Third-Party Funding in Malaysia: History, Regulations and Advantages

After decades of debate on maintenance, champerty and third-party funding (“TPF”), it is exciting to say that TPF has finally reached the shores of Malaysia and has come into effect on 1 January 2026. The legislators have deemed that the time is now ripe for the legalisation and regulation of TPF. Prior to this, TPF was perceived as being illegal as it was contrary to public policy. To understand the rationale of this, one needs to appreciate the circumstances which led to TPF being contrary to public policy, from centuries ago.

History from the UK

The abovementioned circumstances have been helpfully set out by Lord Justice Steyn in Giles v Thompson¹. Essentially, one of the abuses in English medieval society which afflicted the administration of justice was the practice of assigning doubtful or fraudulent claims to royal officials, nobles or other wealthy and influential individuals as they could receive a more sympathetic hearing in court proceedings then. The arrangement is one where the assignee maintains an action at his own expense and subsequently shares the proceeds of a favourable outcome with the assignor. The disputes usually involved a claim to the possession of land, and the subsequent sharing of the land if the action was successful.

The two factors which contributed to the growth of these abuses were, first, that independence was not the hallmark of the medieval judiciary; and second, that the civil justice system was not developed, and it was not capable of exposing abuses of legal procedure and not capable of giving suitable or effective redress.

In these circumstances, the statutes then created the offences of maintenance and champerty as well as the torts of maintenance and champerty. There was also a parallel common law development in respect of maintenance and champerty.

Over time, structural reforms ensured the independence of the judiciary which meant that the circumstances which led to the emergence of the doctrine of maintenance and champerty, ceased to exist. The Law Commission² then noted that there were no records of prosecution for maintenance and champerty for years³. The Law Commission further pointed out that the factor of damage was almost impossible to prove for torts of maintenance and champerty. Thus, it was concluded that an action for damages for maintenance was an 'empty shell'⁴. These findings resulted in the abolition of the offences and torts of maintenance and champerty by the Criminal Law Act 1967.

The Law Commission also specifically dealt with the issue of the illegality of champertous agreements. It noted that this species of maintenance and champerty plays an effective role and there are substantial case laws to the effect that champertous agreements (including in this context “contingency fee” agreements) are unlawful as they are contrary to public policy.

This doctrine stayed on for decades to come and was adopted by common law countries. Lord Justice Steyn in Giles v Thompson⁵ summarises the doctrines of maintenance and champerty as follows:

“In modern idiom maintenance is the support of litigation by a stranger without just cause. Champerty is an aggravated form of maintenance. The distinguishing feature of champerty is the support of litigation by a stranger in return for a share of the proceeds.”

These doctrines strike at the heart of TPF arrangements. Lord Denning in Re Trepca Mines Ltd (No 2)⁶ summarised the concern which relates to TPF arrangements by stating that “The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”

Present Position in the UK

Over time, TPF agreements were legitimised by the Courts and Legal Services Act 1990 and eventually governed by self-regulation through the code of conduct published by the Civil Justice Council (“CJC”), an agency of the UK’s Ministry of Justice⁷. The Association of Litigation Funders was tasked to administer the self-regulation of the industry in accordance with the Code of Conduct for Litigation Funders (“Code”)⁸. The Code⁹ applies to disputes whose resolution is to be achieved principally through litigation in the Courts of England and Wales¹⁰. The Code provides, among others, that the funders are to ensure capital adequacy, circumstances in which a TPF agreement may be terminated and the extent of the funder’s control in the litigation.

In 2023, the UK Supreme Court in the case of PACCAR¹¹ held that a TPF agreement, where the funder’s returns are computed based on a share of damages ultimately recovered in an action, is a damages-based agreement (“DBA”) which is caught by section 58AA(3) of the Courts and Legal Services Act 1990. If a TPF agreement falls within the definition of a DBA, the TPF agreement must then comply with the specific formalities and statutory requirements in order to be enforceable. A DBA is typically a contingency fee agreement between a party and a firm providing litigation services.

The PACCAR decision has caused a stir and left parties to TPF agreements in uncertainty as to the enforceability of their existing TPF agreements.

It appears that a Bill was formulated by the previous UK government to carve out TPF agreements from the scope of DBA in section 58AA. However, this Bill did not complete its passage through the Parliament before the 2024 general election and has been suspended after the change of the government thereafter. The new government commissioned the CJC to review TPF and the fallout from PACCAR, which resulted in the CJC’s report¹² which recommended, among others, that legislation be introduced to clarify the difference between TPF and DBA, to introduce a light-touch regulation on TPF, to regulate the TPF practices, and that TPF regulation should not apply to arbitration (this leaves the oversight of TPF for arbitration to arbitral institutions and tribunals or to party autonomy). The new Government through its Justice Minister then announced that they intend to take action to mitigate the impact of the 2023 Supreme Court’s decision in PACCAR and implement proportionate regulation on TPF¹³. This included a framework for light-touch regulation of TPF, to improve transparency and fairness.

However, it is understood that the said framework or legislation has yet to be tabled. The UK Court of Appeal, in subsequent challenges to TPF agreements, made it clear that a fee mechanism in the multiples of the funder’s cost is not a DBA even if it is capped by the proceeds recovered.

The Australian Experience

Third party funders in Australia were earlier subjected to financial regulations and even required a licence. The route to obtain the licence and compliance with the financial regulations may be time consuming and costly. Thus, it may be perceived as a deterrent for funders, especially those who are already subject to self-regulation policies in the UK or other jurisdictions. Subsequently, this requirement was changed and the extent of regulation for third party funders went back and forth through case law developments and statutory amendments. In summary, it is noted that third party funders are closely regulated in Australia. However, the regulations in place do not appear to have affected the growth of the litigation funding market as it is noted that there has been an estimated growth of 9.6% per annum between 2019 and 2024¹⁴.

The Position in Singapore and Hong Kong

Singapore prohibits TPF in domestic litigation (except arbitration related court proceedings, proceedings in the Singapore International Commercial Court and related mediation proceedings). TPF in Singapore is well-regulated pursuant to a comprehensive framework encompassing the Civil Law Act 1909, Civil Law (Third-Party Funding) Regulations 2016 and the Legal Profession Act 1966, ensuring that provisions for the various stakeholders, including funders and lawyers, are clearly spelt out. For example, lawyers are obliged to disclose the existence of a TPF agreement and the identity and address of the third party funder to the court or tribunal and to every party in a funded proceeding they conduct.¹⁵ Singapore subsequently expanded the applicability of TPF to insolvency proceedings by virtue of their Insolvency, Restructuring and Dissolution Act 2018.

In Hong Kong, the Arbitration Ordinance was amended by the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 to legalise TPF of arbitration, mediation and related proceedings. This has been distinguished from an outcome related fee structure agreement, which is similar to the DBA in the UK.¹⁶ The said Ordinance inter alia, require funders to comply with the detailed Code of Practice for Third Party Funding of Arbitration (“HK Code”). Hong Kong has also established an advisory body to monitor and review the operation of the laws in relation to TPF¹⁷. Non-compliance with the HK Code or Division 5 of the Arbitration Ordinance (which provides for, among others, disclosure and communications relating to TPF) does not, of itself, render any person liable to any judicial or other proceedings¹⁸. Apart from this, Hong Kong allows litigation funding of insolvency related matters¹⁹ as part of the exceptions (common interest, access to justice and miscellaneous practices)²⁰ to the rules against maintenance and champerty and by virtue of insolvency related law²¹. Hence, litigation funding works outside the confines of the Arbitration Ordinance and the HK Code.

The Malaysian Position on Maintenance and Champerty Pre-Arbitration (Amendment) Act 2024

Malaysia, as a common law country, applies the common law of England and the rules of equity as administered in England on the prescribed dates, namely 7 April 1956 for Peninsular Malaysia, 1 December 1951 for Sabah and 12 December 1949 for Sarawak²² (pre-legalisation of TPF in the UK²³). Thus, Malaysia applied the doctrine of maintenance and champerty for decades. These doctrines were arguably fortified in Section 24(e) of the Malaysian Contracts Act 1950 (“Malaysian Contracts Act”) which provides, among others, that an agreement where its consideration or object is “opposed to public policy” is unlawful and such agreement is void.

In interpreting Section 24 of the Malaysian Contracts Act, the Federal Court in Wong Yee Boon v Gainvest Builders (M) Sdn Bhd²⁴ noted that Section 24 is in pari materia with Section 23 of the Contracts Act of India and therefore adopted the commentary from Pollock and Mulla on the Indian Contract Act and Specific Relief Act (10th edn). In Pollock and Mulla, public policy is defined as the principle which declares that no man can lawfully do that which has a tendency to be injurious to the public welfare. The passage from Pollock and Mulla specifically includes champerty and maintenance as one of the considerations or objects which are opposed to public policy.

The Malaysian Introduction of TPF

The introduction of TPF in Malaysia via the Arbitration (Amendment) Act 2025 (“Amendment Act”), puts Malaysia on the map along with other leading arbitral seats such as the UK, Singapore and Hong Kong.

Well, this does not actually come as a surprise. The Minister in the Prime Minister’s Department (Law and Institutional Reform) has been particularly vocal about TPF since ‘Malaysia fell victim’²⁵ to a third-party funded arbitration famously known as the Sulu Arbitration. This was where the purported heirs of the Sultan of Sulu (“Claimants”) clamed for compensation over the cessation of certain land in the North of Borneo, which is under the territory of Malaysia. On 28 February 2022, the arbitrator, Dr. Gonzalo Stampa, decided in favour of the Claimants and issued a final award in the tune of US$14.9bil. Subsequently, the Hague Court of Appeal denied the Claimants’ petition to enforce the purported final award citing, among others, the absence of an arbitration clause in the original pact. ²⁶ Further, this award was issued despite the prior revocation of Stampa’s appointment as an arbitrator by the Superior Court of Justice of Madrid. In this regard, Stampa has since been found guilty of contempt of court. It was later found that a UK global litigation fund had funded the arbitration²⁷ but did not disclose the same at the material time²⁸.

Despite Malaysia’s experience above, TPF is not all evil. If regulated well with, among others, full disclosure and accountability, TPF will prove to show more benefits than harm.

In this regard, various amendments have been incorporated in the Amendment Act to legalise and regulate TPF in Malaysia. This has culminated in the inclusion of an entire chapter in the Arbitration Act 2005 (“AA 2005”), known as Chapter 2 of Part 3. Our write-up on the Amendment Act (whilst it was in the form of Parliamentary Bills) can be read here²⁹.

Pursuant to Section 46D of the amended AA 2005, the Minister in the Prime Minister’s Department (Law and Institutional Reform) has subsequently issued the Code of Practice for Third Party Funding 2026 (“Malaysian Code”) which came into operation on 1 January 2026. Our write-up on the key aspects of the Malaysian Code can be read here³⁰.

The Regulatory Approach of TPF in Malaysia and its Advantages

The legalisation and regulation of TPF in Malaysia ensures greater access to justice for parties, as it allows parties to pursue claims in arbitrations which they would otherwise not be able to pursue due to their financial constraints or lack of support and expertise.

A reading of the Amendment Act and the Malaysian Code (or our two write ups referred to above) shows that Malaysia has adopted a light-touch approach in regulating TPF, as opposed to other approaches in other jurisdictions such as self-regulation (the UK) and strict regulation (previously in Australia) which may be more prescriptive in nature.

The light-touch approach is evident from the provisions of the Malaysian Code and the amendments made to the AA 2005 under the Amendment Act. Section 46E and 46I of the amended AA 2005 and Clause 4 of the Malaysian Code in fact protects the funder even if there is non-compliance with the Malaysian Code or Sections 46F, 46G and 46H of the amended AA 2005. These provisions, taken together, expressly provide that any non-compliance with the Malaysian Code or Sections 46F, 46G and 46H of the amended AA 2005 does not in itself render the third-party funder liable to any action or legal proceedings. However, such non-compliance may be taken into account by any arbitral tribunal or court if it is relevant to a question being decided.

Thus, even if there is clear non-compliance by the funder or a party, it appears that there will be no real consequences to funders personally, apart from their liability for costs, which is already a natural consequence. While this may sound like the funders are let off scot-free, there appears to be an underlying rationale behind this.

Malaysia is a jurisdiction which has deemed TPF arrangements as illegal for numerous decades now. To then legitimise it with various prescriptive or restrictive regulations along with serious consequences for any breaches could be seen as defeating the purpose of introducing TPF in Malaysia in the first place. Prescriptive regulations and the prospect of serious consequences could make funders hesitant and potentially deter them from funding arbitrations seated in Malaysia.

In line with the amended AA 2005, the Asian International Arbitration Centre (“AIAC”) has updated its suite of rules by introducing the AIAC Arbitration Rules 2026 (“2026 AIAC Rules”) and the AIAC i-Arbitration Rules 2026 (“2026 AIAC i-Rules”). The 2026 AIAC Rules and the 2026 AIAC i-Rules incorporate a new provision on TPF at Rule 31 . According to Rule 31.1 of the 2026 AIAC Rules and Rule 31.2 of the 2026 AIAC i-Rules, it is mandatory for a funded party to communicate in writing the existence of a TPF agreement and the identity of the funder to the Arbitral Tribunal, other parties to the arbitration and the AIAC. Further, Rule 31.4 of the 2026 AIAC Rules and Rule 31.5 of the 2026 AIAC i-Rules provide that the Arbitral Tribunal may take into account any TPF agreement, including compliance or non-compliance of disclosure obligations under Rule 31 of the 2026 AIAC Rules and the 2026 AIAC i-Rules, as applicable, in the issuance of an order, award or final award, or the apportionment of costs. Further, in the case of the 2026 AIAC i-Rules, Rule 31.1 stipulates that, unless provided otherwise by relevant law or an order of any court of competent jurisdiction, a TPF agreement must be compatible with Shariah principles, and Rule 31.2 requires the funded party to disclose guidance on the application of Shariah principles.

As discussed above, the self-regulation approach in the UK also has its challenges. In addition, as there is no mandatory obligation for funded parties in the UK to disclose the funding or funder - disclosure is voluntary and if done, is as a matter of good practice. This raises concerns about transparency and conflict of interest. Further, after the PACCAR decision, stakeholders and funders are left in uncertainty and as a result, parties to TPF agreements in the UK may opt to renegotiate their agreements and fee structures to avoid being caught by the definition of DBA. It is interesting to note that unlike in Malaysia, TPF is not limited to arbitration in the UK, Australia, Singapore and Hong Kong, but applies to certain types of court proceedings, e.g. insolvency related.

In comparison to other jurisdictions like Australia (previously) and the UK, it is arguable that the light-touch approach in Malaysia encourages flexibility and efficiency by allowing the industry to innovate and adapt to various circumstances quickly, while providing the fundamental framework (Malaysian Code) needed to achieve the main object of ensuring access to justice. The amended AA 2005 and Malaysian Code provide the needed regulations by requiring mandatory disclosure, restricting funder’s control over the arbitral proceedings, prescribing provisions to address conflict of interest, stipulating requirements for funder’s capital adequacy, setting out the circumstances in which a TPF agreement may be terminated, and extent of application of TPF. This gives the necessary comfort to all parties - on one end flexibility, efficiency and ease for funders to fund arbitrations seated in Malaysia; and on the other, the necessary fundamental regulations to protect the parties and stakeholders.

The rationale of having a light-touch approach is clear - to give Malaysia a competitive edge and to promote Malaysia as an international arbitration hub and a preferred seat for international arbitrations. With this, it is hoped that the introduction of TPF will prove to be beneficial and that Malaysia will expand and grow as a preferred international arbitration hub.