Understanding failed delivery and likely recourse options

As a backer, you need to be aware of what your options are in the event that the project creator fails to deliver your reward. These options are part of your legal recourse that you can pursue if you don’t receive your reward.

If the crowdfunding transaction has tangible, commensurate rewards offered for pledges, it is classified as a sale transaction and the project creator earns income or revenue from the transaction. The key difference between a crowdfunded transaction versus sale is that the legal transfer of rights and responsibilities over the product is in the future, because the product only ships at a much later date compared to when the money is taken.

Because this is a sale transaction, a backer should be able to enjoy the rights and obligations that are part and parcel of a sale transaction, given statutory rights and the refund and legal recourse policies described by Kickstarter. But this isn’t always the case.

Key takeaways

  • Even though the crowdfunding transaction is a sale, there are multiple risks inherent in the process that can cause delayed or failed delivery.
  • Kickstarter still deems a funded project as successful, even if the project creator failed to deliver the rewards to the backers.
  • The project’s success may be a contributing factor in delaying delivery or causing failed delivery.
  • The right of a refund exists if a project creator can’t or is unable to deliver, but this is subject to his ability to refund the money.
  • In the event of the project creator’s liquidation, legal recourse is as per the hierarchy of creditors, and because the transaction is a sale, backers are at the bottom of the hierarchy.

What is the project creator’s obligation to fulfill rewards?

When a project creator submits a project to Kickstarter, the last term and condition he has to agree to is:

If a project is successfully funded, you are required to fulfill all rewards or refund any backer whose reward you do not or cannot fulfill. A failure to do so could result in damage to your reputation or even legal action on behalf of your backers.”

Because a project creator has earned income / revenue from the crowdfunding transaction, he has a commensurate obligation to produce and deliver the rewards to the backers. If the project creator does not do this, it is a scam.

What is disappointing in the term and condition above is that Kickstarter’s worse case scenario for failed delivery from the project creator is a ruined reputation. This is not a deterrent at all! Additionally, because there is no feedback or rating system on Kickstarter to track a project creator’s reputation, this consequence seems moot. The issue of legal action is explored more fully below.

Remember that Kickstarter classifies a project as successful if it reaches or exceeds its funding goal. Whether or not the project creator actually fulfills his obligation is beyond Kickstarter’s responsibilities and business model. Even though Kickstarter can track delivery from both the project creator and backer’s perspectives, as from their profiles, it currently chooses not to.

Understanding the estimated delivery date for rewards

As per Kickstarter’s terms and conditions:

The Estimated Delivery Date listed on each reward is not a promise to fulfill by that date, but is merely an estimate of when the Project Creator hopes to fulfill by.”

Notice the use of the words “estimates” and “hopes”. This clearly  gives the project creator an undefined amount of time to deliver. This vague timeline makes it exceptionally difficult for a backer to request a refund or initiate legal proceedings against a project creator for failed delivery.

Another pertinent clause in Kickstarter’s terms and conditions is:

“Project Creators agree to make a good faith attempt to fulfill each reward by its Estimated Delivery Date.”

Let’s first understand the definition of “good faith”, as from Wikipedia:

“In contract law, the implied covenant of good faith is a general presumption that the parties to a contract will deal with each other honestly and fairly, so as not to destroy the right of the other party or parties to receive the benefits of the contract.”

Because the contracting parties are the project creator and backer, and the contract is a sale, contract law applies. Backers have already fulfilled their part of the contract when the money exchanged hands at the end of the funding campaign. It is now up to the project creator to fulfill his part, in a good faith attempt.

What is key to realise about this clause, is that a reasonable good faith attempt is dependent on the project creator’s ability and experience to conduct business. A project creator with limited supply chain, manufacturing and shipping experience may make a good faith attempt at trying to fulfill rewards, but can still fail delivery.

When has failed delivery occurred?

It is important to distinguish between a delivery that failed because the estimated shipping date was incorrectly estimated by the project creator versus whether the project creator can fulfill the reward at all.

If the shipping is delayed, for example, due to manufacturing delays or goods stuck in customs, then the legal recourse of the backer is limited, and backers may simply have to wait.

Indeed, the project creator can at all times claim delayed shipping, and accordingly, backers have no recourse except for seeking to prove that the project creator cannot fulfill the reward, and accordingly need to refund the backers. Project creators can delay shipping so far into the future that backers may eventually write off any pledges made.

If the project creator cannot fulfill the rewards at all, due to either bad business planning, inexperience in business or liquidation, then the backer has two routes he can take:

1) A backer can request a refund, but the project creator may not be able to fulfill it. Simply put, the project creator may have spent all the money and doesn’t have any left for refunds. If the project creator has the funds, he needs to refund backers accordingly.

2) A backer can take legal action against the project creator, but if the project creator is forced into bankruptcy or liquidation, then a backer is last in the hierarchy of creditors.

The hierarchy of creditors is the order in which any stakeholder is considered in the event of a company liquidating. The order typically is: secured debt, such as property mortgages, then shareholders, trade creditors, and lastly employees and customers. As a backer, the probability of getting any money back if the company liquidates is severely limited.

A key issue to note, is that if a project has retail backers, not delivering rewards has greater consequences on the project creator compared to projects without retailer backers. Apart from ruined reputations, the retailer backer can more easily take legal action.

A project’s success may be a curse when it comes to delivery

If a project is overfunded and the volume of backers excessive, then the likelihood of the project creator meeting the original estimated delivery date is low.

For example, assume that the original funding goal was $15,000 and estimated number of backers 1,000. If the final funded amount is 6x the original goal, and number of backers 4x the original estimate, then it is fair to assume that there is an impact on manufacturing and shipping. This, of course, depends on the complexity of manufacturing and the original quotes relating to manufacturing and shipping costs, but if a project is crazy successful, then backers should be prepared for delayed shipping at a minimum.

In conclusion

Which route you should take boils down to a simple question: how much did you pledge and how much can you afford to write off, versus how much any legal fees would amount to. If the pledge is around $40, and the project creator fails to deliver, then maybe the safer bet is simply to write it off and learn from the experience. If the pledge is $200, then maybe consider pursuing legal action, especially as higher pledges mean that the project creator collected a lot more income from backers.

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