Tim Hardy
Partner, CMS
David Bridge
Senior associate, CMS
When the people of France gave the Statue of Liberty to the US in 1886, they left it to the people of the US to fund the acquisition of a site and build the pedestal. Fundraising proved difficult until the publisher of the New York World started a campaign that attracted over 120,000 donations, most of which were less than a dollar.
Crowdfunding has been around for many years, but it has only recently become a business as a consequence of the ability to appeal to a larger audience through the internet and the ease of donating through electronic transfers. The first online crowdfunding is incongruously credited to rock band Marillion, who raised £39,000 to fund a tour in 1997. There are now over 500 crowdfunding platforms, which host fundraising campaigns. The success of donation funding led to rewards-based funding, credit funding and equity offering platforms. Inevitably, litigants unable to afford the legal fees to pursue their claims are also turning to crowdfunding.
Can it go mainstream? In theory, anyone can provide litigation third-party funding and crowdfunding is now being used to do this. In the US, firms such as Invest4Justice invite up to 10,000 individuals to invest in cases and their website refers to possible returns of up to 500%, in just a few months, on the basis that 95% of legal disputes settle. In November 2014, LexShares (a US legal start up) was launched and it claims to have already crowdfunded a case worth an estimated $40m with an investment of $250,000.
In the UK, CrowdJustice has entered the market as a legal crowdfunder – the first of its kind in this jurisdiction. However, unlike its American counterparts, CrowdJustice encourages the public to make donations, not investments, and in cases involving matters of public interest, including challenges to planning applications, nuisance and other ‘nimby’ claims. As such, there is no monetary reward for participants, just the satisfaction of supporting a potentially successful claim from which there may be some resulting common benefit. Any surplus funds are donated to charity, with 5% of all funds paid to CrowdJustice.
Coming together
So, is crowdfunding litigation a viable model for third-party litigation funding and what are the potential pitfalls to consider in the UK, in particular if it is to evolve into a form of investment?
It is early days, but already there are some key areas of concern. In particular, there remains the risk that funders of unsuccessful claims will be liable for the winning party’s costs as, unlike the US, the UK courts usually apply the ‘loser pays’ rule. The principle in Arkin (established in the case of Arkin v Borchard Lines Ltd & Ors [2005]) is that such liability may be capped at the amount of funding provided. However, this may still be a considerable sum.
Unwary members of the public may not fully appreciate their potential personal costs liability. A costs order to that effect is at the discretion of the court, and the discretion is generally not exercised against ‘pure’ funders with no personal interest in the litigation and who do not stand to benefit from it (Hamilton v Al Fayed (No 2) [2003]). On that basis, it may be arguable that there is less of a risk to donors in public interest claims with no financial reward. However, it is equally arguable that donors may still benefit from a successful claim if, for example, it concerns a public interest issue that has a direct impact on the donor. Accordingly, the risk remains of being found personally liable for the costs of defending a claim. It may be possible to mitigate that risk by obtaining after-the-event (ATE) insurance, but the premium payable is then a further cost to be crowdfunded and there remains a risk that the ATE cover may not be sufficient. Alternatively, potential crowdfunders may take the view that it will be impractical for the losing party to enforce any costs liability against a mass of individuals. However, one would not want to be the wealthiest individuals among that mass of funders.
Members of the public may not appreciate their potential personal costs liability. The risk remains of being found personally liable for the costs of defending a claim.
The Financial Conduct Authority (FCA) has previously considered crowdfunding and set out rules in 2014 in the context of peer-to-peer lending and invest-based funding. Although it did not consider crowdfunding litigation, if this took off in the UK there may be some pressure from the FCA to ensure that it was appropriately regulated – in particular by ensuring that the public understood the risks involved, even in the context of donations.
On a practical level, the amount obtained by crowdfunding would obviously need to be sufficient to cover the likely costs involved. As frequently happens in litigation, if new issues arise, additional funding may need to be raised, or the action will be forced to an abrupt halt. Wealthy litigants are not always averse to adopting obstructive strategies deliberately to exhaust the opponent’s funds. This may be ameliorated if the lawyers will act on a no-win-no-fee basis subject to being satisfied that there will be sufficient funds to pay their fees if they win.
The Association of Litigation Funders abides by a code that includes minimum capital requirements to ensure that there are sufficient funds to pay the fees of cases they are funding and requirements that members undergo an annual audit. There are no similar safeguards for parties and/or the lawyers involved in crowdfunding. There is, therefore, a risk that further funds may not be available to continue the claim. Lawyers are, as such, likely to be wary of representing a party on the basis of crowdfunding.
Finally, care would need to be taken to preserve privilege. Crowdfunders will likely want to know that the claim has a good prospect of success and may want to see the legal advice to support it. However, with so many funders, necessary safeguards would need to be in place to preserve confidentiality and to avoid privilege being waived, or the advice falling into the hands of the defendant (whether inadvertently or by design).
In conclusion, crowdfunding litigation in the UK presents a number of legal challenges and logistical difficulties that may prove problematic to overcome, and it remains to be seen whether this form of funding will flourish. Time will tell.
Tim Hardy is head of CMS’s commercial litigation team in London. He deals primarily with disputes concerning finance, commerce, professional negligence, product and corporate reputations. Tim is an accredited mediator with ADR Group and CEDR, and a solicitor-advocate (Higher Courts Civil). He is a fellow of the Chartered Institute of Arbitrators and chairs its Practice and Standards Committee. He is also a member of CPR’s European Advisory Board.
David Bridge is a senior associate and solicitor-advocate (Higher Courts Civil) in the commercial litigation team. He advises clients across a range of industry sectors in relation to contractual rights and litigation risk issues, with particular experience of group litigation.
As one of the largest law firms in the world, with offices in 53 cities and over 500 disputes lawyers worldwide, CMS offers expert advice on national and international commercial disputes. The firm is particularly strong in western, central and eastern Europe, and in specialist sectors such as financial services, energy, life sciences and technology, media and communications, where its in-depth knowledge of the market can make all the difference to getting a satisfactory commercial outcome. CMS has a wealth of experience in resolving the most complex of commercial disputes, as well as working with clients successfully to avoid disputes in the first place. The firm’s work ranges from drafting dispute resolution clauses during pre-contractual negotiations, through to obtaining emergency injunctions in situations where assets may be at risk, to complex multi-jurisdictional disputes, enforcing judgments and recovering assets.