Third-Party Funding in Arbitration: Malaysia's New Legal Framework and the Code of Practice 2026

Authored by Pravin Prakawan

Introduction

A claimant with a strong case but no funds to pursue it, or a defendant unable to afford a proper defence, these are the practical problems Third-Party Funding (“TPF”) is designed to solve. Until recently, Malaysian arbitration practitioners had to navigate this area without any statutory guidance. That changed with the Arbitration (Amendment) Act 2024 (the “Amendment Act 2024”), which came into force on 1 January 2026, together with the Code of Practice for Third Party Funding 2026 (the “Code of Practice”) and the revised AIAC Arbitration Rules 2026 (“AIAC Rules 2026”). This article sets out what TPF is, the position before the 2024 amendment, the new statutory framework under the amended Arbitration Act 2005 (the “AA 2005”), and the practical implications for parties.

What is Third-Party Funding?

TPF is an arrangement where a funder with no prior interest in a dispute pays all or part of a party's arbitration costs, in exchange for a share of the proceeds from the award if the arbitration succeeds. If the funded party loses, the funder ordinarily recovers nothing. TPF allows meritorious claims to proceed regardless of a claimant's means, however, raises concerns about funders influencing the conduct of proceedings and funded parties being unable to meet adverse costs orders.

The Position Before the 2024 Amendments

Before the Amendment Act 2024, the AA 2005 was silent on TPF, leaving the applicability and enforcement of TPF to the common law doctrines of maintenance and champerty. Malaysian courts had held that champertous agreements are unenforceable on public policy grounds. However, in the litigation context, there has been cases which described these doctrines as largely defunct in Malaysia. This left TPF in arbitration in a state of uncertainty, arguably permissible, but without express statutory footing.

Statutory Recognition of Third-Party Funding

The Amendment Act 2024 inserts a new Chapter 2 into Part III of the AA 2005 (Sections 46A - 46I), dealing exclusively with TPF. Key features of the revised AA 2005 include: -

• Section 46A defines “third-party funder”, “third-party funding” and related terms;

• Section 46B provides the new provisions are not retrospective;

• Section 46C disapplies the common law rules against maintenance and champerty to TPF of arbitration, while other public policy and illegality doctrines remain unaffected; and

• Section 3A extends the TPF provisions to international arbitrations not seated in Malaysia, where services relating to the arbitration are provided in Malaysia.

Who Can Fund an Arbitration?

The AA 2005 does not impose licensing requirements on third party funders. Any person meeting the Section 46A definition (a party to a written funding agreement, providing the funding, with no other interest in the arbitration) may act as a funder. The practical eligibility threshold instead comes from the Code of Practice, which is described further below.

Disclosure of Third-Party Funding

Mandatory disclosure is the centrepiece of the new regime:-

• Section 46F permits a funded party to disclose arbitration-related information to secure funding, subject to confidentiality restrictions on the recipient;

• Section 46G requires disclosure of the existence of the TPF agreement and the funder's identity to the opposing party and the tribunal or court, at commencement or within 15 days of the agreement being made;

• Section 46H requires disclosure of termination of a TPF agreement; and

• Section 46I provides that non-compliance does not, of itself, render a funder liable, but the tribunal or court may take compliance or non-compliance into account where relevant.

Code of Practice for Third Party Funding 2026

The Code of Practice, which was issued by the Minister under Section 46D, which sets out the minimum standards and/or requirements funders are expected to meet. The main requirements under the Code of Practice include: -

• Section 9 - Capital adequacy: continuous access to at least RM10 million, sufficient resources to cover liabilities for 36 months, and annual audit;

• Section 6 & 7 - Pre-funding conduct: clear promotional materials and notifying the funded party of its right to independent legal advice;

• Section 10 - Conflicts of interest: maintaining effective procedures to detect and resolve conflicts;

• Section 12 - Control and influence: funders are prohibited from controlling or influencing the funded party or its counsel in the conduct or settlement of the arbitration;

• Section 11 - Confidentiality: both funder and funded party must preserve confidentiality and privilege over arbitration materials;

• Section 13 - Liability for costs: funding agreements must state the funder's liability for adverse costs, costs insurance and security for costs; and

• Section 14 - Termination: a funder may only terminate on limited grounds (unlikely to succeed, material adverse change in prospects, or the funded party's material breach), remaining liable for accrued obligations except in the last case.

Role of the AIAC Arbitration Rules 2026

The AIAC Rules 2026 provides the operative structure for the statutory disclosure regime. Rule 31 requires a funded party to disclose the existence of a funding agreement and the funder's identity, at commencement or as soon as practicable thereafter, and to disclose subsequent changes, including termination. The tribunal may take funding arrangements and disclosure compliance into account when making orders and awards, including on costs. Funding disclosure is also required in the notice of arbitration, the response, and applications for consolidation, joinder and emergency arbitrators.

Conclusion

The reforms relating to TPF in arbitration proceedings replace years of uncertainty with a clear statutory and regulatory framework. Sections 46A - 46I of the revised AA 2005 remove the common law restrictions relating to maintenance and champerty while introducing specific disclosure obligations. The Code of Practice further establishes baseline standards governing the conduct of third-party funders, while the AIAC Rules 2026 ensure that the existence of TPF is disclosed and remains transparent throughout an AIAC-administered arbitration.

Nevertheless, the practical impact of this new TPF regime remains to be seen. As TPF becomes more widely utilised in arbitration proceedings, its operation in practice may expose areas requiring further clarification or refinement. It remains possible that the regulatory framework, including the Code of Practice, may be subject to further review and stricter requirements as experience is gained from the implementation of TPF in Malaysia.

Bibliography

Arbitration (Amendment) Act 2024

Arbitration Act 2005, ss 3A, 46A, 46B, 46C, 46D, 46E, 46F, 46G, 46H & 46I

Code of Practice for Third Party Funding 2026, ss 6, 7, 9, 10, 11, 12, 13 & 14

AIAC Arbitration Rules 2026, Rule 31