By Sergio Puig
Legal scholars devote a great deal of energy to understanding how judges allocate expenses in litigation — rules designed to encourage lawyers to bring cases, to discourage socially excessive litigation, or to sanction undesirable behavior by litigants or their legal counsels. In recent years, the scholarly debate has narrowly focused on empirically evaluating and comparing the American rule (“the costs lie where they fall”) and the English rule (“the loser pays the costs”). What the debate has missed, however, is a conceptual understanding of the broader factors that influence the choice between them. In other words, scholars have focused on the “seed” (rule) and not on the “soil” (context).
In this Article, I use a discrete area of litigation as an entry point into this debate. Focusing on the uniquely discretionary (or “judge-centered”) litigation system of investment arbitration panels, I explore the practice of cost shifting when dealing with manifestly unmeritorious claims — a setting where the theory unambiguously predicts cost shifting. What makes this narrow domain particularly interesting is that the theoretical prediction of the application of the English rule sharply contrasts with the actual practice in the field, where the American rule dominates. The contrast between theory and practice can be used to help understand the factors that may constrain discretion beyond formal rules.
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