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Apr 06

The American Rule and Attorney Fees in US Litigation

One of the most striking differences between the US and the NZ legal system is the rule regarding the payment of attorney fees by the litigants.

In New Zealand, and in most other Common Law courts, attorney fees of the litigants are controlled by the English Rule. The English Rule provides, in general, that the party which loses the litigation will be responsible for the winning party’s attorney’s fees and costs. This dramatically changes the litigation landscape as it forces plaintiffs to consider the true strength of their case before filing the case in court. This rule also promotes settlement, as a confrontation in court will generally result in an order for fees and costs against the losing party.

In the United States, litigation proceeds under a vastly different approach called the American Rule. The American Rule provides that each party bears its own litigation costs and attorneys fees, unless specifically provided for by statute or contract. The policy behind this rule is to promote access to the courts. This, along with the contingency fee arrangement, partially explains the litigious nature of American society.

When entering into business in the US, New Zealand businesses should specifically consider the American Rule when negotiating any contract or when entering into any dispute. NZ businesses should seek specific American legal counsel to insure that the contractual provisions being negotiated provide coverage for attorneys fees to the winning party in case of a dispute, or indemnity clauses which would provide for attorney’s fees in case of a claim by a third party.

Many clients are shocked to learn that they have no coverage for attorney’s fees in a dispute because of poor contract drafting. The language in these contractual clauses is highly specialised in each state and must be carefully drafted, or the opportunity for fee switching may be lost.