Risks of “Baseball Arbitration” in Resolving Real Estate Disputes

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.”