'Baseball arbitration' encourages settlement
Toronto commercial arbitrator Marvin J. Huberman says there are a few styles of arbitration that can really shine in certain contexts.
“Arbitration is truly an alternative method of dispute resolution to traditional litigation,” he tells AdvocateDaily.com. “When it's utilized effectively, arbitration is flexible, creative, innovative and responsive to the needs, interests and objectives of its users.”
He says two prime examples of effective arbitration are pendulum arbitration (also known as baseball arbitration) and high-low arbitration.
Initiated in Chile in the late 1970s, this technique was primarily used for determining industrial disputes between trade unions and management.
Pendulum or baseball arbitration is defined as a form of binding arbitration in which each of the parties chooses one number and the arbitrator is required to select only one of the figures as the award, he says, so there are only two possible outcomes.
Essentially, Huberman explains, the arbitrator resolves a claim by making a determination of which of the two sides has the more reasonable position. The arbitrator is required to choose between the two options and cannot split the difference or make an alternative determination.
“It started in the context of industrial disputes and it's increasingly used in resolving international tax disputes, including deciding on the transfer pricing margins,” he says. “Also known as baseball arbitration, it’s not surprising this method is used in relation to salary arbitrations in Major League Baseball.”
He shares a famous example of this style of arbitration. In 2012, Boston Red Sox designated hitter David Ortiz agreed to a one-year contract worth $14.5 million. The deal was the midway point between the $16.5 million Ortiz asked for and the $12.6 million submitted by the team.
Huberman says this style of arbitration encourages settlement and is particularly beneficial for parties who have a continuing or long-term relationship.
“In the Ortiz arbitration, each side knew the award was either going to be $16.5 or $12.6 million. The morning before the scheduled hearing, the parties agreed to $14.5 million, which was the midway,” he says.
A sample pendulum or baseball arbitration clause, he says, could read:
Each party shall submit to the arbitrator and exchange with each other in advance of the hearing their last best offer and demand. The arbitrator shall be limited to awarding only one or the other of the two figures submitted.
Huberman notes there’s also a variation called night baseball arbitration. The difference is the parties exchange their own determination of the value of the case but those figures are not disclosed to the arbitrator
“The arbitrator carries on with the case and determines the value in his or her award and the parties then agree to be bound by the figure that is closest to the arbitral award,” he says.
A sample night baseball arbitration clause could read:
The parties acknowledge that in a separate confidential document, they have exchanged with each other in advance of the hearing their last best offer and demand, and that these figures shall not be disclosed to the arbitrator. The arbitrator shall determine the value of the claim in the usual manner and the parties agree to accept and be bound by the offer or demand figure which is closest to the arbitrator's award.
High-low (also known as bracketed) is a style of arbitration where the parties have agreed to a ceiling and floor with regards to the award, Huberman says.
“If the award is lower than the floor, the defendant will pay the agreed upon low figure. If the award is higher than the ceiling, the plaintiff will accept the agreed upon high figure,” he says. “In a case where the award is in between the ceiling and floor, the parties agree to be bound by the arbitrator's figure.”
Huberman says these agreed upon high-low figures may or may not be disclosed to the arbitrator.
“Parties could have a side agreement, which is kept secret from the arbitrator. The parties can tell the arbitrator what they have agreed to and usually it can be incorporated into the award by consent of the parties,” he says. “In this case, the award is based not on what the arbitrator decided but the high-low side agreement stipulated.”