk of an uncorrected error is significant. To invoke this procedure, the parties must agree to it in their arbitration agreement or by separate written consent.
Therefore, parties to international or domestic agreements governed by United States state law should determine whether an expanded appeal process is available under the applicable state's arbitration statute, or consider selecting the law of a state that provides for an expanded basis of appeal of an arbitration award. If such a state law is selected, parties must research the requirements they must satisfy to preserve and enforce the right to appeal an arbitration award. Below is a brief description of the requirements of several such states.
In summary, while arbitration offers speed, efficiency, and finality, the very limited scope of appeal can pose significant risks—particularly in disputes involving complex legal questions or high-value assets such as intellectual property. Parties entering into arbitration agreements should carefully evaluate whether the default appeal limitations are acceptable, and if not, should proactively draft provisions that preserve meaningful review rights. This may involve selecting the law of a state that permits expanded judicial review, incorporating the JAMS Optional Appellate Arbitration Procedure, or both. Thoughtful attention to these issues at the contract drafting stage can prevent costly and irreversible outcomes down the road.