Document Type

Article

Publication Title

Cornell Law Review

Abstract

The American rule for attorney fees requires each party to pay its attorney, win or lose; the English rule (applicable in most of the world) requires the losing party to pay the winner's reasonable attorney fees. We study fee clauses in 2,347 contracts in large corporations' public securities filings. Because contracting parties can opt out of the default American rule at low cost, we expected opting out to predominate if the English rule more efficiently compensates counsel. Parties in fact contract out of the American rule in 60% of contracts, which far exceeds the rate of contracting out of other default dispute-resolution rules-those allowing for access to courts (avoidable through ex ante agreement to arbitrate) and the right to a jury trial. Thus, parties often find that the American rule is not optimal. Still, parties choose the American rule about as often as the English rule; the remaining fee clauses they choose are intermediate forms such as "one-way " fee shifts that require only one of the parties to pay the other's fees. Certain factors help explain the observed pattern of rules through their association with acceptance of the American rule. These factors include specific contract types, the presence of a non-US. party, the absence of arbitration clauses and jury-trial waivers, selection of New York law, and a likely long-term relation between the parties. Conversely, factors such as state laws that impose symmetric fee responsibility and an increasing degree of contract standardization are negatively associated with acceptance of the American rule. More generally, our findings suggest that the American rule is not optimal in many large commercial contracts and that sophisticated parties often reject default rules sufficiently important to them. Theoretical models should resist the assumption that one fee rule is most efficient in all contexts, and models should account for real-world factors associated with fee clauses.

First Page

327

Volume

98

Publication Date

2013

Download

Share

COinS