Written by Syazrinie Jalil
Introduction
The Arbitration (Amendment) Bill 2024, passed by both the Dewan Rakyat and Dewan negara respectively, is a watershed moment in Malaysia’s legal landscape. This amendment introduces several key changes to the Arbitration Act 2005, including provisions for third-party funding (“TPF”) in arbitration. This modification brings Malaysia in line with other prominent jurisdictions such as Singapore and Hong Kong.
Under the 2024 Amendment, a new Chapter 2 in Part III is established to introduce new provisions, ie, Section 46A-I that provides a comprehensive framework for regulating TPF in Malaysia. The key elements and provisions under these sections include:
Key Elements of Third-Party Funding
- The Third-party Funder;
- The Funded Party; and
- The Third-party Funding Agreement.
Key Provisions of Third-Party Funding
- Disclosure Requirements: Parties must disclose the existence of a TPF arrangement and the identity of the funder. This ensures transparency and allows the tribunal to assess any potential conflicts of interest.
- Code of Practice: A code of practice may be established by the Minister to regulate the conduct of third-party funders. This code will set out the standards and ethical guidelines that funders must adhere to, ensuring the integrity of the funding process.
Understanding Third-Party Funding
Third-party funding (“TPF”) is a financial arrangement where an entity not involved in the arbitration finances the legal costs of one of the parties. In return, the funder receives a fee, or a portion of the damages awarded if the funded party wins the case. This mechanism allows parties with strong legal claims but limited financial resources to pursue their cases without bearing the full financial risk.
History
Previously, the doctrines of maintenance and champerty have played a crucial role in shaping the legal landscape governing third-party involvement in litigation or arbitration. Maintenance refers to the improper support of litigation by a third party with no legal stake in the case, while champerty involves such assistance in exchange for a portion of the lawsuit proceeds. These doctrines were established to prevent frivolous lawsuits and the potential for abuse by affluent individuals who might otherwise finance litigation for personal gain. As in the Malaysian High Court case of Amal Bakti Sdn Bhd & Ors v Milan Auto (M) Sdn Bhd & Ors, Hamid Sultan JC held that “it is trite that court will not entertain champerty agreements or its like on public policy grounds …”.
On top of that, the recent Malaysian-Sulu arbitration proceeding has also brought an attention to the issue of third-party funding. In this case, the purported heirs to the Sultan of Sulu sought compensation from Malaysia, with their legal action being funded by a third-party funder, Therium Capital Management Ltd. However, the lack of full disclosure regarding the funding arrangement aroused concerns, highlighting the need for regulatory measures to ensure transparency and accountability in TPF agreements.
Hence, in modern legal contexts, this new amendment eliminates the previous doctrine as well as establishing a comprehensive framework for TPF, assuring transparency and integrity through statutory disclosure requirements and a code of practice. This reform is expected to improve access to justice and foster a more equitable arbitration process in Malaysia.
Benefits of Third-Party Funding
The introduction of TPF in Malaysian arbitration brings several benefits:
- Access to Justice: TPF enables parties with strong legal claims but limited financial resources to pursue their cases. This encourages access to justice and ensures that genuine claims are not abandoned due to financial constraints.
- Risk Management: By shifting the financial risk to the funder, parties can manage their case risks more effectively.
- Balance Playing Field: TPF can help balance the playing field in arbitration by providing financial support to parties who might otherwise be at a disadvantage. This ensures a more fair and just arbitration process.
Challenges and Considerations
While TPF offers numerous benefits, it also presents certain challenges and considerations:
- Conflict of Interest & Confidentiality: The involvement of a third-party funder may give rise to potential conflicts of interest and raise concerns about confidentiality, as sensitive information about the case may need to be shared with the funder.
- Control and Influence: There is a risk that funders may seek to exert control or influence over the arbitration proceedings. The regulatory framework and code of practice aim to mitigate this risk by setting out clear guidelines for funders’ control.
Conclusion
The introduction of third-party funding in Malaysian arbitration is a significant step in enhancing access to justice and promoting a more equitable arbitration process. The comprehensive regulatory framework established by the Arbitration (Amendment) Bill 2024 ensures transparency, integrity, and effective management of TPF arrangements. As Malaysia continues to develop as a regional arbitration centre, the availability of TPF will undoubtedly play a crucial role in shaping the future of arbitration in the country.
The full Arbitration (Amendment) Bill 2024 can be accessed here.
Published on 25 September 2024