Most commercial contracts in Pakistan contain an arbitration clause and most people signing them have never read it. It is the clause that decides, before any dispute exists, where a dispute will be fought, by whom, under what rules and how quickly — which makes it one of the most consequential paragraphs in the document.
The governing law
Domestic arbitration in Pakistan runs under the Arbitration Act, 1940 — an old statute, still in force, and considerably more court-supervised than modern arbitration laws elsewhere.
For arbitrations with a foreign element there are two further pieces:
- The Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011, which gives effect to the New York Convention in Pakistan.
- The Arbitration (International Investment Disputes) Act, 2011, for ICSID awards.
The 2011 Act matters enormously in practice: it is what makes a foreign arbitral award enforceable in Pakistan, and what makes a Pakistani party's agreement to arbitrate abroad meaningful. A foreign court judgment enjoys no comparable route.
What the clause does to your right to sue
If you have agreed to arbitrate and you nevertheless file a civil suit, the other side can apply to have the proceedings stayed and referred to arbitration. Under the 1940 Act a stay is discretionary on defined grounds; under the 2011 Act, for a Convention agreement, referral is close to mandatory unless the agreement is null and void, inoperative or incapable of being performed.
So the clause is not decorative. It removes the court as your first forum.
Arbitration or court — choosing honestly
Arbitration suits commercial disputes between businesses, matters needing technical expertise (construction, engineering, IT), disputes where confidentiality matters, and above all cross-border contracts, where an award is far more portable than a judgment.
Court is better for small claims, where the cost of arbitrators and a venue swallows the claim; where you need urgent coercive relief against a stranger to the contract; where the other party has no assets and enforcement is the real problem anyway; and where there is a serious allegation of fraud.
Be honest about cost. Arbitration is not cheap: the parties pay the arbitrators, the venue and the institution. It is faster and more private, not less expensive.
Drafting a clause that works
Badly drafted clauses generate a preliminary fight about the clause itself, which is precisely what arbitration was meant to avoid. A workable clause states:
- Scope — "any dispute arising out of or in connection with this contract". Narrow wording invites arguments about whether this dispute qualifies.
- Number and appointment of arbitrators. One is cheaper and faster; three is usual for large matters. Say how they are appointed and who appoints if a party refuses — the commonest deadlock is a respondent who simply will not nominate.
- Seat and venue. The seat determines the supervising court and the procedural law; the venue is only where hearings are held. Naming a city without saying it is the seat is a recurring drafting failure.
- Governing law of the contract, stated separately from the seat.
- Language.
- Rules — ad hoc under the 1940 Act, or an institution's rules. Institutional rules solve appointment, timetable and default problems that an ad hoc clause leaves you to litigate.
- Time limits for the award, where you want them.
How an award is enforced — and challenged
Under the 1940 Act the award is filed in court, and the court pronounces judgment in its terms unless it is set aside. The grounds for setting aside are narrow: misconduct of the arbitrator or the proceedings, an award made after the authority was superseded, or an award otherwise invalid. Dissatisfaction with the outcome is not a ground, and applications that amount to a re-argument of the merits fail.
A foreign award is enforced under the 2011 Act, and the grounds for refusal are the Convention grounds — invalid agreement, lack of notice or inability to present a case, matters beyond the scope of the submission, irregular composition of the tribunal, an award not yet binding or set aside at the seat, non-arbitrability, or public policy.
Note the limitation periods at every stage. They are short, and an award unchallenged in time becomes a decree.
Practical advice
- Read the clause before signing, not when the dispute starts. It is far easier to negotiate then.
- For a contract with a foreign counterparty, prefer arbitration with a named seat. A New York Convention award is enforceable in over 170 countries; a Pakistani decree, in practice, is not.
- Do not accept a seat you cannot afford to litigate in merely because it was in the draft.
- Keep the contract, the notice of dispute and the correspondence in order. Arbitration is a documents exercise before it is anything else.
- Take advice before filing a suit where a clause exists — a stay application will cost you months and the costs of it.
This article describes the general framework of arbitration law in Pakistan and is not advice on any particular contract or dispute. Whether a clause is enforceable, and how an award will be treated, depend on its wording, the seat and the facts. Have an arbitration clause drafted or reviewed by an advocate before you sign.