|All, or virtually all, court systems have some sort of appeals process whereby litigants that are dissatisfied with an initial decision can challenge that decision “on appeal.” The widespread availability of an appeals process in court adjudication contrasts sharply with the lack of an appeals process in commercial arbitration, where a party has a very limited ability to appeal an adverse award. The literature identifies two principal functions served by an appeals process. The first function of an appeals process is to correct errors by the initial decision-maker. Trial courts make mistakes, and appellate courts, because of their greater expertise, lesser time pressures, collegial decision-making, or some other reason, correct those mistakes. The second function attributed to the appeals process is lawmaking. At least in common law countries, appellate judges decide cases that provide precedents to guide decisions in future cases.
This Article extends the existing literature by addressing the functions of an appeals process from the perspective of the incentives of judges rather than from the perspective of the incentives of litigants. Because the institutional characteristics of courts at different tiers of the court system vary, the incentives of judges at the different tiers vary as well. As a result, on the margin a judge may decide a case differently depending on whether the judge sits on a trial court, an intermediate appellate court, or a supreme court. An appeals process permits parties to have their case reviewed by a court with different incentives than the trial judge, and ensures that the trial judge considers that possibility in deciding the case. As a result, the appeals process prevents some such “errors”; others will be corrected by the appellate court. An appeals process does more than correct cognitive mistakes by trial court judges; it changes the trial judge's incentives.
Arbitrators, by comparison, have very different incentives than trial judges. Unlike judges, the compensation of arbitrators varies with the amount of time they spend on a case, and arbitrators compete with each other for future cases. Market forces constrain the self-interest of arbitrators
in ways that they do not for judges, making an appeals process of less value to the disputing parties in an arbitration proceeding. The differing incentives of judges and arbitrators thus provide an additional, incentives-based explanation for the lack of an appeals process in commercial arbitration.