Stepping up to the plate: Why and when to consider taking a swing at baseball arbitration

Herbert Smith has advised Winterthur Swiss Insurance Company, a member of the Credit Suisse Group, in a major dispute with XL Insurance (Bermuda) Limited, a subsidiary of XL Capital, which was resolved in Winterthur's favour following what is believed to be the world's biggest ever "baseball" arbitration. Originally used for determining baseball players' salaries, baseball arbitration offers advantages if used in the right circumstances, but is neither without risk nor for the feint hearted.

Background

At the heart of dispute resolution through "baseball" arbitration is a requirement that the parties exchange final figures at an early stage and indeed usually before a Tribunal is constituted. Those figures are then binding on the parties throughout the arbitral process, and the Tribunal may or may not be told about them (the latter being termed "night" baseball). The key point is that it is the figure of the party which is closest to the award made by the Tribunal which becomes the binding figure payable. Less frequently baseball arbitrations involve non-monetary remedies, with the Tribunal assessing whose final offer is the preferable ultimate award.

The dispute between Winterthur and XL arose following the sale of Winterthur's international insurance operations in early 2001. It was agreed that the reserves in place would be "seasoned" ie reviewed after three years and a balancing payment made. Any dispute was to be resolved through a "baseball" arbitration (or strictly a "baseball" expert determination).

In light of significant losses, a balancing payment from Winterthur to XL was necessary, but the amount could not be agreed. There was no less than some US$ 900 million difference between the amounts initially proposed by the parties as their binding figures. An independent actuary was appointed to make a determination. The result was closest to Winterthur's proposed figure which was therefore deemed to be the final amount for the purposes of the agreement.

The dispute was a high value and high profile example of a baseball arbitration process which was carried out to completion. The remainder of this article looks briefly at the advantages and disadvantages of the process and comments upon the types of dispute where it may be of most use as a method of effective dispute resolution.

The Advantages

The main advantages of "baseball" arbitration are perceived to be the following:

1. The process should result in negotiation using reasonable settlement figuresMost baseball arbitration procedures require the parties to set out their position and the basis for it, and thereafter to negotiate in good faith. The requirement on each party to set out a final figure at an early stage discourages unreasonable or inflated offers. This approach is intended to accelerate a settlement which may otherwise take to the doors of the hearing to achieve.
2. Costs and TimeIt follows naturally that potentially significant time and costs will be saved if the baseball process produces a settlement at an early stage.
3. The process does not allow a tribunal to "split the baby" in difficult casesIt is not unknown, particularly in disputes on quantum, for a Tribunal to provide a compromise in its award which may satisfy neither party. Baseball arbitration removes this risk.

The Disadvantages

There are a number of disadvantages as risks inherent in a "baseball" process:

1. Lack of level playing field?Most methods of dispute resolution contain procedures intended to ensure the parties become better informed of the strengths and weaknesses of their cases – whether through the disclosure of documents, advance disclosure/discovery of oral evidence or otherwise. It is, of course, one of the aims of baseball arbitrations to avoid the cost and delay of those procedures. However, that may come at a significant price to the party who only discovers a critical assumption on which it has based its final figure is wrong after that figure has been submitted. It follows that sensible baseball arbitration procedures involve exchanges of information in advance of the production of final figures, albeit these procedures will not usually match those put in place in the baseball arbitration itself. The necessity for the initial exchange can add materially to the cost of the arbitration where a settlement is not achieved.
2. A non-compensatory result?It follows naturally from baseball arbitration that the end result may bring a windfall to the successful party – on the assumption the arbitrator has himself assessed the final figure correctly. 

When to take a swing?

The type of dispute likely to be sensibly resolved by baseball arbitration will usually be a simple quantum only dispute where there is little information not known by both parties or which cannot easily be exchanged. Beyond that situation, baseball arbitration should only be considered with great caution and it may be other methods of dispute resolution will be preferable.

Conclusion

Baseball arbitration provides real motivation for parties to seek to negotiate settlements using realistic offers. It will not be suitable in all circumstances but where it can be used to its full potential, as may particularly be the case in certain quantum disputes, it ensures that the parties either settle or face the daunting prospect of a potentially significant swing factor in the outcome. Stepping up to the plate presents significant potential advantages, but demands plenty of confidence in one's aim.