[COLUMNIST]: First look at Malaysia's Third-Party Funding Bill

KUALA LUMPUR : The Minister for Law and Institutional Reform, Datuk Seri Azalina Othman Said, presented the Arbitration (Amendment) Bill to Parliament for the first reading on 15 July 2024. The amendment's crucial aspect is the introduction of third-party funding in the arbitration sector.

Third-party funding offers significant benefits, particularly in terms of access to justice. Third-party funding ensures that justice is not reserved solely for those with deep pockets by enabling parties who may lack the financial resources to pursue their claims. This development positions Malaysia's arbitration sector on par with leading arbitral jurisdictions such as Singapore and Hong Kong, enhancing its attractiveness as a regional arbitration hub.

Legally, third-party funding of a dispute resolution, be it litigation or arbitration, is prohibited by law through the doctrine of maintenance and champerty. The modern definition of maintenance is giving financial assistance to a party in dispute by someone who has no particular interest in the action. Champerty is an aggravated form of maintenance whereby the financial assistance given to a party in a dispute is on consideration for a share of the proceeds in the event the claim is successful.

The doctrine of maintenance and champerty originated in medieval England. The origin has been lost in time, with the only recorded statutory history of the doctrine being in the Statute of Westminster in 1275, and all the previous encounters of the doctrine being in the common law. The English Courts understood that the origin of the doctrine was due to the medieval English courts being subjugated to the whims of barons, where they would buy a weak claim and subsequently using their power and wealth to turn it into a strong one.

Malaysia adopted this doctrine through the Civil Law Act 1956, even though the rationale for its emergence was never present in the federation. The attitude of the Malaysian judiciary has been unyielding, confirming that the doctrine of maintenance and champerty is part of the law of this country. The amendment to the Arbitration Act is, thus, a breath of fresh air to the legal landscape in Malaysia.

The Arbitration (Amendment) Bill proposed to introduce, among other things, Chapter 2 on third-party funding. It starts with definition sections to be inserted in the proposed s.46A. The Bill proposed that all third-party funding agreements must be in writing. A notable definition is of what is considered a "funded party," whereby the Bill defined it as a person who was or is a party or likely to be a party. This indicates that both the claimant and the respondent can be the funded party.

The proposed s.46C is intended to abolish the application of the doctrine of maintenance and champerty in relation to third-party and the agreement to provide funding shall not be treated as contrary to public policy. This section needs to be clarified as to whether the doctrine is abolished only in arbitration or beyond that. The explanatory statement to the Bill stated that the abolishment is only within the arbitration sector.

Even so, the provision is also unclear if it is intended only to abolish the application of the doctrine in international arbitration, as Singapore did, or both domestic and international arbitration, as Hong Kong did. Perhaps it would be better if the provision was amended to express a clear scope of the abolishment.

The Bill subsequently proposed that the Minister issue a Code of Practice aimed at third-party funders (s.46D). This Code of Practice, however, is not mandatory. Non-compliance with the Code of Practice will not make the third-party funder legally liable but will be considered by the arbitral tribunal or the court if it is relevant to the question to be determined.

Singapore's regulations for third-party funding are mandatory, and the funder might lose their rights under the third-party funding agreement. Hong Kong, on the other hand, has a similar non-mandatory nature.

The Code of Practice may provide the extent of control that the third-party funder can exert on the proceedings (s.46D(2)(b)). While it is commendable that this point captures the attention of lawmakers, since the Code of Practice is not mandatory, the point of control of proceedings might not place much emphasis on party autonomy in arbitration. Since the funder is only 'ordinarily expected to comply' with any requirements to limit control, they might exert more control on the arbitration proceeding to ensure a positive return on their 'investment'. This would curtail the principles of party autonomy. The law should not risk the third-party funder to overshadow the arbitral proceedings.

The Code of Practice may also provide for the requirements to be a third-party funder in the form of minimum capital they should have. This is akin to the Singaporean version of the regulation whereby it is required there that the third-party funder must have not less than SGD 5 million in paid-up share capital or the same amount in managed assets. Hong Kong regulations set the minimum capital to be HKD 20 million.

The Bill indicated that the principle of confidentiality, a feature in arbitration, is slightly relaxed (s.46F). Prospective party to the arbitration may disclose requisite information relating to the arbitration to the prospective third-party funder. This is vital for the third-party funder to assess the merits of the case. In the usual funding process, the third-party funder will conduct their due diligence to determine whether the case has merits to ensure they don't invest in vexatious claims.

The Bill further requires any funded party to disclose the third-party funding agreement and the identity of the third-party funder to the other party and the arbitral tribunal or before the court in related proceedings (s.46G). The extent of what should be disclosed with respect to the agreement's content needs to be clarified. Perhaps this could be a point to consider inserting in the Code of Practice.

If the third-party agreement is made before the arbitral proceedings, it is mandatory to make such disclosure at the start of the proceedings (s.46G(2)(a)). However, if it is made after the commencement of the arbitral proceedings, the disclosure must be made within 15 days of the date the third-party funding agreement is made (s.46G(2)(b)). Disclosure of termination of the third-party funding agreement is also mandatory and must be done within 15 days of the date of termination (s.46H).

This proposed Bill is a welcome amendment to the arbitration industry. Third-party funding, an innovative financial tool in arbitration, has been legal in many jurisdictions and contributed to the industry's competitive edge in Singapore and Hong Kong. However, the move to legalize third-party funding must be coupled with clear safeguards to ensure the integrity of the arbitral proceedings is protected and that no party falls victim to unethical practices in third-party funding. We don't want another Sulu Arbitration Case!

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Mu'iz Razak is a UiTM Law Lecturer who is pursuing his Ph.D. in Third-Party Funding in Arbitration for his PhD at the College of Law, Australian National University.