The Code of Practice for Third Party Funding 2026
29 January 2026
Introduction
The Arbitration Act 2005 (“AA 2005”) was amended by the Arbitration (Amendment) Act 2024 to introduce a statutory framework for third party funding in arbitration Malaysia, recognising third party funding as a permissible means of financing arbitration proceedings. The amendments came into force on 1 January 2026.
Pursuant to Section 46D of the AA 2005, the Minister in the Prime Minister’s Department (Law and Institutional Reforms) has issued the Code of Practice for Third Party Funding 2026 (“Code”) which came into operation on 1 January 2026.
This article provides an overview of the key aspects of the Code that parties considering third party funding in arbitration should be aware of.
| 1. |
What is the purpose of the Code? |
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The Code sets out the ethical practices and standards with which third party funders are ordinarily expected to comply when providing third party funding in arbitration proceedings.
The Code is to be read together with Chapter 2, Part III of the AA 2005 in relation to third party funding in arbitration 1. |
| 2. |
To whom does the Code apply? |
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The Code applies to all third party funders and third party funding arrangements under the AA 2005 where the third party funding agreement is made on or after the commencement of Chapter 2, Part III of the Act 2 (which was on 1 January 2026).
It applies not only to the third party funder itself, but also extends to the funder’s subsidiaries, associated entities, and any investment advisers acting as agents, for whom the third party funder must accept responsibility for compliance 3. |
| 3. |
What is “third party funding” and who is a “third party funder” under the Code”? |
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The terms “third party funder” and “third party funding” are defined under the Code. These definitions are consistent with the definitions under Section 46A of the AA 2005.
"Third party funding” refers to an arrangement where a third party funds all or part of a party’s arbitration costs and expenses in return for a financial benefit payable only if the arbitration is successful 4.
A “third party funder” is a person who provides such funding under a written third party funding agreement and who has no legal interest in the arbitration other than the rights arising under that agreement 5.
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| 4. |
What is the legal effect of non-compliance with the Code? |
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Non-compliance with the Code does not, in itself, render a third party funder liable to legal action or proceedings.
However, any compliance or non-compliance with the Code may be taken into account by an arbitral tribunal or court, where such compliance or non-compliance is relevant to an issue under consideration 6. |
| 5. |
What are the key requirements relating to third party funding agreements? |
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The Code prescribes minimum matters that must be addressed in a third party funding agreement 7. These include:
- the name and contact details of the third party funder;
- the amount of funding to be provided;
- the agreed financial benefit payable to the third party funder;
- a neutral, independent and effective dispute resolution mechanism for disputes arising out of the funding agreement; and
- all other matters required under Chapter 2, Part III of the AA 2005 and the Code.
The other matters required under Chapter 2, Part III of the AA 2005 and the Code are, amongst others, as follows:
- The third party funding agreement must clearly state the extent of the third party funder’s liability in respect of8:
- adverse costs orders;
- premiums to obtain costs insurance (including insurance premium tax);
- provision of security for costs; and
- any other financial liabilities arising from the arbitration.
- Third party funders must further take reasonable steps to ensure that the funded party is informed, in writing, of its right to obtain independent legal advice, and must provide a reasonable opportunity for such advice to be obtained prior to execution of the funding agreement9.
- The funded party must disclose the fact that a third party funding agreement has been made and the name of the third party funder to the other party to the arbitration and to the arbitral tribunal or the court, as the case may be. Such disclosure must be made upon the commencement of the arbitration or related court proceedings if the funding agreement was entered into on or before commencement, or within 15 days after the funding agreement is made if it is entered into after commencement. Where no arbitral tribunal has been appointed at the relevant time, disclosure to the tribunal must be made immediately upon its appointment10.
- The funded party must disclose the termination or expiry of a third party funding agreement, and the date of such termination or expiry, to the other party to the arbitration and to the arbitral tribunal or the court, as the case may be. This disclosure must be made within 15 days after the third party funding agreement is terminated or has come to an end11.
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| 6. |
Are there capital adequacy requirements for third party funders? |
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Yes. The Code introduces specific capital adequacy requirements, including an obligation for third party funders to maintain access to a minimum of RM10 million in capital (or its foreign currency equivalent) 12.
Third party funders must also maintain access to adequate financial resources to meet its obligations, its subsidiary and associate entity, which include the capacity to:
- pay all debts as they fall due and payable; and
- cover aggregate funding liabilities under all funding agreements for a minimum period of 36 months.
Third party funders are subject to a continuous disclosure obligation as to its capital adequacy, and must notify the funded party expeditiously if they reasonably foresee that they may no longer satisfy the capital adequacy requirements. Annual audits by a nationally or internationally recognised audit firm are also required.
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| 7. |
How does the Code address conflicts of interest? |
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The Code requires third party funders to maintain effective procedures to detect and resolve conflicts of interest arising from their funding activities 13.
These effective procedures shall include:
- monitoring its operations to identify and assess potential conflicts of interests and effectively detecting and resolving any conflicting interest;
- disclosing and resolving conflicts to the funded party both prior to concluding the third party funding agreement and during the funding relationship;
- protecting the interests of the funded party; and
- reviewing the compliance of the third party funding agreement with the Code and the Chapter 2, Part III of the AA 2005.
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| 8. |
Are there restrictions on third party funders’ control over arbitral proceedings? |
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The Code expressly prohibits a third party funder from controlling or seeking to influence the conduct or settlement of the arbitral proceedings 14.
The Code does not define the nature or extent of “control” or “influence” for these purposes. As such, the scope of a third party funder’s involvement is likely to be tested and developed through arbitral practice and judicial consideration.
Third party funders must also refrain from taking any action that causes, or is likely to cause, the funded party’s legal representatives to act in breach of their professional duties.
However, the Code expressly preserves the right of third party funders to conduct appropriate due diligence before entering into a third party funding agreement or during the arbitral proceedings 15. This may include analysis of the applicable law, facts, witnesses, costs, and progress of the proceedings. |
| 9. |
When may a third party funding agreement be terminated? |
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A third party funder may terminate a funding agreement only in limited circumstances, including where it reasonably believes that 16:
- the funded party is unlikely to succeed on the merits of the arbitral proceedings;
- there has been a material adverse change in the prospects of the funded party’s success or recovery; or
- the funded party has committed a material breach of the funding agreement.
Where termination occurs, the third party funder shall remain liable for funding obligations accrued up to the date of termination, except where termination is due to a material breach by the funded party.
The funded party is likewise entitled to terminate the agreement where it reasonably believes that the funder has committed a material breach of the third party funding agreement.
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| 10. |
What does the Code require in relation to complaints by funded parties? |
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The Code requires a third party funder to maintain proper procedures to investigate, address and remedy complaints raised by a funded party in relation to the third party funding agreement 17.
In addition, the third party funder must take reasonable steps to inform the funded party, in writing, of its complaints procedures on or before the third party funding agreement is made. |
Conclusion
When the Arbitration (Amendment) Bill 2024 was passed by the
Dewan Rakyat (House of Representatives) and the
Dewan Negara (Senate) on 16 and 24 July 2024 respectively, the statutory recognition of third party funding in Malaysia was widely welcomed as a step towards modernising the arbitration framework and enhancing Malaysia’s attractiveness as a seat of international arbitration.
As previously observed, the arbitral community looked forward to the issuance of Code to facilitate the introduction of the game-changing third party funding provisions.
Therefore, the Code is a welcome development that provides more certainty to the third party funding regime. By setting out ethical standards and minimum requirements for funding arrangements, the Code reflects a balanced approach that promotes access to justice and commercial flexibility while safeguarding arbitral integrity and transparency.
Article by Loshini Ramarmuty (Partner) and Katelyn Yeoh (Associate) of the Construction Litigation and Arbitration Practice of Skrine.
1 Section 2(1) of the Code.
3 Section 5(1) of the Code.
4 Section 2(2) of the Code.
5 Section 2(2) of the Code.
8 Section 13 of the Code.
10 Section 46G of the Act.
11 Section 46H of the Act.
12 Section 9 of the Code.
13 Section 10 of the Code.
14 Section 12 of the Code.
15 Section 16 of the Code.
16 Section 14 of the Code.
17 Section 15 of the Code.
This article/alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.