Third Party Funding In Arbitration In Malaysia - A Critical Examination Of Its Legality And Implications

Author: LawSphereX

Category: Arbitration & ADR

Published: 2026-08-23T21:34:09.555187+00:00

Updated: 2026-08-26T17:05:17.209+00:00

THIRD PARTY FUNDING IN ARBITRATION IN MALAYSIA:

A CRITICAL EXAMINATION OF ITS LEGALITY AND

IMPLICATIONS

Ms. Aditi Vyas, Doctoral Research Scholar at National Law Institute University, Bhopal Dr. Padma Singh, Assistant Professor (Senior) at National Law Institute University, Bhopal Ms. Vani Sharma, Doctoral Research Scholar at National Law Institute University, Bhopal

ABSTRACT

The concept of Third Party Funding (TPF) in legal proceedings, particularly in arbitration, has attracted significant international scholarly and practical discourse. 1 It is increasingly recognized as an instrument to promote access to justice, alleviate financial burdens, and foster a more equitable playing field in litigation and arbitration. 2 While TPF has gained widespread acceptance and is subject to robust regulation in jurisdictions such as the United Kingdom, Australia, and Singapore,3 its legal status in Malaysia has historically remained ambiguous, undergoing a period of nascent development characterized by cautious judicial engagement. This article explores the contours of TPF within the Malaysian legal landscape, critically examining its legality, the evolving judicial stance, and its potential ramifications for the legal system, especially in commercial arbitration.

It traces the evolution of the doctrines of champerty and maintenance which were historically formidable barriers to third-party intervention in legal claims4 and evaluates Malaysia's recent paradigm shift towards explicitly embracing funded legal claims. The article analyzes key judicial pronouncements, such as KS Energy Services Ltd v. BR Energy (M) Sdn Bhd,5 which have touched upon elements of funding, while assessing the absence of comprehensive regulatory regime governing third-party funders prior to recent legislative reforms. In doing so, the article also considers the relevance of international instruments like the UNCITRAL Model Law on

1 Sai Ramani Garimella, “Third-Party Funding of Arbitral Claims in India - A Narrative for

2 Access to Justice,” Journal of International Arbitration 38, no. 2 (2021): 203-228.

Third Party Funding in the Indian Arbitration Scenario, Singhania & Co. LLP. 3 Leong, Chun Yen, Third party funding for arbitration in Malaysia (Masters thesis, Universiti Teknologi Malaysia, Faculty of Built Environment, 2016). 4 Kshama Loya Modani & Vyapak Desai, Asia No Longer 'Third' To Third Party Funding – Meets The Financing World Of Arbitration, Asian Int’l Arb. Ctr. (2020).

5 KS Energy Services Ltd v. BR Energy (M) Sdn Bhd, 5 M.L.J. 753 (Malay.).

International Commercial Arbitration6 and guidelines issued by arbitral institutions such as the Asian International Arbitration Centre (AIAC).7 Further, this study identifies the legal and ethical issues raised by TPF, including concerns of confidentiality, impartiality, disclosure obligations, and the potential for funders to influence litigation strategy.8 It argues that without clear legislative and ethical guidelines, the Malaysian legal environment risked uncertainty and inconsistency in handling funded claims. The discussion is contextualized with insights from jurisdictions such as Singapore which is Malaysia’s closest legal and economic comparator which has already established statutory frameworks for TPF in arbitration.9 A brief yet meaningful comparative insight is also provided with respect to

the Indian legal approach to third-party funding. While India permits TPF in select contexts, its regulatory clarity remains limited. 10 The Indian scenario helps underscore the challenges and potential regulatory blueprints for Malaysia as it grapples with the introduction of TPF into its legal culture. This article includes recommendations for Malaysian legal policy, a call for legislative reform, and adoption of ethical standards for funders and counsel, and greater transparency requirements in arbitration. It proposes a roadmap for Malaysia to evolve from ambiguity to informed regulation, drawing lessons from comparative jurisdictions and aligning itself with the global movement towards modern, market-friendly litigation finance structures.

Keywords: Third-Party Funding (TPF); Champerty; Malaysia Arbitration Law; Legal Ethics; Litigation Finance; Comparative Jurisprudence Introduction The legal landscape of dispute resolution has undergone a significant transformation in recent decades, witnessing the emergence of innovative mechanisms designed to enhance access to justice and streamline litigation and arbitration procedures. One such mechanism that has garnered increasing attention globally is Third Party Funding (TPF), a practice wherein an unrelated party provides financial resources to a claimant or respondent to pursue or defend a legal claim in return for a share of the proceeds, if successful. 11 While TPF has been embraced 6 UNCITRAL, Model Law on International Commercial Arbitration, U. N. Doc. A/40/17, Annex I (1985), with amendments as adopted in 2006, https://uncitral. un.

org/en/texts/arbitration/modellaw/commercial_arbitration.

7 AIAC, Arbitration Rules, https://www.aiac.world/arbitration-rules.

8 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

9 Civil Law Act, ch. 43, § 5B (Sing.) (amended 2017).

10 Third-Party Funding in the Asia-Pacific, Norton Rose Fulbright (2022).

11 Kshama Loya Modani & Vyapak Desai, Asia No Longer 'Third' To Third Party Funding – Meets The Financing World Of Arbitration, Asian Int’l Arb. Ctr. (2020).

in many jurisdictions as a tool to broaden the pathways to legal redress, it continues to be viewed with cautious scrutiny in others, particularly where traditional legal doctrines such as champerty and maintenance still cast a shadow. In essence, TPF represents a fundamental shift from conventional models of litigation financing by introducing market-driven capital into legal disputes. 12 Historically condemned under common law for encouraging frivolous litigation and interference by disinterested parties, the notion of allowing third parties to fund claims has now gained legitimacy in many modern jurisdictions. 13 Countries such as the United Kingdom, Australia, Hong Kong, and Singapore have moved progressively toward recognizing and regulating TPF, especially in the realm of international commercial arbitration.

14 These developments are aligned with a broader global trend towards facilitating access to justice and reducing financial inequality in legal battles. 15 Malaysia, however, has historically remained at a crossroads. While the practice of TPF was not expressly prohibited under prior legislation, it was not actively regulated either. This regulatory vacuum generated uncertainty for litigants, funders, and legal practitioners. Historically influenced by English common law traditions which included the doctrines of champerty and maintenance, Malaysia’s legal system had yet to decisively abandon its conservative posture on the matter. The judiciary has occasionally hinted at a willingness to reconsider rigid applications of traditional doctrines in commercial contexts, but a concrete legal position on TPF remained elusive.

The legal community thus found itself in a state of interpretive flux, grappling with questions about whether third-party funding could legally coexist with existing legal ethics, procedural rules, and principles of justice in Malaysia. In commercial arbitration, the urgency for clarity becomes even more pronounced. The growth of Malaysia as an arbitration-friendly jurisdiction, particularly with the prominence of the Asian International Arbitration Centre (AIAC),16 calls for a transparent and investor-friendly approach to dispute resolution financing. Given the increasingly complex and high-stakes nature of modern commercial disputes, many parties—especially small and medium

12 Third Party Funding in the Indian Arbitration Scenario, Singhania & Co. LLP.

13 A Comparison of Singapore and Hong Kong's Third-Party Funding Regimes to England and Australia,

Arbitration: The Int’l J. of Arb., Mediation & Dispute Mgmt. 87, no. 2 (2021).

14 Toby Gayner & James Khouri, The New Frontier: Third Party Funding in Singapore and Hong Kong, 41

Fordham Int’l L.J. 1243 (2018). 15 Leong, Chun Yen, Third party funding for arbitration in Malaysia (Masters thesis, Universiti Teknologi Malaysia, Faculty of Built Environment, 2016).

16 Malaysia: International Arbitration, The Legal 500 Guides (2024).

enterprises—find themselves priced out of arbitration, thereby undermining its foundational promise of equitable and accessible justice. This article seeks to critically examine the legality and implications of third-party funding in Malaysia, focusing on its interaction with local jurisprudence, ethical considerations, and commercial realities. The analysis is structured around doctrinal developments, case law, and the broader implications for Malaysia’s legal system. Furthermore, a comparative insight into India’s evolving approach to TPF will help contextualize Malaysia’s position within the larger regional and international framework.

Through this scholarly inquiry, the paper aims to answer pivotal questions like whether Malaysia is legally and ethically prepared to accommodate third-party funding in arbitration, what are the risks and benefits of doing so, how can Malaysia reconcile traditional legal doctrines with modern commercial needs, and what lessons can be drawn from other jurisdictions that have successfully navigated similar transitions? Understanding Third Party Funding in International Dispute Resolution Third-party funding (TPF) in the realm of dispute resolution is a dynamic and rapidly evolving phenomenon. It involves a non-party to a dispute, usually a commercial funder, providing financial assistance to a litigant, typically a claimant, to pursue legal or arbitral proceedings in return for a share of the financial recovery if the claim is successful.

17 While this model originally emerged in jurisdictions like Australia and the United Kingdom in the context of insolvency and class action litigation, it has increasingly permeated the field of international commercial arbitration, where high costs often act as a deterrent to effective participation, especially for smaller or resource-constrained claimants. 18 At its core, TPF introduces a tripartite relationship between the claimant, the legal counsel, and the funder. The funder may cover various costs including counsel fees, tribunal fees, expert witnesses, and procedural expenses, with no recourse against the claimant if the case fails, placing the risk squarely on the funder.

This arrangement has fundamentally reshaped the economic calculus of legal claims, allowing parties who might otherwise be unable to pursue 17 Kshama Loya Modani & Vyapak Desai, Asia No Longer 'Third' To Third Party Funding – Meets The Financing World Of Arbitration, Asian Int’l Arb. Ctr. (2020). 18 Sai Ramani Garimella, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

meritorious claims to do so. The rise of specialized litigation funding firms, hedge funds, and other financial entities engaging in this sector underscores the growing recognition of legal claims as a legitimate investment asset class. 19 Notably, the increased prevalence of TPF has been facilitated by reforms in legal thinking around doctrines like champerty and maintenance, historically viewed as deterrents to thirdparty intervention in litigation. 20 These doctrines originated in medieval England to prevent abuse of court processes and were premised on the idea that uninterested parties should not meddle in others’ litigation for personal gain. 21 However, as courts and legislatures in modern jurisdictions began to distinguish abusive practices from legitimate financing models, TPF has gradually shed its historical stigma.

For example, the UK abolished the criminal and tortious liability for maintenance and champerty through the Criminal Law Act, 1967,22 thereby paving the way for a robust litigation finance industry. In arbitration, where procedural flexibility and party autonomy are fundamental, TPF has been widely accepted, particularly in jurisdictions seeking to position themselves as international arbitration hubs. 23 The International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration (2014)24 recognized TPF and recommended disclosure where a funder has a direct economic interest in the outcome of the dispute.

25 Likewise, institutional rules such as those of the Singapore International Arbitration Centre (SIAC)26 and Hong Kong International Arbitration Centre (HKIAC)27 have incorporated express provisions for the disclosure of third-party funding arrangements, emphasizing transparency and avoiding conflicts of interest. 28 19 Kshama Loya Modani & Vyapak Desai, Asia No Longer 'Third' To Third Party Funding – Meets The Financing World Of Arbitration, Asian Int’l Arb. Ctr. (2020). 20 Kshama Loya Modani & Vyapak Desai, Asia No Longer 'Third' To Third Party Funding – Meets The Financing World Of Arbitration, Asian Int’l Arb. Ctr. (2020). 21 Kshama Loya Modani & Vyapak Desai, Asia No Longer 'Third' To Third Party Funding – Meets The Financing World Of Arbitration, Asian Int’l Arb. Ctr. (2020).

22 Criminal Law Act 1967, c. 58, § 13 (U.K.).

23 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

24 Int’l Bar Ass’n, Guidelines on Conflicts of Interest in International Arbitration (2014),

https://www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918. 25 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

26 Singapore International Arbitration Centre, SIAC Investment Arbitration Rules (2017), Rule 24(l).

27 Hong Kong International Arbitration Centre, HKIAC Administered Arbitration Rules (2018), art. 44.

28 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

Despite these advancements, TPF remains controversial. Critics argue that it commodifies justice, fosters opportunistic litigation, and introduces ethical dilemmas concerning confidentiality, privilege, and funder influence. 29 Proponents, however, see it as a facilitator of justice, especially in cases where deep-pocketed defendants use legal costs as a weapon against less-resourced claimants. 30 Academic and policy discourse on TPF thus revolves around finding the right regulatory balance, maximizing access while minimizing potential abuse. 31 In the Malaysian context, this discussion is still nascent. While TPF has not been formally legalized or regulated, neither has it been expressly prohibited. The Legal Profession Act 1976,32 along with common law traditions imported from England, still casts a shadow through residual concerns of champerty.

Yet, Malaysia’s aspiration to emerge as a regional arbitration hub evident from the initiatives of the Asian International Arbitration Centre (AIAC) places it in a critical position to reassess its stance on third-party funding in arbitration. Legal Status and Judicial Perception of Third Party Funding in Malaysia The legal status of third-party funding (TPF) in Malaysia has historically remained largely unsettled, occupying a space between permissibility by silence and prohibition by historical doctrine. Malaysia’s legal system, founded on English common law, inherited the traditional doctrines of champerty and maintenance, which were historically invoked to curtail third-party interference in legal proceedings. However, as Malaysia aims to align itself with international commercial practices especially in the arbitration sphere.

Its courts and stakeholders have been called upon to reassess the viability of these long-standing doctrines in the modern context. The doctrine of champerty, defined as an agreement to share in the proceeds of a successful action in exchange for providing support to a litigant, was previously treated as both a tort and a crime under English law. Although England formally abolished criminal and civil liabilities for maintenance and champerty through the Criminal Law Act 1967,33 Malaysia had not Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024). Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024). 29 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

30 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

31 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

32 Legal Profession Act 1976, Act 166, § 37(2)(b) (Malay.).

33 Criminal Law Act 1967, c. 58, § 13 (U.K.).

enacted similar statutory reforms until recently. Instead, the continued relevance of champerty in Malaysian jurisprudence was primarily determined by judicial interpretation, which had begun to reflect a more nuanced understanding of commercial realities. A leading case that illustrates the Malaysian judiciary’s evolving stance is KS Energy Services

Ltd v. BR Energy (M) Sdn Bhd. 34 In this matter, while the court did not directly address the legality of TPF, it did recognize the increasing complexity of commercial arrangements and the need for a more contextual interpretation of contractual and procedural norms. Although KS Energy did not establish binding precedent on TPF, it highlighted a judicial willingness to move away from rigid doctrinal adherence and toward commercially pragmatic adjudication. Earlier, in Mohamed Ezam Mohd Nor v. Ketua Polis Negara,35 the Federal Court reaffirmed the principles surrounding abuse of process and improper interference, referencing doctrines akin to champerty, albeit in a criminal context. However, Malaysian courts had yet to directly confront a case that squarely addressed third-party funding in the context of arbitration or commercial litigation.

Notably, there was no explicit statutory provision in Malaysian law that prohibited TPF. The Contracts Act 1950,36 which governs agreements and their enforceability, did not address funding arrangements. Similarly, the Arbitration Act 2005, Act 64637 (as amended in 2018), which is modeled closely on the UNCITRAL Model Law on International Commercial Arbitration,38 was silent on the permissibility or regulation of funding by non-parties. This legislative silence led to uncertainty among stakeholders about the enforceability of TPF agreements and the ethical implications for lawyers who participated in or advised on such arrangements. The Legal Profession Act 1976, Act 16639 introduced additional complexity. Section 37(2)(b) of the Act prohibits advocates and solicitors from acquiring an interest in litigation through any agreement.

While this is aimed at preventing lawyers from profiting improperly from their clients' claims, it could also be interpreted to apply more broadly to other stakeholders,

34 KS Energy Services Ltd v. BR Energy (M) Sdn Bhd, 5 M.L.J. 753 (Malay.).

35 Mohamed Ezam Mohd Nor v. Ketua Polis Negara, 4 C.L.J. 309 (Malay.),35

36 Contracts Act 1950 (Malay.).

37 Arbitration Act 2005, Act 646, § 2 (Malay.).

38 UNCITRAL, Model Law on International Commercial Arbitration, U.N. Doc. A/40/17, Annex I (1985), with amendments as adopted in 2006, https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration.

39 Legal Profession Act 1976, Act 166, § 37(2)(b) (Malay.).

including funders. However, the lack of express mention or judicial interpretation of this section in the context of commercial third-party funders left the door ajar for a more liberal reading. There have also been soft signals of reform from within the arbitration community. The Asian International Arbitration Centre (AIAC), in its rules and policy discussions, has acknowledged the role of third-party funding and the need for transparency in such arrangements. 40 While the AIAC Arbitration Rules did not previously mandate disclosure of TPF, they are increasingly influenced by international norms which have now led to the formal adoption of such measures. In a landmark development, the Arbitration (Amendment) Act 2024 (Act A1737), gazetted on November 1, 2024, explicitly legalizes and regulates third-party funding in arbitration in Malaysia.

41 This pivotal legislation introduces new Sections 46A-I into the Arbitration Act 2005, which, among other things, expressly state that the common law rules against champerty and maintenance do not apply to TPF agreements made after the commencement of these new provisions. 42 This legislative intervention definitively moves Malaysia from a state of tolerated ambiguity to a clear statutory framework for TPF in arbitration. Recent Developments and Emerging Legal Framework in Malaysia Although Malaysia has historically lacked formal regulation for third-party funding (TPF), recent developments within its legal and arbitral institutions indicate a gradual, albeit cautious, openness to integrating TPF into the country’s legal infrastructure.

This transition, however, is nuanced, navigating the intricate balance between preserving doctrinal conservatism and embracing modern, market-aligned mechanisms of dispute resolution financing. With the increasing importance of arbitration in Malaysia’s commercial dispute resolution landscape, the potential for formalizing TPF through legislative or institutional channels has gained significant momentum. One of the most significant actors in this evolution is the Asian International Arbitration Centre (AIAC). 43 As a leading institution for arbitration and alternative dispute resolution (ADR) in Malaysia and the broader Asia-Pacific region, the AIAC has signalled interest in aligning its

40 AIAC, Arbitration Rules, https://www.aiac.world/arbitration-rules.

41 Arbitration (Amendment) Act 2024 (Act A1737), Federal Gazette, Nov. 1, 2024.

42 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

43 AIAC, Arbitration Rules, https://www.aiac.world/arbitration-rules.

procedural rules with international best practices. 44 While the current AIAC Arbitration Rules did not explicitly require the disclosure of third-party funding arrangements, discussions in professional forums and policy papers suggested that reform was on the horizon. A more structured approach perhaps akin to the disclosure obligations found in the rules of the Singapore International Arbitration Centre (SIAC)45 or the Hong Kong International Arbitration Centre (HKIAC)46 could have enhanced transparency and procedural fairness in Malaysian-seated arbitrations. From a policy perspective, one of the strongest arguments in favor of recognizing and regulating TPF is its potential to enhance access to justice and level the playing field in complex commercial disputes.

47 In high-value international arbitrations, costs can be prohibitive for smaller claimants, who often find themselves unable to pursue legitimate claims against betterresourced adversaries. TPF thus serves a democratizing function, particularly where national legal aid or institutional support is unavailable in commercial disputes. Given Malaysia’s ambitions to establish itself as a global arbitration hub,48 its institutions must offer not only competent adjudication but also an infrastructure that supports economic equity in legal contests. On the legislative front, the Arbitration Act 2005, Act 64649 which was last amended in 2018 remained silent on the permissibility, regulation, or disclosure of TPF.

Nevertheless, the Act’s adoption of key elements of the UNCITRAL Model Law on International Commercial Arbitration provided a strong doctrinal foundation for accepting TPF, especially given the UNCITRAL’s policy-neutral position on funding mechanisms. Malaysian legislators, however, have now followed the path of Singapore, which amended its Civil Law Act, ch. 43, § 5B (Sing. ) in 2017 to permit third-party funding in international arbitration, thereby explicitly overturning common law doctrines that might otherwise inhibit such arrangements. 50 A critical development that catalyzed Malaysia's legislative reform in TPF is the high-profile

44 Announcement on the Arbitration (Amendment) Bill 2024 and the Construction Industry Payment and

Adjudication (Amendment) Bill 2024, AIAC (July 26, 2024).

45 Singapore International Arbitration Centre, SIAC Investment Arbitration Rules (2017), Rule 24(l).

46 Hong Kong International Arbitration Centre, HKIAC Administered Arbitration Rules (2018), art. 44.

47 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

48 Malaysia: International Arbitration, The Legal 500 Guides (2024).

49 Arbitration Act 2005, Act 646, § 2 (Malay.).

50 Civil Law Act, ch. 43, § 5B (Sing.) (amended 2017).

Sulu dispute. 51 Minister in the Prime Minister's Department (Law and Institutional Reform), Datuk Seri Azalina Othman Said, explicitly linked the Arbitration (Amendment) Act 2024 to lessons learned from this incident. 52 She publicly stated that the case "exposed how third-party litigation funding was misused to prolong an unfounded claim in a deceptive manner" and that "no full disclosure was given" by the funders. 53 This direct causal relationship where a financially significant international arbitration case, perceived as an abuse of TPF, directly spurred legislative action is a crucial point. The implication extends beyond mere TPF regulation; it underscores a sovereign state's vulnerability to privately funded claims and its legislative response to protect national interests and sovereign immunity.

The new disclosure requirements under Sections 46G and 46H of the Amendment Act, mandating the funded party to disclose the existence, identity, and termination of a TPF agreement to the other party and the tribunal,54 serve as direct legislative countermeasures designed to prevent future misuse and enhance transparency in arbitral proceedings. Moreover, the Malaysian judiciary has demonstrated a slow but steady movement toward accepting commercial realities that were once taboo under traditional legal doctrines. Courts have increasingly prioritized party autonomy, efficiency, and commercial sensibility in their interpretation of contract law and arbitration procedures. This is evidenced by decisions such as TNB Fuel Services Sdn Bhd v.

China National Coal Group Corp,55 where the courts emphasized minimal curial intervention in arbitration and recognized the sophistication of parties engaged in cross-border disputes. Although not directly addressing TPF, such decisions form part of a broader judicial trend toward greater receptivity to contemporary dispute resolution practices. The Bar Council of Malaysia has not yet issued formal ethical guidance on the role of lawyers in advising on or participating in third-party funding arrangements. 56 However, in light of evolving international bar standards such as those articulated by the International Bar 51 Maya Zaharudin, Paris court to hear Malaysia's US4. 9 bil Sulu dispute on July 7: Azalina, Scoop. my (Apr. 30, 2025).

52 ‘We learnt from Sulu incident,’ says Azalina, The Star (July 16, 2024).

53 Maya Zaharudin, Paris court to hear Malaysia's US4.9 bil Sulu dispute on July 7: Azalina, Scoop.my (Apr. 30, 2025).

54 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

55 TNB Fuel Services Sdn Bhd v. China National Coal Group Corp, 4 M.L.J. 857 (Malay.)

56 Circular No 018/2025 Dated 9 Jan 2025, Malaysian Bar (Jan. 9, 2025).

Association (IBA) Guidelines on Conflicts of Interest in International Arbitration (2014)57 it is anticipated that ethical guidelines will eventually be necessary to address concerns related to confidentiality, privilege, and funder influence over litigation or arbitral strategy. While legislative inertia was once a challenge, the convergence of institutional interest, commercial demand, and comparative reform models has presented an opportunity for Malaysia to move decisively toward formalizing a legal framework for TPF. The Arbitration (Amendment) Act 2024, gazetted on November 1, 2024, and set to commence on a date appointed by the Minister,58 represents this decisive shift.

A carefully calibrated regulatory approach, combining statutory clarity with ethical safeguards, would not only promote responsible funding practices but also enhance Malaysia’s credibility as a venue for international arbitration. Critical Challenges: Ethical, Procedural and Practical Issues While the promise of third-party funding (TPF) as a mechanism for enhancing access to justice is evident, its integration into a legal system especially one like Malaysia’s, which is still navigating its common law roots presents a multifaceted array of ethical, procedural, and practical complexities. The previously unregulated nature of TPF in Malaysia, coupled with the absence of formal guidance from legal institutions, raised significant concerns regarding transparency, confidentiality, potential conflicts of interest, and undue influence on proceedings.

Ethical Concerns and Conflict of Interest The most immediate ethical challenge posed by TPF is the possibility of conflict of interest, particularly where a funder has financial stakes in the outcome of the dispute. 59 In arbitration, this becomes a critical issue when arbitrators, counsel, or even parties may have existing relationships with funders that are not disclosed. While global best practices such as those contained in the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration (2014)60 recommend disclosure of any economic interests held by

57 Int’l Bar Ass’n, Guidelines on Conflicts of Interest in International Arbitration (2014),

https://www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918.

58 Arbitration (Amendment) Act 2024 (Act A1737), Federal Gazette, Nov. 1, 2024.

59 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

60 Int’l Bar Ass’n, Guidelines on Conflicts of Interest in International Arbitration (2014),

https://www.ibanet.org/MediaHandler?id=e2fe5e72-eb14-4bba-b10d-d33dafee8918.

third-party funders, Malaysia is yet to incorporate such requirements into either its domestic arbitration legislation or institutional rules. In the absence of mandatory disclosure, the integrity of arbitral proceedings could be compromised. For instance, an arbitrator unaware of a funder’s indirect connection to one of the parties could inadvertently breach the principle of impartiality, leading to potential annulment of awards or enforcement challenges. 61 The lack of transparency can also impair party equality, especially when only one party is funded and the other remains unaware of the strategic and financial calculus underlying its opponent’s case. The Arbitration (Amendment) Act 2024 directly addresses this by introducing mandatory disclosure requirements for TPF agreements.

62 Confidentiality and Privilege Arbitration is traditionally valued for its confidential nature, which is often a key reason for its selection over court litigation. 63 The involvement of a third-party funder, however, complicates this assurance. Sharing sensitive documents, legal strategies, and case assessments with funders may result in the waiver of legal professional privilege, particularly in jurisdictions that do not recognize common interest privilege or litigation privilege in the context of third-party funders. In Malaysia, while confidentiality in arbitration is preserved under Section 41A of the Arbitration Act 2005, the provision was silent on how confidentiality interacts with third-party funding. The lack of a statutory framework addressing whether disclosures made to funders are privileged or confidential further deepened the uncertainty.

Unlike the United States or the United Kingdom, where courts have occasionally extended privilege to communications involving funders, Malaysian law remained undeveloped in this area. The Arbitration (Amendment) Act 2024 now explicitly allows a party to disclose information relating to arbitral proceedings for the purpose of seeking third-party funding. 64 61 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

62 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

63 Sai Ramani Garimela, "Third-Party Funding of Arbitral Claims in India - A Narrative for Access to Justice," Journal of International Arbitration 38, no. 2 (2021): 203-228.

64 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

Control over Proceedings and Strategic Influence Another significant concern relates to the degree of control a funder may exert over the litigation or arbitration strategy. 65 In principle, the funded party should retain autonomy over decisions such as whether to settle, proceed to hearing, or appeal. However, in practice, funders often require contractual provisions that allow them to influence or even veto certain decisions to protect their investment. This may lead to situations where a party’s genuine interests are subordinated to the funder’s profit motives. In jurisdictions with advanced TPF regulation, such as Singapore, this issue is addressed through professional conduct rules that require lawyers to act in the best interest of their clients, not funders. 66 In Malaysia, the Legal Profession (Practice and Etiquette) Rules 1978, Rule 33 (Malay.

) 67 affirm the lawyer’s duty of loyalty and independence, but these rules did not explicitly contemplate scenarios involving third-party funders. The potential for ethical breaches—particularly if a lawyer feels beholden to a funder rather than the client—raised red flags about professional integrity and the preservation of justice. The Arbitration (Amendment) Act 2024 aims to mitigate this risk by setting out clear guidelines for funders' control and envisages a code of practice to regulate the conduct of third-party funders. Enforceability and Public Policy Another procedural challenge concerned the enforceability of TPF agreements. In the absence of statutory recognition or judicial precedent upholding such agreements, Malaysian courts might have refused to enforce them on grounds of illegality or public policy, especially if they were viewed as champertous.

This posed a risk not only for funders but also for claimants who might have found themselves exposed to legal liability or fee claims without legal recourse to their funding contract. Moreover, the potential misuse of TPF for frivolous or vexatious litigation, particularly by shell entities with no assets, underscored the need for regulatory oversight. 68 Without safeguards such as security for costs provisions, disclosure requirements, or licensing regimes for funders

65 Arbitration (Amendment) Bill 2024: Third Party Funding, Richard Wee Chambers (2024).

66 Balancing Desire and Danger: Regulating Third-Party Funding in a Global Context, LH-AG Insights (Feb. 19, 2024).

67 Legal Profession (Practice and Etiquette) Rules 1978, Rule 33 (Malay.).

68 Third-Party Funding: A Tool to Deter Investor Misconduct, ITAINR (2023).

TPF could be manipulated to abuse the arbitral process. The Arbitration (Amendment) Act 2024 directly addresses these concerns by abolishing the common law rules against champerty and maintenance for TPF agreements, introducing disclosure requirements, and providing for a code of practice. Despite these concerns, the challenges associated with TPF are not insurmountable. Comparative jurisdictions have demonstrated that clear, principled regulation can mitigate risks while preserving the benefits of funding. 69 As Malaysia now embarks on its own regulatory trajectory, these lessons are highly instructive.

Comparative Insights: The Indian Perspective on Third Party Funding India’s approach to third-party funding (TPF), though not formally codified under a comprehensive regulatory framework, has evolved through judicial pronouncements and statelevel practices that permit such arrangements under limited scrutiny. 70 As in Malaysia, the legal heritage of champerty and maintenance initially cast a long shadow over the admissibility of third-party involvement in litigation. 71 However, over time, Indian courts have come to recognize the legitimacy of TPF, particularly in the context of civil and commercial disputes, provided such agreements are not extortionate, fraudulent, or against public policy. 72 The legal permissibility of TPF in India finds implicit support in judgments such as Ram Coomar Condoo v. Chunder Canto Mukherjee, (1876) L. R. 4 I. A. 23 (P. C.

),73 wherein the Privy Council upheld a funding agreement that allowed a financier to claim a portion of the recovered property, provided it was not “extortionate or unconscionable. ” This ruling set an enduring precedent, distinguishing Indian law from English law, where champertous agreements were historically viewed more strictly. This judicial acceptance was further affirmed by the Supreme Court in Bar Council of India v. A. K. Balaji, (2018) 5 S. C. C. 379 (India),74 which clarified that while advocates are barred from funding litigation under the Bar Council of India Rules,75 there is no general prohibition on third parties other than lawyers—

69 Toby Gayner & James Khouri, The New Frontier: Third Party Funding in Singapore and Hong Kong, 41

Fordham Int’l L.J. 1243 (2018).

70 Third Party Funding in the Indian Arbitration Scenario, Singhania & Co. LLP.

71 Third Party Funding in the Indian Arbitration Scenario, Singhania & Co. LLP.

72 Third Party Funding in the Indian Arbitration Scenario, Singhania & Co. LLP.

73 Ram Coomar Condoo v. Chunder Canto Mukherjee, (1876) L.R. 4 I.A. 23 (P.C.).

74 Bar Council of India v. A.K. Balaji, (2018) 5 S.C.C. 379 (India).

75 Bar Council of India Rules, Rule 9.

funding litigation in India. The Court observed that, “There appears to be no restriction on third parties (non-lawyers) funding litigation and getting repaid after the outcome of the litigation”. 76 This endorsement, albeit cautious, has opened the door for commercial funders to enter the Indian dispute resolution market, particularly in arbitration where high costs can deter access to justice. Another instructive decision is In re: G, A Senior Advocate, A. I. R. 1954 S. C. 557 (India),77 where the Supreme Court underscored the importance of maintaining professional ethics and independence of legal counsel, especially in contexts that may involve financial arrangements external to the client-counsel relationship.

Although the case did not directly involve a commercial funder, it laid down ethical guardrails that remain relevant for discussions on the role of third parties in litigation finance. Furthermore, in Harilal Nathalal Talati v. Bhailal Pranlal Shah, AIR 1990 Bom 184,78 the Bombay High Court reinforced that while TPF was legal, agreements that offered disproportionate returns to funders were invalid as “opposed to public policy. ” Indian jurisprudence has also shown flexibility in allowing funding agreements, particularly in arbitration and insolvency proceedings, provided they do not amount to trafficking in litigation. Notably, in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 S. C. C.

227 (India),79 the Court invalidated an agreement that attempted to interfere with the professional autonomy of a sportsman, indirectly reinforcing the principle that third-party interference must not override the autonomy of the primary parties in a contract or dispute. In the landmark case of Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. , 2022 SCC OnLine Del 3415,80 the Delhi High Court reinforced TPF's acceptance in Indian arbitration, ruling that third-party funders, if not signatories to an arbitration agreement, cannot be held liable for adverse cost awards. Here, the court distinguished Indian law from English cases such as Arkin v. Borchard Lines and Excalibur Ventures LLC v. Texas Keystone Inc,81 which impose cost liability on funders.

This decision underscores the autonomy of funders in Indian arbitration and highlights the judiciary's cautious approach to imposing cost liabilities.

76 Third Party Funding in the Indian Arbitration Scenario, Singhania & Co. LLP.

77 In re: G, A Senior Advocate, A.I.R. 1954 S.C. 557 (India).

78 Harilal Nathalal Talati v. Bhailal Pranlal Shah, A.I.R. 1990 Bom. 184.

79 Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 S.C.C. 227 (India).

80 Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc., 2022 SCC OnLine Del 3415

81 Arkin v. Borchard Lines and Excalibur Ventures LLC v. Texas Keystone Inc. EWCA Civ 655

From a legislative standpoint, India does not yet have a statute equivalent to Singapore’s Civil Law Act, ch. 43, § 5B (Sing. ) (amended 2017),82 which expressly legalizes TPF in international arbitration. However, several Indian states, such as Maharashtra, Gujarat, and Madhya Pradesh, have recognized TPF through amendments to the Code of Civil Procedure, 1908, Order XXV, Rule 1 (India),83 enabling courts to make security for costs orders and regulate the conduct of funded litigations under Order XXV, Rule 1 CPC. 84 This regional variation introduces further complexity into the Indian scenario, suggesting a fragmented regulatory landscape. When compared with Malaysia, India’s position is arguably more permissive in practice, even if equally unregulated.

Indian courts have adopted a functional approach focusing on the fairness and intent of the funding arrangement rather than its form whereas Malaysia, prior to the Arbitration (Amendment) Act 2024, continued to operate under a regime where champerty remained theoretically operative and largely untested in the context of commercial funding. 10 Moreover, Indian discourse on TPF has gained traction in policy forums and arbitration circles, with increased interest from international funders, especially in light of India’s growing arbitration market under the Arbitration and Conciliation Act, 1996, Act No. 26 of 1996. 85 India also appears to be ahead in terms of judicial clarity and practical engagement with TPF, even if it lacks the institutional or statutory frameworks seen in Singapore or Hong Kong.

Malaysia, by contrast, had yet to develop a judicial precedent squarely addressing the legality or enforceability of TPF agreements, and remained bound by outdate concerns of champerty that were inconsistently applied. The English High Court's landmark decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited, EWHC 2361 (Comm. )86 affirmed that TPF costs can be recovered as "other costs" of arbitration under Section 59(1)(c) of the Arbitration Act 1996 (UK). This broad interpretation significantly impacts the commercial viability and risk assessment for funders, as it allows for the recovery of substantial funding fees. 87 The Indian experience thus offers valuable comparative insight for Malaysia. It demonstrates that while a cautious and conservative approach to TPF is understandable, the absence of

82 Civil Law Act, ch. 43, § 5B (Sing.) (amended 2017).

83 Code of Civil Procedure, 1908, Order XXV, Rule 1 (India).

84 Litigation Funding India, Woodsford (2022).

85 Arbitration and Conciliation Act, 1996, Act No. 26 of 1996 (India).

86 Essar Oilfields Services Limited v Norscot Rig Management PVT Limited, EWHC 2361 (Comm.).

87 The Award of Third-Party Funding Costs to a Successful Party in International Arbitration, Daily Jus (2024).

express regulation need not be an impediment to its adoption. Judicial pragmatism, combined with ethical safeguards and evolving institutional practices, can provide a stable foundation for the development of a TPF-friendly regime, even in the absence of express legislation. Conclusion and Recommendations Third-party funding (TPF) has emerged as a transformative force in the landscape of international dispute resolution, and Malaysia finds itself at a pivotal juncture in embracing this evolution. Historically, the absence of a coherent legal framework, coupled with the lingering influence of outdate common law doctrines such as champerty and maintenance, created a significant regulatory vacuum.

88 This ambiguity not only fostered legal uncertainty but also presented practical and ethical challenges, including potential conflicts of interest, breaches of confidentiality, undue funder influence, and risks to procedural integrity, leaving lawyers and parties to navigate TPF on uncertain ethical and contractual grounds, risking judicial backlash and reputational consequences. The enactment of the Arbitration (Amendment) Act 2024 (Act A1737) marks a decisive shift, explicitly legalizing and regulating TPF in arbitration and abolishing the common law rules against champerty and maintenance for TPF agreements. This landmark legislation aligns Malaysia with leading international arbitration jurisdictions and positions it as a more attractive venue for dispute resolution.

The catalyst for this legislative shift, notably the Sulu dispute 40, underscores the critical importance of transparency and robust regulation in TPF arrangements, particularly when sovereign interests are at stake. While the Arbitration (Amendment) Act 2024 provides a foundational framework, its successful implementation and the continued evolution of TPF in Malaysia will depend on several key factors. The forthcoming "code of practice" for third-party funders, envisaged under the new Act, will be crucial in setting clear standards for conduct, financial capacity, and ethical guidelines. This code should draw comprehensively from the experiences of jurisdictions like Singapore and Hong Kong, which have established stringent requirements for funders and emphasized conflict management.

89 88 Leong, Chun Yen, Third party funding for arbitration in Malaysia (Masters thesis, Universiti Teknologi Malaysia, Faculty of Built Environment, 2016). 89 Balancing Desire and Danger: Regulating Third-Party Funding in a Global Context, LH-AG Insights (Feb. 19, 2024).

To further strengthen Malaysia's position as a leading arbitration hub and ensure the responsible growth of TPF, the following recommendations are proposed:

1. Expeditious Development and Implementation of the Code of Practice: The Minister

responsible for arbitration matters should prioritize the swift development and gazetting of the TPF code of practice. This code must be comprehensive, addressing not only disclosure requirements (as mandated by Sections 46G and 46H of the Amendment Act

43) but also clear guidelines on funder influence over case strategy, ethical boundaries for

legal counsel, and mechanisms for addressing potential conflicts of interest. Consideration should also be given to incorporating principles from the Code of Conduct for Third-Party Litigation Funders, Ass’n of Litig. Funders of Eng. & Wales (Rev. ed. 2018).90

2. Enhanced Ethical Guidance for Legal Professionals: The Malaysian Bar Council

should proactively issue detailed ethical guidelines for advocates and solicitors involved in TPF arrangements. These guidelines should build upon the existing Legal Profession (Practice and Etiquette) Rules 1978, Rule 33 (Malay.),91 and address specific scenarios arising from TPF, such as maintaining client autonomy, managing conflicts of interest with funders, and ensuring professional independence. Comparative insights from the Bar Council of India Rules,92 which explicitly prohibit lawyers from having pecuniary interests in litigation, could be instructive.

3. Judicial Familiarization and Precedent Development: While the new Act provides

statutory clarity, the Malaysian judiciary will play a vital role in interpreting and applying its provisions. Training programs and judicial colloquia on TPF should be organized to ensure a consistent and informed approach to funded claims, drawing lessons from international case law, such as the English High Court's decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited93 regarding the recoverability of funding costs. 90 Code of Conduct for Third-Party Litigation Funders, Ass’n of Litig. Funders of Eng. & Wales (Rev. ed. 2018), https://associationoflitigationfunders.com.

91 Legal Profession (Practice and Etiquette) Rules 1978, Rule 33 (Malay.),

https://www.malaysianbar.org.my/list/members/laws-bc-rulings-and-practice-directions/legal-professionpractice-and-etiquette-rules-1978

92 Bar Council of India Rules under Advocates Act, 1961 available at

https://www.indiacode.nic.in/bitstream/123456789/15341/1/advocate_1961.pdf

93 Essar Oilfields Services Limited v Norscot Rig Management PVT Limited, EWHC 2361 (Comm).

4. Continuous Monitoring and Review: The TPF landscape is dynamic. Malaysia should

establish a mechanism for continuous monitoring of the TPF market, including data collection on funded cases, outcomes, and any emerging challenges. Regular reviews of the Arbitration (Amendment) Act 2024 and its accompanying code of practice should be conducted to ensure they remain relevant, effective, and aligned with international best practices.

5. Public Awareness and Education: Efforts should be made to educate the broader legal

and business communities about the new TPF framework. This includes seminars, workshops, and publications to clarify the benefits, risks, and regulatory requirements of TPF, thereby fostering a more informed and confident engagement with this evolving financing mechanism. Ultimately, the challenge before Malaysia is not merely legal but strategic. By embracing these recommendations, Malaysia can effectively transition from a period of legal ambiguity to a robust and transparent regulatory environment for third-party funding in arbitration.

This proactive approach will not only enhance access to justice and promote economic efficiency but also solidify Malaysia’s reputation as a sophisticated and reliable jurisdiction for international dispute resolution, serving as a catalyst for growth in its arbitration ecosystem, while reinforcing its commitment to access to justice, professional ethics, and procedural fairness.