MALAYSIA: CODE OF PRACTICE FOR THIRD-pARTY FUNDING

On 1 January 2026, Malaysia's Code of Practice for Third-Party Funding 2026 (CoP) entered into force together with TFP-related amendments to the Malaysian Arbitration Act 2005 (MAA) and the 2026 AIAC Arbitration Rules bringing a new era of arbitration finance to this emerging ADR-hub.

Described by YB Dato' Sri Azalina Othman Said, Minister in the Prime Minister's Department as an integral part of a 'gentleman's strategy' to regulating TPF, the CoP seeks to provide the necessary guidance to all stakeholders on funding requirements and practices in Malaysia.

What are the salient features?

CAPITAL ADEQUACY AND AUDITING REQUIREMENTS

To give effect to the MAA, s. 46D, the CoP set out the minimum capital requirement a third party funder must continuously satisfy. At present, the CoP requires a funder to 'maintain access to a minimum of ten million ringgit [~ USD 2,45 mln] or the equivalent amount in foreign currency' (s. 9(1)).

Further, a funder shall maintain 'adequate financial resources' to cover liabilities under all TFP agreements for a minimum period of three years (s. 9(2)(b)). To ensure compliance with the capital adequacy requirements, the CoP imposes a lasting disclosure obligation on a funder and requires the funder to undertake annual audits.

THIRD-PARTY FUNDING AGREEMENT: TERMS, EXECUTION, TERMINATION

The CoP outlines the essential terms of a third-party funding agreement: (a) the name and contact details of the funder; (b) the amount of funding to be provided; (c) the agreed financial benefit for the funder; (d) 'a neutral, independent and effective dispute resolution mechanism' to resolve disputes under the third-party funding agreement' (s. 8).

A TPF agreement shall also state 'the extent of liability of the third party funder', inter alia, for: (a) any adverse costs decisions and (b) security for costs (s. 13). The funder shall provide a funded party 'a reasonable opportunity to seek independent legal advise on the terms' of the TPF agreement (s. 7).

Given that pulling out of funding may negatively impact the funded party's access to justice, the CoP seeks to limit the grounds for termination of the TPF agreement by a funder. To wit, the funder is entitled to terminate the TPF agreement only if it reasonably believes that: (a) a funded party is unlikely to succeed on the merits of the claim; (b) there has been a material adverse change of the prospects of success, or (c) the funded party has materially breached the TPF agreement.

It is worth nothing that the funder 'shall remain liable to all funding obligations accrued to the date of the termination', except where the termination is based on the funder's reasonable belief in a funded party's material breach of the TPF agreement.

ETHICAL CONSIDERATIONS

The CoP seeks to address two core ethical issues that are typically associated with TPF arrangements: (a) the conflicts of interest and (b) the control and influence of the funder over the proceedings. The CoP requires a funder to implement and maintain 'effective procedures to detect and resolve any conflicts of interests' (s. 10) and expressly prohibits the funder to 'control or seek to influence the funded party [or its counsel] to give conduct or settlement of the arbitral proceedings to the third party funder' (s. 12).

NON-COMPLIANCE WITH THE COP

The CoP makes it clear that 'any non-compliance' with the code shall not, per se, render a funder liable to 'any action or legal proceedings'. Ultimately, a funder's liability is a matter of the TPF agreement. However, the CoP expressly authorizes arbitral tribunals and/or competent courts to take into account the funder's non-compliance with any provision of the code, if such non-compliance is relevant to the issue put before them (e.g. decision on costs) (s. 4).