The Law Reform Outlook: Malaysia Legislates on Third-Party Funding

The dawn of 2026 has been marked by significant legal and institutional changes to the Malaysian arbitration landscape. Most notably, the establishment of the inaugural Asian International Arbitration Centre (“AIAC”) Court of Arbitration aims to enhance the AIAC’s stature as a neutral and independent international arbitral institution that delivers quality-oriented and user-driven alternative dispute resolution (“ADR”) services. Concurrently, legislative revisions to the arbitration framework unveiled notable amendments that codify best practices and international standards, thereby bringing Malaysia even closer to the realm of a global arbitration hub.

One of these legislative revisions is the legalisation of third-party funding in arbitration by virtue of section 10 of the Malaysian Arbitration (Amendment) Act 2024 (“Amendment Act”), which was an act to amend the Malaysian Arbitration Act 2005 (“Arbitration Act”), and which came into operation on 1 January 2026. The Amendment Act represents a pivotal breakthrough for the arbitration and litigation funding sectors in Malaysia.

Malaysia’s History with Third-Party Funding

Malaysia was once a staunch advocate of the antiquated doctrines of maintenance and champerty, which were intended to preserve the purity of justice against champertous maintainers and thus treated third-party funding as contrary to public policy. The doctrine had been introduced into Malaysia by virtue of Malaysia’s importation of English common law under the Civil Law Act 1956.

Third-party funding in arbitration first came under judicial scrutiny over a decade ago. The High Court in Measat Broadcast Network Systems Sdn Bhd v AV Asia Sdn Bhd [2014] MLJU 1860 viewed the involvement of third-party funders in arbitration as a critical factor in deciding an application for security for costs, and notably ruled that a party’s reliance on a funder demonstrates impecuniosity and an inability to meet any order of costs made against it.

The turning of the tide in third-party funding was, critically, the Government of Malaysia’s experience in its legal battle against claims brought by the proclaimed heirs of the Sulu Sultanate, covered on the Blog previously (here and here). The nebulous involvement of a third-party funder in bankrolling the protracted arbitration and the corollary enforcement actions against Malaysia, led to questions being raised about the transparency of the fragmented and scarcely regulated global funding industry.

Accordingly, disclosure of third-party funding involvement and the implementation of concomitant ethical guardrails came to be recognised as the focal point of the movement towards the legalisation of transparent and responsible funding practices in a previously self-regulated or unregulated litigation funding industry.

The New Legislative Framework for Third-Party Funding in Malaysia

Establishing a governing legal framework was evidently the first practical step in this direction. In July 2024, the Malaysian Arbitration (Amendment) Bill was passed by both Houses of Parliament and in October 2024, it received Royal Assent, becoming the Amendment Act. The Amendment Act introduced a new chapter on the disclosure regime pertaining to third-party funding in arbitration. The legalisation of third-party funding in arbitration, which was a key priority of this Amendment Act, signalled a bold legislative move to adapt and respond to a fast-changing legal landscape.

Under the Amendment Act, the legalisation is not unconditional; it comes with a light-touch regulatory framework that guides how funders and funded parties should conduct themselves in upholding the equality of arms in arbitration.

Principally, the liberalisation of the common law doctrine of champerty and maintenance is given effect in section 46C of the Arbitration Act. Insofar as arbitration proceedings are concerned, the law now explicitly carves out third-party funding from the ambit of this doctrine. Simply put, third-party funding in arbitration is no longer treated as a violation of public policy on the premise of the common law rule against maintenance and champerty. It thus provides both legal clarity and certainty on the legitimacy of third-party funding at the outset.

The Amendment Act proceeds to impose mandatory disclosure obligations on the funded party. Specifically, section 46G sets out the responsibility of the funded party to disclose to the counterparty and arbitral tribunal or court (as the case may be): (a) the existence of any third-party funding agreement, and (b) the name of the funder involved in the third-party funding agreement. The timing of disclosure is contingent on the execution of the third-party funding agreement. Where the funding agreement is made on or before the commencement of arbitration, the funded party shall undertake disclosure upon commencement. Where the funding agreement is made post-commencement, the disclosure shall occur within fifteen days from the date the funding agreement is made. Section 46H similarly requires disclosure of the termination or expiration of any third-party funding agreement and the date when this occurred, within fifteen days after the termination or expiration of the funding agreement.

While any non-compliance with the disclosure mandate does not, by itself, expose a third-party funder to any potential liability, section 46I empowers the tribunal or court to weigh any compliance or non-compliance with the disclosure obligations when deciding any relevant questions before it.

To recapitulate, the emphasis on mandatory disclosure of third-party funding in Malaysia rests substantially on a light-touch regulatory approach, which was implemented in similar fashion in Singapore and Hong Kong. This legislative approach achieves Malaysia’s objective of furthering access to justice by encouraging the growth of the funding industry, while mandating greater transparency regarding third-party funding arrangements.

Accompanying Code of Practice for Funders

The foregoing analysis illustrates the onerous disclosure obligation shouldered by the funded party under the law. To restore this equilibrium, the Code of Practice for Third Party Funding 2026 (“Code”) was issued by the Malaysian Minister in the Prime Minister’s Department (Law and Institutional Reform) to prescribe the key ethical standards for third-party funders, with the aim of protecting the interests of the funded party.

Formulating a code of practice as an aide is not unprecedented. In Hong Kong, the Secretary of Justice issued a Code of Practice for Third Party Funding of Arbitration in 2018 to establish the “standard of practice expected” of the funders under the parent law. Similarly, the Code of Conduct for Litigation Funders was introduced by the Civil Justice Council in the UK in 2011 and revised most recently in 2018, notwithstanding the self-regulatory funding practices in the UK.

Drawing authority from section 46D of the Arbitration Act, the Code came into force on 1 January 2026 to provide guidance on the “ethical practices and standards” for third-party funding in arbitration at all stages of the funding process. Funders’ obligations at the pre-funding stage generally include ensuring clarity of the promotional materials, conducting due diligence and notifying the funded party of its right to obtain independent legal advice for an informed decision.

Specifically, to facilitate the participation of financially competent funders in the market, a funder is required to maintain access to a minimum of 10 million ringgit (approximately 2.5 million US dollars) of capital (or equivalent amount in foreign currency), and maintain continuous financial stability. Any material changes in financial status shall be promptly notified to the funded party to allow for necessary mitigation measures. A funder is even responsible for ensuring that its subsidiary, associated entity and investment advisor acting as its agent, if any, comply with the Code. The funders’ financial soundness, coupled with their expanded responsibility, aim to provide certainty, fairness and a level playing field to the funded party.

To improve the predictability and equitability of negotiations of third-party funding agreements, the Code also stipulates that a third-party funding agreement shall encompass the funder’s details, funding amounts, agreed financial returns, a neutral, independent and effective dispute resolution mechanism, and notably, the extent of the funder’s financial liability arising from the funding arrangement such as adverse costs, premiums, and security for costs.

Ultimately, the guidance-oriented Code is tailored with a view to shaping the ethical and responsible use of third-party funding while consistently safeguarding the funded party’s interests.

Institutional Cohesion in the AIAC Rules

In parallel with the legislative architecture, Rule 31 of the AIAC Arbitration Rules 2026 offers a cohesive framework that reinforces the obligation to disclose third-party funding in an AIAC-administered arbitration. It embodies the policy objectives of the statutory disclosure regime, where disclosure plays a central role in strengthening transparency. To optimise procedural effectiveness, Rule 31.4 also empowers the tribunal to account for any compliance or non-compliance of disclosure obligations in its decision-making and apportionment of costs.

This shows how the legal and institutional frameworks have been designed to operate in a synergistic and mutually reinforcing manner in support of the light-touch approach, thereby nurturing ethics, transparency and accountability in third-party funding.

Key Takeaways

While Malaysia advocates for access to justice and remains supportive of third-party funding as a legitimate financial avenue, much emphasis is placed on promoting ethically-guided funding practices through disclosure, to minimise manipulations and abuses of the justice system. This echoes the words of the Malaysian Minister in the Prime Minister’s Department (Law and Institutional Reform), Dato’ Sri Azalina Othman Said, who described adopting a “gentleman’s strategy” as a pillar of this Code.

Taken altogether, the ambition of this latest legislative reform stretches beyond merely “regulating” the funding industry, and is one that focuses on fostering prudence and sustainability that furthers long-term results. With the latest legislative frameworks only just starting to be enforced, only time will tell if the legislated measures are indeed effective in fostering a discipline of compliance among the relevant parties.