Under “baseball” style arbitration the arbitrator, when making his determination, must select as the outcome of the arbitration either one party’s proposed outcome or the other party’s proposed outcome.
The arbitrator cannot make his own determination. When parties are required to resolve a dispute through baseball arbitration they are motivated
- to submit a reasonable final binding proposal, because submitting an extreme proposal is likely to result in the other party’s proposal being selected, and
- to settle because each faces the possibility of a total loss, i.e., if the other party’s proposal is selected.
Here is a suggestion for drafting a baseball arbitration provision which produces both of the desirable effects listed above while reducing cost and delay.
Include in the lease a requirement that the parties must exchange their final binding proposals before the arbitrator is selected.
Yes, that’s it — the entire suggestion. The fact is that the making of the final binding proposals often results in settlement of the arbitration, even if the arbitrator hasn’t yet been chosen, and since choosing the arbitrator is often time-consuming and expensive, especially if the involvement of the AAA or a similar body is required, it is best to delay having to do so.
Baseball arbitration is only fair if each party is required to submit his final binding proposal without knowledge of the final binding proposal of the other party and so, in order to implement the suggestion above, the baseball arbitration provision should provide, at a minimum, that the parties will exchange their final binding proposals in sealed envelopes at a meeting at which each is present.
Even better, but slightly more costly, is to require that an umpire be appointed solely to oversee the exchange of the final binding proposals. The umpire should be a lawyer who, and whose firm, will be expressly excluded from acting as arbitrator, and whose duties are simply
- to call the meeting and receive and review the final binding proposals from each party,
- if both proposals meet the technical requirement of the governing agreement, exchange them
- if one or both do not, inform the parties and call another meeting for a few days later. (For example, if fair market rental is to be determined under a baseball arbitration provision, and one party submits a proposed rent per rentable square foot per annum and the other party submits a proposed aggregate rent per annum, the umpire, instead of making the exchange, should decide which type of proposal is called for by the lease and call another meeting for the submission of conforming proposals).
Given the purely ministerial role of the umpire, neither party ought to be too concerned with who acts as umpire and, when representing a tenant, I have sometimes agreed to give the landlord the unilateral right to select the umpire so long as the umpire is a partner is a 100+ lawyer law firm who has, for the past ten years, done no work for the landlord or any of its affiliates.
I have used this approach in baseball arbitration provisions whenever possible. Only one of those provisions has (to my knowledge) been used. In that case the landlord (acting unilaterally as permitted by the provision) appointed Jack Bart, a partner at Stroock and Stroock and Lavan (in New York), as the umpire, both parties made conforming final proposals, Jack made the exchange, the proposals were close to each other and the parties settled the matter within a few weeks. No arbitrator was ever appointed. Q.E.D.
Commercial Tenant Notes 