Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

American Rule

What it is:

The American Rule, in law, is a rule by which each party pays its legal fees resulting from litigation.  This contrasts with the English Rule, which is the global norm, where the losing party pays the legal fees of the winning party.

How it works (Example):

For example, assume the plaintiff (the party suing that claims to have been wronged by the defendant's actions) files a lawsuit against a defendant and hires an attorney on a contingent fee basis (whereby the attorney doesn't charge fees but gets a percentage of the settlement if the suit is victorious).  Under the American rule, If the plaintiff loses and no settlement is awarded, the defendant must still pay legal fees he or she incurred. 

Why it Matters:

Supporters of the American Rule claim that the system allows everyone legal recourse.  Even poor people, who otherwise could not afford to risk having to pay the other party's legal fees, can have access to justice.

Critics of the law claim that it invites frivolous lawsuits because plaintiffs, especially those who hire attorneys on a contingient basis, have nothing to lose.  Defendants are forced to pay legal fees even to fend off less than honest attempts to game the system for money.