- 14-Sep-2025
- Elder & Estate Planning law
The American Rule is a widely followed cost allocation principle in arbitration, particularly in the United States, that generally requires each party to bear its own legal fees and arbitration costs, regardless of the outcome of the case. This rule contrasts with other international cost allocation principles, such as the cost-follow-the-event rule, which often places the burden of arbitration costs on the losing party.
While the American Rule is the default approach in many jurisdictions, parties to an arbitration may agree to a different allocation of costs in their arbitration agreement, or the arbitration institution’s rules may provide specific guidance on cost allocation.
Under the American Rule, each party is typically responsible for its own legal fees, regardless of who wins or loses the case. This means that the successful party does not automatically recover its attorney fees or other legal costs from the losing party.
For example, if Company A wins a $5 million dispute against Company B, Company A would not be entitled to recover its legal fees from Company B unless there is a specific agreement or statutory provision to that effect.
The tribunal fees (the fees paid to the arbitrators) and the administrative costs (paid to the arbitration institution) are usually shared between the parties, unless the arbitration rules provide otherwise. In some cases, the tribunal may decide to allocate these costs based on the outcome of the arbitration or the conduct of the parties during the proceedings.
Under American Rule, if the arbitration proceeds to a final award and Company B loses, the tribunal may still decide that both Company A and Company B share the tribunal’s costs equally, regardless of the result. However, this is often subject to the specific rules of the arbitration institution.
Unlike the cost-follow-the-event principle, where the losing party is typically required to pay the legal fees of the prevailing party, the American Rule does not automatically allow a party to recover its legal fees. Recovery of fees under the American Rule can occur only if there is:
The American Rule has several exceptions where a party may be able to recover legal costs:
Under the American Rule, since the winning party cannot automatically recover its legal costs, parties may approach the arbitration process with more caution. Parties may be less aggressive in pursuing frivolous claims or defenses, knowing they will have to bear their own legal costs.
However, it also means that losing parties are not unduly burdened with excessive legal fees, which can be particularly advantageous for smaller parties or individuals in arbitration proceedings.
The American Rule can encourage efficiency in arbitration since both parties are likely to be conscious of their own costs. There is an incentive for both sides to streamline the proceedings and avoid unnecessarily complex or prolonged disputes, as they will be responsible for their own expenses.
On the downside, the American Rule can act as a deterrent for parties considering arbitration as a dispute resolution mechanism. Without the possibility of recovering legal fees, parties may feel that the cost of arbitration could be too high, particularly if they have to pay significant legal fees for a dispute that they ultimately lose.
The American Rule may be perceived as unfair in cases where a party acts in bad faith, forces the other party into arbitration unnecessarily, or engages in procedural delays. In such cases, the losing party may not bear the financial consequences of its actions, as it would under the cost-follow-the-event principle.
The American Rule is quite different from the cost-follow-the-event principle, which is more commonly used in international arbitration. Under the cost-follow-the-event principle, the losing party typically bears the costs of the arbitration, including the legal fees of the prevailing party.
Company A and Company B are involved in a $10 million commercial dispute. After a full arbitration process, Company A is awarded $8 million in damages.
Under the American Rule, Company A would not automatically recover its legal fees from Company B, even though it prevailed in the arbitration. Both parties would generally bear their own legal costs.
The tribunal fees and administrative costs could be split equally between the parties or allocated based on the arbitration rules of the institution.
If Company A and Company B had a contractual clause stating that the prevailing party would recover its legal fees, then, under the American Rule, Company A could claim its legal costs as part of the award, even though the arbitration system generally follows the American Rule.
The American Rule on costs in arbitration typically requires that each party bear its own legal fees and arbitration costs, regardless of the outcome of the arbitration. This is in contrast to the cost-follow-the-event principle, which allocates costs to the losing party. The American Rule encourages caution and efficiency in arbitration, but it also has potential drawbacks, such as deterring parties from pursuing arbitration due to the burden of their own legal fees. Exceptions to this rule exist in certain contractual provisions, arbitration institution rules, or statutory laws, allowing for the recovery of legal costs in specific circumstances.
Answer By Law4u Team
Discover clear and detailed answers to common questions about public international law. Learn about procedures and more in straightforward language.
