Should You Include Appellate Provisions in Your Contracts?

The appellate scheme embedded within the rules of the American Arbitration Association (AAA) is often overlooked and rarely considered when drafting and negotiating contracts. Unless they are addressed at the contract drafting stage, the rights and procedures granted by these rules are lost to parties in a later arbitrable dispute.

In the complex landscape of construction and commercial contracts, dispute resolution mechanisms often receive less attention than they deserve during negotiations. Yet, these provisions can significantly impact how parties resolve conflicts and protect their interests. Among these mechanisms, appellate arbitration rules represent a critical component that merits careful consideration.

Traditional arbitration has long been valued for its finality. Once an arbitrator renders a decision, it typically stands with limited grounds for judicial review. However, this finality—while efficient—creates risk when substantial financial interests are at stake or when legal errors might occur.

In response to these concerns, arbitration providers have developed appellate procedures. Organizations like the AAA now offer Appellate Rules that allow contracting parties to build in review mechanisms while maintaining arbitration's private nature. These rules provide a structured process for appealing arbitration awards within the arbitration framework rather than resorting to courts.

Benefits of Including Appellate Provisions in Contracts

1. Balancing Efficiency with Accuracy One of the most compelling reasons to incorporate appellate arbitration rules is to strike a balance between efficiency and accuracy. Standard arbitration offers expediency but provides limited recourse for correcting errors. By including appellate provisions with appropriate thresholds, parties can preserve arbitration's efficiency for smaller disputes while enabling review for high stakes matters.
2. Preserving the Benefits of Arbitration Appellate arbitration rules allow parties to address concerns about arbitral errors without abandoning arbitration's core benefits. By keeping the appeal within the arbitration framework, parties maintain:
   • Privacy and confidentiality
   • Industry-specialized arbitrators
   • Procedural flexibility
   • Limited discovery
   • International enforceability
   This balanced approach offers a middle ground between traditional arbitration's finality and litigation's extensive appeal rights.
3. Controlling the Appeal Process When carefully drafted, appellate provisions give parties control over critical aspects of the appeal process, including:
   • The standard of review (such as de novo review of legal issues)
   • Selection criteria for appellate arbitrators
   • Cost allocation between parties
   • Scope of the appealable issues.
   This level of customization allows parties to tailor the appeal process to their specific relationship and risk tolerance.

Effective Implementation of Appellate Provisions

Despite their benefits, appellate arbitration provisions require careful consideration:

1. Additional costs and time: Appeals inevitably extend the dispute resolution timeline and increase expenses.
2. Complexity in drafting: Poorly drafted appellate provisions can create ambiguity and additional disputes.
3. Preserving work continuity: Parties should address whether work continues during disputes and appeals.

In an era of increasingly complex commercial relationships and high-value contracts, appellate arbitration rules offer a sophisticated mechanism for balancing finality with accuracy. By thoughtfully incorporating these provisions into contracts, parties can preserve arbitration's benefits while mitigating the risk of errors in high-stakes disputes.

The ideal approach varies based on industry context, relationship dynamics and risk profiles. However, the growing availability of institutional appellate rules makes these mechanisms increasingly accessible and standardized. For contracts involving substantial financial stakes or complex legal issues, appellate arbitration provisions warrant serious consideration during contract negotiations.

By addressing these issues proactively, contracting parties can establish a dispute resolution framework that aligns with their business objectives and risk tolerance, potentially saving significant time and resources if disputes arise.