The Risks of “Baseball Arbitration” in Resolving Real Estate Disputes: A Neutral’s Perspective
ALM Media
Gerald Levy
In 1974 Major League Baseball (MLB) introduced what is now known as “baseball arbitration.” If an eligible player’s representative and the club ownership cannot reach a compensation agreement through negotiation, each party enters a final submission and during a formal hearing each side—player and management—presents its case and then the designated panel of arbitrators chooses one of the salary bids with no other result being allowed.
This method has become increasingly popular even beyond the sport of baseball. For example, many real estate lawyers now advise clients to utilize “baseball arbitration” for resolving disputes. The range of such disputes includes such things as market rent re-settings for commercial space lease renewal periods; renewal rents for ground leases; disputes between buyers and sellers in the case of purchase options specifying market value at the point of the purchase option’s exercise, and brokerage commission disputes.
Sounds Good in Theory
Arbitral discretion in such a process is limited to choosing exactly one side’s position or the opposing party’s view. The rationale is that each party fearing that its proposal will not be chosen will be forced into a “zone of reasonableness” and, consequently, the difference in the positions will be narrowed. Although this approach seems theoretically sound, it is often fails in practice. Rarely does it seem to work effectively in actual arbitration cases. There is often an immense gap in the final bids submitted.
For one thing the way such clauses are usually written, each party does not see the opposite party’s submission until after the entry of bids. I have never seen a baseball clause in real estate agreements that allowed the parties to revise their bids after their initial formulations. If there was such an opportunity it might make the theory somewhat more reliable. To borrow a wise and well known thought from Justice Oliver Wendell Holmes, Jr. in his treatise The Common Law: “The life of the law has not been logic; it has been experience….it cannot be dealt with as if it contained only the axioms or corollaries in a book of mathematics.”
There is also a widely held belief that baseball arbitration is likely to be quicker and cheaper in resolving the matter at issue. This argument assumes that the arbitrator can easily come to a decision in a very short period of time. Many commercial real estate arbitration cases involve complex properties and have substantial financial consequences for both parties. Mandated quick decisions do not necessarily produce equitable outcomes.
In addition, a highly accelerated time deadline lacks the flexibility to adjust for the other unrelated obligations of the neutral in the same time period or any consideration of whether or not such an arbitrary deadline will result in the best decision that could be achieved. Such deadlines may commit the arbitrator to reach a quick decision without also formally obligating other necessary witnesses to be involved and committed to complying with the same deadline. In such a circumstance how can the neutral confidently commit to such a date certain; what happens if the deadline is not met?
Respective counsel may assume that any arbitrator’s time expended in such a case is minimal since it appears that he or she simply has to make a binary choice. This thinking may seem true but often is not. In a real estate arbitration case with a large number of dollars at stake there are many issues that may make it necessary for the arbitrator to utilize a great deal of professional thought and time in analyzing the diverse factors that could have an impact on the either/or choice.
In addition, the amount of evidence presented during formal hearing sessions (and subsequently recorded in stenographic transcripts) as well as opening and closing statements, expert reports, documents, and exhibits may be voluminous and challenging to absorb while complying with an abrupt deadline.
“Split the Difference”
Among the other arguments set forth in favor of baseball arbitration is that avoids the concern that arbitrators may just “split the difference.” Yes, there may be a few arbitrators who do split the difference but this talking point is exaggerated and trying to avoid that concern hardly justifies choosing an even riskier process.
Sometimes in a baseball arbitration clause it is specified that if the differential in the bids is in a “narrow” range—say 5 or 10 percent or some other stipulated percentage—the difference could just be split. Although “split the difference” is not a professionally sanctioned valuation concept and is a concept that the parties might usually find undesirable, they have it within their power to make such a decision and it may be in their interest to do so.
In such circumstances and with an appropriately drafted arbitration clause, the need for an arbitrator could be eliminated; however, such occasions are rare. To employ such an arbitrary split when there are even larger percentage differentials would be to discourage submissions rationally conceived and to encourage wilder positions by one or both sides. If an absurd proposal is submitted by one party, this circumstance in a split the difference scenario would benefit the wilder actor and penalize the party who entered a more realistic submission!
Often the parties fear a priori bias by an arbitrator and do not wish to give any arbitrator the power to decide based on his or her own market rental or market value estimates. This skepticism is an inherent right of the parties but often it is not grounded in reality. As an arbitrator who has participated in many real estate disputes, I have never observed a neutrally selected arbitrator, who after being screened in an effective conflict of interest disclosure review, “threw a decision.” Although, not personally offended by the parties’ right to limit discretion in resolution of their dispute, often they are not well serving their own interests.
Appropriate results would often be better safeguarded by allowing the arbitrator broader discretion in the matter at issue. The disputants’ skepticism ignores the likelihood that most professional arbitrators will arrive at an equitable decision without arbitrary constraints. Such requirements may just result in the arbitrator necessarily selecting the “least worst” of the two choices with gambling the order of the day for the respective parties.
In England in the eleventh and twelfth centuries a dispute over land ownership was often resolved by an actual “trial by battle” or physical fight possibly leading to serious injury or death to a claimant or his designated “champion;” subsequently, this dispute resolution method was abandoned. When it was sanctioned, the dubious assumption was that the winner of the battle was the rightful property owner.
In the present baseball arbitration circumstance we have a resolution of a disputed matter without any physical battering but even though no blood is shed the decision may well lack fairness. In any event, an arbitrator is not authorized to reform the lease or other legal agreement to prevent an unreasonable result. Unlike trial by battle, baseball arbitration is still advocated by many professionals.
Reducing the Risk
Perhaps, the most positive attribute of baseball arbitration is that it may frighten the parties into settling the matter before the process proceeds but, if it does go forward, it is a high stakes gamble featuring the equivalent of an unpredictable roll of the dice.
Yet, there have been some suggestions put forth over the years for the reduction of the riskiness of baseball arbitration, such proposals include but are not limited to the following:
Two independent arbitrators without consulting each other select one of the two submissions; if they both choose the same bid then the chosen submission is the award. If they each choose different proposals then the award is the midpoint between the two submissions.
Three independent arbitrators without consulting each other select one of the two submissions; if all three make the same choice then that is the award; if two select the same proposal and the third the other submission then the award is weighted toward the more frequently chosen submission.
These suggestions are at present rarely if ever used and have logistical difficulties and more expense burdens but they are attempts to make baseball arbitration less onerous for either party. Such alternatives are unlikely to be utilized in cases of minor financial consequence because of the expense, time, and logistical burdens imposed, but these concepts could be tried in a few larger cases.
There are two additional features which, if added to baseball arbitration clauses, could possibly reduce the riskiness of the process. One would be to provide for mandatory price negotiations before the initial bids are submitted, and another would be that such clauses could allow for revised bid submissions if desired by either one or both parties. Revised submissions would occur after the initial bids are transmitted and both bids are known to each side and would attempt to narrow the spread of the bids.
Conclusion
I have served as an arbitrator in many real estate matters including those mandating a baseball arbitration process and would do so again in the future. Perhaps, to eliminate some of the chances for random unfairness, the parties would be best served by allowing the arbitrators greater discretion in decision-making.
Gerald M. Levy is president of Gerald M. Levy & Co., a real estate arbitration and mediation services company. He was the primary drafter of the “Real Estate Industry Arbitration Rules (Including a Mediation Alternative)” sponsored by the American Arbitration Association. He can be reached at gmlevyllc@aol.com.
