Winterthur – Baseball Arbitration

It is not too often that you see a Queen's Counsel dancing around a Herbert Smith conference room late in the evening. There are also few occasions on which it will be helpful to know where the Herbert Smith stash of champagne is kept so that a warm bottle can be cracked open and drunk whilst reading an actuarial report. But both of these occurrences took place on the night that the result of a baseball arbitration involving our client, Winterthur Swiss Insurance Company, was announced. The announcement took place late in the evening because it was price sensitive to companies whose shares were traded on the New York Stock Exchange. More importantly, the result was in Winterthur's favour. This triggered tremendous excitement and relief both for Winterthur and its professional advisers; hence the dancing and champagne.

Baseball arbitration is an unusual method of resolving disputes, originally used in the negotiation of baseball players' salaries. It involves each party to the dispute putting forward an initial 'bid' indicating what it believes the correct figure for the amount in dispute should be. An independent expert is then appointed to make its own determination of the figure. Crucially, whichever of the parties' bids is closest to the figure determined by the independent expert 'wins' the baseball arbitration and is deemed to be the correct figure. In the current case involving Winterthur, there was some US$900 million between the two bids put forward by the parties.

The dispute itself arose from the sale of an insurance business by Winterthur to a Bermudan insurance company, XL Insurance (Bermuda) Ltd, in June 2001. The sale and purchase agreement provided that three years after the sale, the adequacy of the reserves of the insurance business, as valued at the time of sale, would be reviewed. To the extent that the reserves appeared to be inadequate after the three year period, a balancing payment was to be made from Winterthur to XL. There was no doubt that such a balancing payment was due, not least because the business had faced large claims arising from the World Trade Centre collapse and large scale US pharmaceutical claims. There was a significant dispute, however, as to the correct amount of the payment. The sale and purchase agreement provided that ultimately this dispute was to be resolved according to a baseball arbitration procedure.

The amount at stake during the case was large and the result was of obvious importance to Winterthur and its then parent, Credit Suisse. The timetable for resolving the dispute was also tightly drawn. This meant that the work involved, while at times challenging, was always exhilarating. The opportunities for trainee involvement were varied and included helping to prepare written presentations to the independent expert; carrying out legal research relevant to the case; and organising communications between the client and its team of professional advisors.

After the baseball arbitration process was complete, Winterthur hosted a celebration day in Switzerland involving winter sports followed by a black tie dinner and dance. It was the ideal way to close such a fast paced and exhilarating case. Once again, the Queen's Counsel ended up dancing. But at least the champagne was chilled this time.

Richard Breavington