In recent years, an increasing number of writers have advocated that the "costs" awarded the winner of a civil lawsuit be increased to reflect the actual expenses of litigation-including attorney's fees.1 The adoption of this practice, often denominated the "English" or "indemnity" system, has been hailed by its partisans as the tonic for a wide variety of ailments that beset American procedure. Our overcrowded courts would be liberated from the burden of deciding "spite," nuisance, and other frivolous suits because the litigants who instigate such lawsuits under the current American system would be deterred from these harassment tactics by the fear of having to reimburse the defendant. Indemnity, it is often asserted, would further alleviate court congestion by encouraging other potential litigants to settle in an out-of-court compromise. In addition, the impact of indemnity on the cases that appeared in court would be to reduce time-consuming and wasteful dilatory tactics. Paradoxically, it is also asserted that indemnity would encourage indigent parties to seek justice in the courts and would encourage lawsuits for small amounts. Finally, * Assistant Professor of Law, University of Iowa College of Law. A.B., Georgetown; LL.B., Harvard. 1 Ehrenzweig, Reimbursement of Counsel Fees and the Great Society, 54 CALIF. L. REV. 792 (1966); Ehrenzweig, Shall Counsel Fees be Allowed, 26 CALIF. S.B.J. 107 (1951); Goodhart, Costs, 38 YALE L.J. 849 (1929); Greenberger, Appellate Review in England and the United States-Who Bears the Ultimate Burden?, 1 DUQUESNE L. REV. 161 (1963); Greenberger, The Cost of Justice: An American Problem, An English Solution, 9 VILL. L. REV. 400 (1964); Kuenzel, The Attorney's Fee: Why Not a Cost of Litigation?, 49 Iowa L. REV. 75 (1963); Lyman, Our Obsolete System of Taxable Costs, 25 CONN. B.J. 141 (1951); McCormick, Counsel Fees and Other Expenses of Litigation as an Element of Damages, 15 MINN. L. REV. 619 (1931); Stoebuck, Counsel Fees Included in Costs: A Logical Development, 38 U. COLO. L. REV. 202 (1966); Note, 53 COLUM. L. REV. 78 (1953). 2 Ehrenzweig, supra note 1, at 109; Kuenzel, supra note 1, at 78-80; McCormick, supra note 1, at 641; Stoebuck, supra note 1, at 202; Note, 53 COLUM. L. REV. 78, 82-85 (1953). 3 Conard, The Economic Treatment of Automobile Injuries, 63 MICH. L. Rev. 279, 315-16 (1964); Greenberger, 9 VILL. L. Rɛv., supra note 1, at 405; Stoebuck, supra note 1, at 202; Note, 53 COLUM. L. Rev. 78, 86-87 (1953). * Goodhart, supra note 1, at 862-72; Greenberger, 9 VILL. L. REV., supra note 1, at 404-05; Kuenzel, supra note 1, at 80; Note, 53 COLUM. L. Rev. 78, 87-93 (1953). 5 Ehrenzweig, supra note 1, at 109; Goodhart, supra note 1, at 875-76; Kuenzel, supra note 1, at 84-85. 1969] INDEMNITY SYSTEM 27 indemnity is asserted to achieve justice by providing a victorious plaintiff with full recovery and freeing a winning defendant from the expense of proving that he should not be held liable. These arguments are often buttressed by comparative analysis of procedure in countries which have indemnity systems and historical arguments which tend to show that the current absence of indemnity in the United States is the product of legislative accident rather than purposeful judgment." By and large, this torrent of law review articles has been met with legislative apathy. Although some states have adopted indemnity for certain classes of cases and under some federal statutes the victorious litigant does receive his actual litigation expenses from the loser, no state has adopted indemnity for all cases and the basic pattern in the United States has remained one in which each party to a civil lawsuit bears the burden of his own expenses.10 There has been no sustained effort to articulate justifications for this deviation from common practice in most other countries. It is the feeling of this writer that indemnity is unquestionably an appropriate procedural device in certain classes of cases-although the definitional problem of determining the appropriate classes is not a simple one. On the other hand, the introduction of an across-the-board indemnity system has raised a number of problems that have been largely ignored by commentators. In addition, many of the asserted advantages of a general rule of indemnity must be characterized as illusory—at least until more evidence concerning the behavior of litigants is somehow made available. The primary relevance of an analysis of this problem is to provide both an impetus and a focus for legislative reform. But a formulation of the problem should also influence the courts in construing existing • Ehrenzweig, supra note 1, at 107-08; Greenberger, 9 VILL. L. REV., supra note 1, at 401, 406-07; McCormick, supra note 1, at 643. 7 Goodhart, supra note 1, at 873-74; Kuenzel, supra note 1, at 81; McCormick, supra note 1, at 641-42; Stoebuck, supra note 1, at 203; Note, 53 COLUM. L. REV. 78, 80-81 (1953). 8 E.g., N.Y. GEN. CORP. LAW §§ 63-68 (Supp. 1969) (reasonable attorney fees awarded in stockholders' derivative suits); ORE. REV. STAT. tit. 2, § 20.010-.095 (Supp. 1968) (reasonable attorney fees to be awarded to the prevailing party); WASH. REV. CODE § 26.08.090 (1950) (reasonable attorney fees to innocent party in divorce or annulment action). E.g., Tort Claims Act, 28 U.S.C. § 2678 (1964) (court may award successful plaintiff reasonable fees); Securities Act of 1933, 48 Stat. 82 (1933), as amended, 15 U.S.C. § 77k (1964) (reasonable attorney fees to successful plaintiff); Fair Labor Standards Act, 29 U.S.C. 216 (1964) (reasonable attorney fees to successful plaintiff); Housing and Rent Act, 50 U.S.C. App. 1895 (1964) (reasonable attorney fees to successful plaintiff). 10 Greenberger, 1 DUQUESNE L. REV., supra note 1, at 165; McCormick, supra note 1, at 638. See generally Stoebuck, supra note 1. 28 IOWA LAW REVIEW [Vol. 55 statutory provisions and in exercising their equitable power to fashion appropriate remedies. I. ADVANTAGES AND DISADVANTAGES OF INDEMNITY A. Justice The argument that indemnity would somehow further "justice" is usually bottomed on a perception of the inconsistency between the net financial results of lawsuits in America and the substantive rules of law which putatively govern the outcome of these suits. Thus, if A owes B five hundred dollars and refuses to pay, B should be able to sue and recover five hundred dollars, rather than five hundred dollars less court and attorney's fee. Likewise, if A sues B and the court holds that B owes A nothing, B should lose nothing. Absent indemnity, however, B has lost the expenses incurred during litigation. In each case, the mechanics of the operation of the judicial system has diminished the theoretically "just" result for B, the successful litigant. The difficulty with this analysis is that it does not support the proposition that A should be compelled to indemnify B. The mere fact that litigation expenses have damaged B through no fault of his own does not compel the conclusion either that B should be made whole, or that A should be bound to make him whole, rather than, for example, the state. If A is to be made to pay B's costs, justice, or even a consistent adherence to the substantive rules which determine when one party is liable to pay damages to another, would seem to require either a finding that A has somehow wronged B, or that some other social policy justifies shifting B's loss to A. A may be considered a wrongdoer because of his role in the litigation. In the first case, A's refusal to settle out of court for the full five hundred dollars is, after all, what forced B to resort to the adjudicative process and incur the expense. In the second case, B was forced to defend himself because A instituted the lawsuit. In each case, B's expense was caused by A's refusal to agree with B on the merits of the case before the trial. If such refusal is wrongful, B's damage has been caused by A's wrong. However, the fact that A ultimately was defeated does not establish that his original refusal to settle on B's terms was blameworthy. In many cases, the outcome of litigation is not clearly predictable. In other cases, A may be defeated because of a change in the law or a determinative fact which was unknown to him until proven at trial. That the loser's refusal to recognize the validity of the winner's position does not always reflect wrongful conduct is recognized even in countries which utilize the indemnity system." On the other hand, 11 See notes 102 and 104 infra. 1969] INDEMNITY SYSTEM 29 in extreme situations, it is clear that A's conduct is fairly characterized as untoward. Even now, absent the indemnity system, some American jurisdictions consider A's conduct to be tortious and award B damages in a separate action, if it can be proven that A was "malicious" in bringing a lawsuit.12 In the overwhelming majority of cases, which lie between proven malice and total surprise due to an unknown fact or a change of law, it is not clear when A's conduct might be considered sufficiently derelict to trigger liability for the real expenses of litigation. Arguably, the "reasonableness" standard of culpability in tort law could be applied. A would be viewed as a wrongdoer whenever his refusal to settle or his instituting a lawsuit constituted conduct which a “reasonable man" would not have undertaken. The key element in determining A's reasonableness would be the predictability of the outcome a clear analogue to the traditional tort concept of foreseeability.13 Depending on how predictable B's ultimate victory should have been to A before the trial, the argument for treating A as a wrongdoer is more or less compelling.14 These difficulties of prediction could be avoided if indemnity were awarded against the loser in all situations on the theory that he is more often a wrongdoer than not, and that the process of determining case by case whether he is a wrongdoer is unworkable or itself too expensive.15 The proposition that a majority of defeated litigants have litigated improvidently is questionable. The reason a case by case adjudication of whether a defeated litigant is a wrongdoer would be difficult is also the reason the proposition that 12 See W. PROSSER, LAW OF TORTS § 114 (3d ed. 1964). This remedy is applied more frequently to bad faith plaintiffs than to bad faith defendants. The tort does not exist in England, because courts have held that indemnity provides a sufficient remedy. 13 This would be a difficult test to formulate. A "reasonable man" would, of course, want to know whether he would be compelled to pay indemnity, before deciding whether to litigate. Probably, the same test could be followed as in determining negligence likelihood of harm (here, the likelihood of defeat) times extent of harm (the cost of the trial) versus the likelihood of victory times the extent of the gain (the amount a victory would have improved the litigant's position-i.e., the amount it would have exceeded the defendant's highest offer or been below the plaintiff's lowest demand). See United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947). The other elements in the equation (cost of trial and extent of gain) would be relatively easy to determine. But determining what a reasonable man would have predicted his odds of success were would be an extremely difficult process. 14 Most exceptions to the general rule of indemnity in other countries and many of the exceptions to the general rule of no-indemnity in the United States seem to be based on this principle. See, e.g., note 102 infra. 15 See, Ehrenzweig, 54 CALIF. L. REV., supra note 1, at 797. 30 IOWA LAW REVIEW [Vol. 55 a majority of defeated litigants is hard to substantiate. There are simply no clear standards for determining what constitutes a "wrong" in refusing to settle on B's terms. Secondly, even under the American system, A is presently damaged by losing the lawsuit (he has to pay his own attorney); 16 it would seem unlikely that, realizing this, he would have continued the litigation unless he calculates his chances of winning and considered them at least promising enough to be worth the risk of his own attorney's fees." 17 There is another rationale for indemnifying a successful plaintiff at the expense of a defeated defendant. By hypothesis, the defendant in the transaction or occurrence which is the subject of the suit wronged the plaintiff even before the lawsuit was commenced.18 The plaintiff's litigation expenses are arguably the foreseeable results of the defendant's original wrong.19 Only through indemnity is a tort plaintiff "made whole" or a contract plaintiff put in the position he would have been in had the contract been fulfilled. In terms of strict foreseeability, this rationale is persuasive. Very few results of wrongful conduct are more foreseeable than that the wronged party will sue and thereby incur legal expenses. Most commentators have assumed that indemnity would further "justice" largely because it appears to make the allocation of litigation expenses consistent with the substantive rules for resolving lawsuits. Even this argument is questionable. A successful defendant justly deserves indemnity only when the plaintiff's conduct in bringing the lawsuit is somehow "wrongful." Successful plaintiffs are a more compelling case for the justice of indemnity. On the other hand, there may be other policy considerations that would render the extension of the substantive standards of justice to litigation expenses undesirable. If so, perhaps the same standard of wrongfulness in the process of the litigation itself should be required before a defeated defendant is compelled to indemnify his opponent, which is the law at present as embodied in the tort doctrine of malicious prosecution. 16 Of course, if A is a plaintiff whose attorney is on a contingent fee, A incurs no attorney's fee by losing the lawsuit. In that case, however, it is likely that the attorney has made a judgment that there is some merit in A's claim. The contingent fee attorney's refusal to accept a worthless case can act as an independent check on meritless litigation. See R. HUNTING & G. NEUWIRTH, WHO SUES IN NEW YORK CITY? A STUDY OF AUTOMOBILE ACCIDENT CLAIMS 51 (1962); F. MACKINNON, CONTINGENT FEES FOR LEGAL SERVICES 206 (1964). 17 The test suggested above, see note 13 supra, would turn on whether his chances of winning were worth the total cost of the trial. 18 This rationale would not support the proposition that a successful defendant should be indemnified at the expense of a defeated plaintiff. 19 The plaintiff never would have litigated but for the defendant's original wrong. |