Loser pays litigation - aka the English Rule - is bottomed on the rationale that the successful litigant should be fully compensated for damages. In contrast, the American Rule is undergirded by the rationale that people should not be discouraged from seeking legal redress for fear they may incur both their own and the opposing parties' costs should they fail in court.
These two rules have profound effects with what scientists - both natural and social - call alpha [Type I] and beta [Type II] errors. The former is known as the false positive and the latter is known as the positive negative. These are constructed around the idea of the null hypothesis.
A null hypothesis provides the default position of rejecting the causal relationship that an experiment seeks to demonstrate. In the legal arena, the null hypothesis is the default of innocence or no liability on the part of the criminal or civil defendant, which is only overcome by the plaintiff carrying the burden of proof.
The effect of the English Rule is to reduce both false positives (i.e., an incorrect burden of proof being carried) and false negatives (i.e., the burden of proof not being carried when it should have). The American Rule would seem to allow an increase of both.
To borrow language from the survey industry in an attempt to provide more conceptual clarity, the English Rule seems to create legal gaps. Legal gaps occur because the closer litigants get to the legal line, the more they fear an incorrect decision because its costs will be higher. As a result, only those with both great financial resources and great appetites for risk will attempt to litigate matters with facts close to the legal line.
The American Rule tends to considerably narrow gaps and may instead - again, borrowing from survey language - create overlaps in the law. Overlaps occur when people are willing to advance their claims, even if not valid, because they are in control of litigation costs. This then serves to increase both types of errors.
Interestingly, these errors - as well as cases correctly adjudicated - can then be appealed. But when this is done in America, generally the American Rule is dropped and the English Rule is adopted. What's more, provided the appellate review is for a trial, the review will very likely be for an abuse of discretion. The aggregate of both situations is to delimit appellate review. However, in that the U.S. spends considerably more money on litigation than countries for which the loser pays, it stands to reason the percentage of cases receiving appellate review in America is probably greater than in those other countries.1
So, which approach is better? Well, for lawyers the American Rule is best ... or so it seems. True to its rationale, the American Rule has the salutary effect of encouraging people with valid claims to seek redress because they are not fearful of the risk associated with needing to pay for the opposing parties' cost. However, the underbelly of the American Rule is that it allows some lawyers the opportunity to take a shot on fairly dubious claims with the goal to strong-arm a settlement.
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