In Ambrose Bierce's "An Occurrence at Owl Creek Bridge," the irony of the statement to which Farquhar agrees, "all is fair in love and war" is situational irony. That is, there is discrepancy between what is expected to happen on Farquahar's part, and what actually happens.
Thinking that he is justified in performing whatever service he can in aid of the South, Farquhar learns from a soldier dressed in grey that the bridge has driftwood now that is dry and "would burn like tow." In addition to the irony of the soldier being in reality a Federal scout, the situational irony is that Farquar sets out to burn the bridge when in actuality it is the bridge that effects his own death: "A man stood upon a railroad bridge....the two private soldiers stepped aside and each drew away the plank upon which he had been standing."
Farquhar's being hanged on the bridge which he has intended to burn makes even the choice of words used by Bierce to describe the phase "all is fair in love and war" ironic. For, Bierce writes that the phase is a "frankly villainous dictum." Obviously, nothing is fair in love and war. And, it is here that the central irony of Bierce's story lies. For, Peyton Farquhar is the butt of the satire in this story and not the sympathetic hero that he first seems. As the story unfolds, Bierce develops the "frankly villainous" nature of war as he contrasts it with Farquar's romanticized, unrealistic view of "gallant army," "larger life of the soldier," "opportunity for distinction," and "no adventure too perilous."
Farquar's imagined escape, too, is ironic as it is a "civilian's dream of war," as well:
'If I could free my hands,' he thought, 'I might throw off the noose and spring into the stream, By diving I could evade the bullets and, swimming vigorously, reach the bank, take to the woods, and get home.'
The knowledge of war that Peyton Farquhar has is that of books, not reality. In fact, his imaginings are described by one critic as "Walter-Mitty like." Even his name is ironic: Peyton derives from the Scottish Payton, a form of Patrick, which means of noble birth; Farquhar derives from the Gaelic Fearachar, meaning manly or brave. Clearly, Bierce's theme of the less than glorious condition of war comes through with all the ironic elements of his story.
I think that what is most ironic about this statement is that it is totally contradicted by what is happening to him.
In this story, Farquhar is being hung exactly because all is not fair in love and war. He is being hung because he has committed an illegal act.
Now, this is even more ironic because of the fact that he got tricked into committing the illegal act. The guy who inspired him to do it was a Yankee spy in Confederate clothing. So all was fair in war for that guy, but Farquhar got caught and so all is not fair in war for him.