THIRD-party funding (TPF) is the funding by an external party of a litigant’s costs for arbitration proceedings. Funding is typically provided by specialised funders or insurers, in return for a share of the settlement or damages, if the litigant is successful. The enactment of the Arbitration (Amendment) Act 2024 sees the introduction of a formal framework governing TPF in domestic and international arbitrations, where any services related to the arbitration are provided in Malaysia, even if the seat of arbitration is outside Malaysia.
The Arbitration (Amendment) Act introduces a structured framework for TPF agreements emphasising legitimacy, transparency, and regulation. The Act states, amongst others, that:
0 TPF agreements may cover the “costs or expenses of the arbitration”, which includes any costs or expenses incurred prior to the commencement of the arbitration or during the arbitral proceedings or the court proceedings relating to the arbitration.
0 The common law rule against maintenance and champerty shall cease to apply to the TPF and such agreements shall not be treated as contrary to public policy; and
0 The Act sets out the disclosure requirements for such agreements which include requirements to disclose the existence of a TPF agreement and the identity of the funder to assess any potential conflicts of interests to facilitate transparency.
This shift signals the end of Malaysia’s long-standing position on the torts of maintenance and champerty – both traceable to English common law and deemed contrary to public policy. Maintenance occurs when a third party, with no prior interests in the proceedings, maintains or aids a litigant to prosecute or defend an action. Champerty is a form of maintenance wherein an action is funded in exchange for a reward or portion of the proceeds of litigation.
These specialised funders, often financial firms or insurers, provide financial assistance on a contingency or success-based model and are invaluable to levelling the playing field in David versus Goliath scenarios where a litigant with little means comes up against a defendant with extensive resources and deep pockets. TPF may balance the scales, ensuring the financial backing of everyday Goliaths do not outlast, overpower or pressure the Davids into submission. It holds larger corporations and well-funded entities accountable and discourages them from using financial dominance over entities or individuals with lesser means, for example, tech startups defending their patents from a dominant tech conglomerate; a subcontractors enforcing payment claims against a main contractor; and a minority shareholder challenging the unfair practices of the majority.
TPF agreements also allow litigants to mitigate financial risks by transferring the costs and risks to an external funder and reducing their own upfront expenditure and exposure to losses with minimal disruption to everyday workflow. Contextually, such agreements would allow a small business(es) involved in protracted legal proceedings to avoid dipping into its working capital or exhausting other financial reserves. Incidentally, this financial safety net may also result in parties being less inclined to settle and may encourage a more robust and drawn-out pursuit of claims.
TPF agreements are often bespoke, highly customisable and complex, with terms tailored to meet the litigant’s specific needs. For example, rather than relying on a single funder, agreements may cater to multiple funders at varying stages of the proceedings, with the funders’ returns and contributions aligned to their expertise and the case’s requirements. This model however brings its own set of challenges as it requires careful coordination between the parties to prevent misalignment of expectations on the outcome, timelines, or strategies of the case. The involvement of multiple funders raises concerns about funders potentially influencing case strategy and prioritising profit over the best interests of the litigant. Without adequate safeguards, there is a risk that disputes may shift from being justice-driven to being investment-driven.
Whilst the introduction of TPF into arbitration proceedings marks a significant shift in the alternative dispute resolution scene in Malaysia, its newness brings both promise and uncertainty, expanding access to justice and providing a lifeline to smaller entities but at the potential cost of unfamiliar complexities. As parties navigate this evolving landscape, it is imperative to seek legal consultation to ensure fair and equitable resolution of disputes that remains justice-driven, not investment driven.
This article is contributed by Praveen Abraham & Sivaram Prasad of Christopher & Lee Ong (www.christopherleeong.com).
