Should the loser pay?

May 31, 2011
Eric Thornton

The most frequently asked question by parties involved in a legal dispute is, “Can I recover my attorney’s fees if I win this lawsuit?” Tennessee, like most jurisdictions, adheres to the American rule for award of attorney fees. Generally speaking, each party to a lawsuit is responsible for their respective attorney’s fees. As a general principle, the American rule reflects the idea that public policy is best served by litigants being responsible for their own legal fees regardless of the outcome of the case. The notion that the loser in litigation pays the other side’s expenses, including attorney fees, is generally known as the British rule. With the exception of Alaska, the entire United States follows the American rule. Texas, however, currently has pending in its legislature a bill that follows a loser-pay system. Proponents of the loser-pay system justify its value by indicating the system reduces frivolous lawsuit while encouraging parties to settle.

Proponents, opponents

Opponents of the loser-pay system take the position that such a system essentially limits access to the courts to large corporations. For most middle class Americans and small to medium sized businesses, the prospect of having to pay significant attorney fees for the other side’s expenses could be devastating. However, those in support of the loser-pay system point to the 2007 lawsuit against a Washington area dry cleaner alleging that it had lost a pair of pants. That case was remarkable not only for the astronomical damages claim totaling $54 million dollars, but also the nearly $100,000 in legal fees incurred by the dry cleaner owner in successfully defending this absurd case. Proponents of the loser-pay system suggest the system would reduce the number of low-merit lawsuits and encourage potential parties to comply with the law while promoting good-faith settlement opportunities.

American rule

Under the American rule, which Tennessee has expressly adopted, a party in a civil action may recover their attorney’s fees only if: (1) a contractual or statutory provision creates a right to recover attorney fees; or (2) some other recognized exception to the American rule applies, allowing for recovery of such fees in a particular case. Adherence to the American rule is based on several public policy considerations: first, since litigation is inherently uncertain, a party should not be penalized for merely bringing or defending a lawsuit; second, the poor might be unjustly discouraged from instituting actions to vindicate their rights if the penalty for losing included paying the fees of their opponent’s lawyer; third, requiring each party to be responsible for their own legal fees promotes settlement; and fourth, the time, expense, and difficulty inherent in litigating the appropriate amount of attorney fees to award would add another layer to the litigation and burden the courts and the parties with ancillary proceedings. Examples of specific exceptions from applicable statutory and decisional law where an award of attorney fees could be obtained include, but are not limited to: contractual provisions agreed upon by both parties, divorce actions, Tennessee Consumer Protection Act violations, fraudulent, reckless, intentional and willful conduct, contemptuous conduct, and implied indemnities.

In the context of contract interpretation, an exception to the American rule is allowed only when a contract specifically or expressly provides for the recovery of attorney fees. If a contract does not specifically or expressly provide for attorney fees, the recovery of fees is generally not permitted. This is the case in most real estate disputes as most real estate transactions are based upon a written agreement or contract. As one can imagine, the facts of every lawsuit are different and dictate what, if any, opportunity exists to recover attorney fees.

With the backdrop of today’s economic climate and individual states re-examining their consumer protections, as well as tort liability and medical malpractice reform, it should come as no surprise that states are also beginning to re-examine their American rule heritage. Under the American rule system in Tennessee, I’m reminded of the statement made by Rosie Perez in the 1992 movie “White Men Can’t Jump.” In a scene from inside the bus, Rosie tells Billy, her boyfriend played by Woody Harrelson, “…sometimes when you win, you really lose.” With tort reform being proposed in most states including Tennessee, I’m certain that the debate over a loser-pay system will soon follow.

– Eric Thornton is a partner with the law firm of Ramsey, Thornton & Barrett, PLC.

The foregoing article is not intended as, nor shall be used, relied upon, or otherwise construed as legal advice or an attorney-client relationship. You are advised to seek independent legal advice from an attorney licensed in the State of Tennessee.

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