Opting for the English rule: On the contractual re-allocation of legal fees

Abstract

This paper explores litigants’ use of the possibility to contractually re-allocate legal fees, that is, to (potentially partially) opt out of the American rule. In our screening framework with two defendant types, the plaintiff prefers offering contract proposals with fee-shifting to settling with only the defendant with a weak case when the share of that defendant type is high. In the contract, the plaintiff offers to the defendant with the strong case that the litigant defeated in court bears all legal fees (i.e., proposes a switch to the English rule). The possibility to contractually re-allocate legal fees turns out to be irrelevant for cases involving a defendant with a weak case because the plaintiff always settles with this defendant type. Importantly, we show that the private use of the contracting opportunity differs from the socially optimal use.