March 12, 2019

Resolving Construction Disputes through Baseball Arbitration

Lochlin B. Samples, Smith, Currie & Hancock LLP, Atlanta, GA

Professional baseball has successfully implemented a dispute-resolution procedure that has both decreased the costs of arbitration and expedited resolution of disputes.  The construction industry would benefit from the incorporation and adaptation of the “baseball arbitration” procedure in construction disputes.  This article is not theoretical; it is based on experience adapting baseball arbitration concepts to construction disputes.

General Overview of Baseball Arbitration

Baseball arbitration arose as an alternative to free agency for professional baseball players.  Instead of free agency, players and teams could request salary arbitration utilizing a three-member panel.  Both parties would put on evidence supporting the requested salary amount, which would depend on factors such as overall team record, player performance, fan appeal, past compensation, mental or physical defects, and comparative salaries.  Both parties then submit their own proposed salary numbers.    

While the procedure up to the presentation of evidence is virtually identical to standard arbitration, baseball arbitration imposes strict limits on the panel’s ability to make an award.  The panel is only empowered to do one of two actions: accept the player’s proposed salary or accept the team’s proposed salary.  The panel is not empowered to split the baby or award a salary other than the amount requested by the player or the team.  The award is final and is issued without explanation.

Benefits of Baseball Arbitration for Construction Disputes

Utilizing the all-or-nothing approach of baseball arbitration along with the issuance of a final decision without explanation both present useful options for incorporation into the construction industry.  The all-or-nothing approach—i.e., the panel is only empowered to award what the petitioner or the respondent requests—forces both parties to perform a realistic assessment of the claimed damages.  By forcing the parties to examine, in detail, the claim amounts, wise parties will consider the risks and benefits of claiming certain amounts.  Simply put, it rewards parties for approaching disputes with a degree of reasonableness.

By rewarding the parties for reasonable claims, while also penalizing parties for unreasonable positions, the process helps eliminate inflated or bogus claims.  Today, it is far too common to see inflated claims in construction arbitration.  Whether this stems from concerns over arbitrators “splitting the baby,” poor claim management, or other causes, the inflated claims and meritless assertions only serve to delay the proceedings, causing all parties to incur additional expenses that could easily be avoided through the use of reasoned claims.  Although some parties will inevitably choose to continue to “swing for the fence” by asserting riskier and less supported claims, the baseball arbitration system will be more apt to reward parties that take a more reasonable approach.  A side benefit of the all-or-nothing baseball style is that it also eliminates concerns that arbitrators simply “split the baby,” because the arbitrators only have authority to award the amount requested by the prevailing party.

Baseball arbitration also encourages party decision-makers to take an in-depth look at the claim earlier, rather than later.  Too often, party decision-makers are not fully briefed on the relative risks and merits of the claims until the dispute is well underway and both parties have incurred significant costs.  Inclusion of baseball arbitration requires the parties to take an early and in-depth look at the relative claims as part of the initial submissions. Ultimately, this results in a significant closing of the gap between the parties, which encourages settlement.

No Reasoned Decision or Explanation

Forgoing a reasoned decision is the second element worth incorporating for some construction disputes.  This is particularly appealing for projects where the dispute only relates to the amount of a payment—not whether the party is entitled to a claim—and where the work is ongoing.  Bypassing any reasoned decision allows the panel to quickly enter an award for either the full amount requested by the petitioner or for the full amount presented by the respondent.  This elimination further assists in a speedy resolution by encouraging the parties to stick to the issues at hand.  It also helps limit bad feelings on the job, as the panel simply adopts either the petitioner’s or respondent’s amount, without any explanation. The decision, which simply adopts a number, does not indicate whether the panel agrees with the arguments of the parties or not; instead, the decision indicates only that the number presented by one party was more reasonable than the number presented by the opposing party.

Drawbacks and Limitations of Baseball Arbitration in Construction Disputes

There are differences in the nature of the disputes between the construction industry and MLB salary negotiations that provide some limits on the use of baseball arbitration in construction disputes.  The primary limitation is that construction disputes often involve multiple claims from numerous entities that may or may not be parties to the arbitration.  Pass-through claims are particularly problematic because the presenting party in the arbitration might have limited abilities to reduce or modify the claim.  For instance, consider a dispute between a general contractor and an owner related to added electrical scope work.  The general contractor is passing through its electrical subcontractor’s claim against the owner in arbitration.  If the arbitration is governed by baseball rules, the general contractor must choose between passing along the full amount of the claim, including elements that the general contractor may find objectionable, or reducing the claim in the arbitration, thereby exposing the general contractor to additional liability from the electrical subcontractor as well as causing harm to the subcontractor relationship.  While there are ways to reduce this risk, such as requiring subcontractors to participate in the arbitration with the owner, these risks must be considered and managed at the time an agreement to arbitrate is reached.

A second drawback relates to the attorneys.  To succeed in a baseball-style arbitration, the party must submit a more reasonable claim than the opponent.  Depending on the nature of the claim, attorneys may be required to inform clients that the risk of asserting unsupported claim amounts outweighs the reward of asserting the claim.  This can lead to hard conversations between the attorney and client about the right amount to put forward.

Recommendations for Use of Baseball Arbitration

Baseball arbitration works best in the construction industry when the dispute is between two parties and the claims do not involve any significant third-party amounts or interference.  For instance, scope claims between a general contractor and subcontractor are good candidates for baseball arbitration, as are payment claims between general contractors and subcontractors.  For owners, baseball arbitration is often difficult with a general contractor due to the prevalence of subcontractor claims; however, the owner may benefit from baseball arbitration with its designers or design team.  While the process can work with multi-party claims, including pass-through claims from subcontractors, additional steps must be taken, particularly for the general contractor, in order to encourage overall fairness.

Additional Considerations

Every project and dispute presents its own unique challenges and requires an independent evaluation.  What follows are some general considerations attorneys should consider when determining whether to use baseball arbitration as well as when drafting the arbitration agreement:

When do the parties have to submit their claim numbers, and can the numbers be subsequently amended?  The parties should decide both when the claim amounts have to be submitted as well as a deadline for revising the numbers, if any.  Allowing revisions encourages the parties to make adjustments for additional information; however, it can also add to the cost of the arbitration.  The parties should also decide whether the revisions allow new claims to be added or simply current claim amounts to be revised.

Are there multiple claims from each party?  If so, is the panel empowered to go claim by claim, or must the panel award the final number of either the petitioner or respondent?  

Are there subcontractor claims or pass-through claims?  If so, what rights, if any, do the parties have to adjust the claim amount? Is the award binding on the subcontractor with the pass-through claim?

Conclusion

The construction industry could benefit from the selective incorporation of baseball arbitration concepts.  Particularly in simple two-party disputes, the all-or-nothing approach encourages the parties to present reasonable offers.  By encouraging the removal of less-supported components, the parties are able to focus on the core claim elements.  Parties often realize that the their positions are not as far apart as they initially seemed.