Crowdfunding seems to be the new black; but is crowdfunding litigation legal?

Jolyon Maugham QC’s crowdfunding of the Irish High Court challenge to Article 50 – the process of the UK leaving the European Union – has so far been a resounding success with the target figure of £70,000 achieved in less than 48 hours from no less than1800 contributors.

Such success makes crowdfunding litigation seem like an easy solution but it raises the question: Is crowdfunding litigation breaching the rules against maintenance and champerty?

Crowdfunding

Is a process of funding a project or venture by raising financial contributions from a large number of people or entities. Crowdfunding can be used to fund a wide range of for-profit or non-profit ventures.

Maintenance and champerty

Maintenance is the support of litigation by a third party without a legitimate interest in the case.

Champerty is an aggravated form of maintenance where the litigation is supported in return for a share of the proceeds if the action is successful.

These ancient torts have not been repealed in Ireland, in contrast to the position in England and Wales and other common law jurisdictions where litigation funding is permissible.

Most crowdfunding websites seek to reward participants for their investments by way of a financial return but some litigation crowdfunding websites, such as Britain's first litigation crowdfunding website, Crowdjustice, seek donations with no financial interest in the outcome.

In Ireland, the doctrines of maintenance and champerty prevent the funding of litigation by parties with no legitimate interest in the litigation whether or not they receive a financial reward.

In a decision delivered on 20 April 2016 in Persona Digital Telephony Limited v Minister for Public Enterprise (No 2)[1], the High Court declared that professional third party funding of litigation is prohibited in Ireland.

In this case, the professional third party funding was provided on the basis that the third party funder would receive a share of the proceeds if the action succeeded. In that decision the Court stated "It is clear that third party funding arrangements cannot be viewed as being consistent with public policy in this Jurisdiction or that modern ideas of propriety in litigation have expanded to such an extent to afford this Court the opportunity to characterise this funding arrangement as acceptable."[2]

The main focus of this decision was the fact that the third party funding was provided by an entity which had no legitimate interest in the outcome of the case and on the basis that the entity would receive a share of the proceeds if the action succeeded.

Given the magnitude of the impact across the European Union and the effect on many businesses and individuals if Brexit proceeds, it is likely that most, if not all, of the contributors to the Irish Brexit challenge, whether people or entities, would have a legitimate interest in the outcome of the Brexit challenge. The challenge does not appear to seek financial compensation and, if so, it should not fall foul of the rule against champerty. However, given the unequivocal decision in the Persona case, the contributors would need to establish that they (1) have a legitimate interest and (2) do not seek a share of any financial award if the proceedings are successful, to stay within the maintenance and champerty rules.

Crowdfunding is different to ATE (after the event) insurance, which was the subject of a Court of Appeal decision earlier this year. The Judgment in Greenclean delivered on 8 May 2015[3] recognised that ATE insurance has "crept into this Jurisdiction". This decision upheld a decision of Hogan J in the High Court where it was held that the Plaintiff's ATE policy was not an illegal contract as it did not savour of maintenance or champerty. However, the terms of the ATE insurance are important in gaining acceptance by the Court, for example, it is unlikely to be accepted by the Court if the terms are so prohibitive that the Plaintiff is not covered.[4]

The Persona decision is currently under appeal and so, depending on the outcome of the appeal, the landscape may change for third party litigation funding in Ireland.