Arbitration has long been a preferred mechanism for resolving international commercial disputes. However, its cost often presents a barrier to access to justice. In response, crowdfunding has emerged as a potential solution, allowing claimants to raise funds through online platforms. This note explores the use of crowdfunding in arbitration, its ethical and practical challenges, and regulatory considerations.
What Is Crowdfunding?
Crowdfunding involves soliciting financial contributions from a large group of people, typically through an online platform. In legal disputes, crowdfunding can take the form of donations (where contributors expect nothing in return) or investments (where contributors anticipate a return upon a successful outcome). The model is attractive for claimants who lack the resources to pursue arbitration, offering a potential democratization of justice.
Crowdfunding in Dispute Management
Crowdfunding platforms dedicated to legal disputes have become more prevalent, offering a range of services from selecting cases to managing funding campaigns. Some notable examples include:
- LexShares: Specializes in litigation financing with a minimum investment threshold of $200,000.[1] While it initially focused on equity crowdfunding, it has since pursued a more traditional third-party funding model.
- CrowdJustice: A donation-based platform focusing on legal fundraising, ensuring that funds go directly to lawyers.[2]
- AxiaFunder: A litigation funding platform that allows individuals to invest in cases.[3]
- Generalist crowdfunding platforms such as GoFundMe have also been used to raise legal funds.[4]
Notable Crowdfunded Cases
Several high-profile cases have demonstrated the power of crowdfunding:
- Stormy Daniels v. Donald Trump: A successful crowdfunding campaign on CrowdJustice.com raised over USD 500,000 to support legal fees.[5]
- Luigi Mangione’s Defense: Following his arrest for the killing of UnitedHealthcare CEO Brian Thompson, Mangione has raised over USD 500,000 through the crowdfunding platform GiveSendGo.[6]
- Andy Wightman (Scotland, 2019): A Scottish politician crowdfunded approximately GBP 170,000 to defend a defamation suit, offering pro-rata reimbursement to contributors in case of a favourable ruling.[7]
- Igal Sarna (Israel, 2017): An Israeli journalist crowdfunded over GBP 45,000 for his defamation defence against the Israeli Prime Minister.[8]
These cases illustrate that crowdfunding often succeeds when disputes have public interest elements or significant emotional appeal.
While the extent of crowdfunding in international arbitration remains unclear, emotionally compelling cases with a strong public interest element are well-positioned to attract funding through this model. A key practical question, however, is whether crowdfunding can generate sufficient funds to cover the inherently high costs of international arbitration.
Ethical Challenges in Crowdfunding Arbitration
While crowdfunding expands access to justice, it introduces several ethical and procedural risks.
Conflict of Interest
The participation of multiple investors heightens the risk of conflicts of interest, particularly concerning arbitrators. Some arbitral institutions require disclosure of third-party funding sources to prevent conflicts.[9]
Confidentiality Concerns
Unlike traditional third-party funding, crowdfunding exposes case details to the public, risking breaches of confidentiality and attorney-client privilege. Parties in arbitration must ensure confidentiality, which may be compromised by widespread donor engagement.[10]
Misrepresentation Risks
Crowdfunding campaigns often involve claimants or their representatives presenting their cases publicly. In doing so, there is a risk of misleading funders or donors regarding the merits of the claim, running afoul of ethical obligations on truthfulness in representations to third parties.[11]
Practical Risks of Crowdfunding in Arbitration
Increase in Frivolous Claims
Traditional third-party funders rigorously assess claims before financing them,[12] typically selecting fewer than 3% of cases for funding. Crowdfunding lacks the same level of professional scrutiny, potentially leading to an influx of speculative claims.
Settlement Complications
In traditional third-party funding, the funder’s consent may be required for settlement. In crowdfunding, the involvement of numerous small investors complicates settlement negotiations, as different stakeholders may have varying expectations regarding the outcome.[13]
Adverse Cost Risks
Many arbitration rules require claimants to cover the respondent’s arbitration costs if the latter refuses to pay. If a claim is unsuccessful, contributors may be unable or unwilling to satisfy an adverse cost award.[14]
Regulatory Approaches to Litigation Crowdfunding
Several bar associations have started addressing the implications of crowdfunding in dispute resolution:
DC Bar Guidance
The DC Bar has clarified that if a lawyer merely acknowledges a client’s crowdfunding efforts, no additional ethical duties arise. However, if the lawyer manages the funding campaign, they must comply with ethical rules on third-party payments.[15]
Law Council of Australia Guidance (2019)
The Law Council of Australia issued a guidance note warning legal practitioners about the risks of crowdfunding, particularly concerning money laundering, fraud, and confidentiality. It advises lawyers to ensure clients understand privilege limitations before making disclosures.[16]
Conclusion
Crowdfunding in arbitration represents an evolving and largely unregulated frontier. While it offers claimants a novel way to finance disputes, it also introduces significant ethical, procedural, and financial challenges. Legal practitioners must carefully navigate these risks to ensure compliance with professional obligations and arbitration rules. For now, any claimant or law firm considering crowdfunding must carefully weigh its benefits against its inherent risks.
[1] Frequently asked questions, LexShares website, available at: https://www.lexshares.com/faqs.
[2] CrowdJustice website, available at: https://www.crowdjustice.com/how-it-works/.
[3] Our Investment Approach, AxiaFunder website, available at: https://www.axiafunder.com/our-investment-approach.
[4] GoFundMe website, available at: https://www.gofundme.com/.
[5] Clifford (aka Daniels) v. Trump et al., CrowdJustice, available at: https://www.crowdjustice.com/case/stormy/.
[6] Legal Fund: Luigi Mangione – CEO Shooting Suspect, available at: https://www.givesendgo.com/legalfund-ceo-shooting-suspect.
[7] Scottish Green MSP Andy Wightman wins defamation case, BBC (11 March 2020), available at: https://www.bbc.com/news/uk-scotland-51832504.
[8] N. Tucker, Found Guilty of Libel for Facebook Post About Netanyahu, Crowdfunding Campaign Helps Cover Journalist’s Costs (20 June 2017), available at: https://www.haaretz.com/israel-news/2017-06-20/ty-article/crowdfunding-covers-journalists-libel-suit-for-facebook-post-about-netanyahus/0000017f-ebc1-d3be-ad7f-fbeb7fe20000.
[9] D. Alhouti, Disclosing Third-Party Funding in International Arbitration: Where Are We Now? (29 November 2022), available at: https://www.charlesrussellspeechlys.com/en/insights/expert-insights/litigation–dispute-resolution/2022/disclosure-obligations-and-third-party-funding/.
[10] The Drawbacks of Third-Party Funding for Arbitration (14 April 2024), available at: https://www.acerislaw.com/the-drawbacks-of-third-party-funding-for-arbitration/.
[11] The third-party funding debate – we look at the risks (September 2016), available at: https://www.nortonrosefulbright.com/en/knowledge/publications/6c843d32/the-third-party-funding-debate—we-look-at-the-risks.
[12] What is Third Party Funding? How Is It Used in International Arbitration? (6 March 2024), available at: https://www.hugheshubbard.com/news/third-party-funding-in-international-arbitration.
[13] C. Sullivan, Think Twice Before Using Crowdfunding and Litigation Investments (21 March 2019), available at: https://www.findlaw.com/legalblogs/strategist/think-twice-before-crowdfunding-litigation-investment/; P. Volna, Litigation Crowdfunding: How Does it Work? (6 October 2023), available at: https://lenderkit.com/blog/litigation-crowdfunding-how-does-it-work/.
[14] The third-party funding debate – we look at the risks (September 2016), available at: https://www.nortonrosefulbright.com/en/knowledge/publications/6c843d32/the-third-party-funding-debate—we-look-at-the-risks.
[15] Ethics Opinion 375, DC Bar, available at: https://www.dcbar.org/for-lawyers/legal-ethics/ethics-opinions-210-present/ethics-opinion-375.
[16] CROWDFUNDING Guidance for Australian legal practitioners, Law Council of Australia (18 December 2019), available at: https://lawcouncil.au/publicassets/4ef19895-b922-ea11-9403-005056be13b5/Crowdfunding%20Guidance%20Note%20Final.pdf.
