With the growth of the internet and social media, it is hardly surprising that the concept of crowdfunding has in recent years extended far beyond its first origins in the publishing industry and in the funding of military conflict through war bonds. In this article Matthew Garbutt explains how crowdfunding can be used as a an effective model for funding a wide variety of litigation.
From its growth through the music industry in the late 1990s, when a number of innovative musicians sought online funding for the recording of their music, websites such as Crowdcube and Crowdfunder UK now offer start ups and entrepreneurs easy access to funding where traditional lending, if available, may come with unacceptable strings attached.
Today it is estimated that crowdfunding initiatives in one form or another have raised in excess of £25 billion worldwide and the concept of legal crowdfunding is becoming a small but significant mechanism for funding difficult cases, particularly those which have a high public profile or public interest.
Devonshires recently advised the commuter pressure group, the Association of British Commuters, in its challenge by judicial review of the Secretary of State’s handling of the Southern Rail franchise operated by Govia, funded entirely through the website CrowdJustice.com. The proceedings reached oral permission stage at which the Court reached a precedent-setting finding that it had jurisdiction to consider the Secretary of State’s handling of private contracts for public services. However, after many months of delay, the Government finally issued a £13.4m fine against Govia effectively bringing the action to a close.
Costs- be aware!
The key concern for potential funders is the exposure to adverse costs orders. That is to say, if the Court makes a costs order against the crowdfunded party then there is a potential exposure to the crowdfunders themselves. Some comfort can be derived from the Arkin principle (Arkin v Borchard Lines Ltd and others  EWCA Civ 655) in which it was established that a third-party funder cannot be held liable for the costs of the other side in excess of the level of the individual’s contribution.
There are ways to further ameliorate this risk. The crowdfunded party can set aside money to meet any adverse costs orders or, in certain cases, obtain an after-the-event insurance policy to cover the risk. In a judicial review of pure public interest, it is possible to agree that the parties will be responsible for their own costs and will not seek recovery from the other side. This application of crowdfunding is likely to grow strongly in the coming years.
We are also likely to see legal crowdfunding extended to the commercial litigation sphere by which individual funders will contribute purely for a monetary return and with little or no interest in the dispute itself. A potential mechanism would be for the funder to purchase shares in a special purpose vehicle which then enters into a third party funding arrangement with the litigant and the legal team. It is important to note that such arrangements will need to be subject to FCA regulation in order to ensure that the interests of investors are protected and it is likely that the existing best practice regimes applicable to existing third party litigation funding will need to be bolstered.
Explanations of the risks of litigation are often hard to convey to even the most engaged client and so ensuring that third parties with little experience of litigation are aware of the risks will be challenging.
The challenge is even greater when one considers that explaining that risk to funders will require the disclosure of legally privileged material. Non-disclosure agreements will be a pre-requisite.
Certainly such investments will only be appropriate for sophisticated investors seeking to supplement a broad portfolio of investments with a high risk opportunity.
Legal crowdfunding is likely to remain a niche funding option for difficult cases that attract widespread public interest, but it is worth considering whether there is an angle to bring or re-frame a claim in a manner that can attract such funding. In due course we expect to the see the adoption of crowdfunding in commercial claims but significant hurdles must be overcome to manage the risk to investors and litigants alike.
For further information, please contact Matthew Garbutt on 020 7880 4248 or firstname.lastname@example.org