SCOPE OF ARBITRATION LAWS IN PAKISTAN

Introduction

Arbitration is an alternative method of resolving disputes outside traditional court proceedings. In Pakistan, arbitration is governed by two main statutes — the Arbitration Act of 1940, which regulates domestic arbitration, and the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act of 2011, which deals with foreign arbitral awards.

In 2024, a draft Arbitration Bill was introduced to replace the outdated 1940 Act and align Pakistan’s arbitration framework with international best practices. However, this bill has not yet been passed by Parliament.

 

Domestic Arbitration

The Arbitration Act of 1940 governs domestic arbitration in Pakistan. It outlines three distinct forms of arbitration:

1. Without Court Intervention – Parties voluntarily agree to refer a dispute to arbitration without involving the court.

2. With Court Intervention (Where No Suit is Pending) – A party may apply to the court to compel the other party to comply with an arbitration agreement.

3. In Suits (Through Court) – During ongoing litigation, the court can refer the matter to arbitration if deemed appropriate.

 

Key Features of the Arbitration Act, 1940

The 1940 Act sets out several important principles for domestic arbitration:

• Written Agreement:
  The arbitration agreement must be in writing for it to be valid.

• Appointment of Arbitrators:
  If the agreement does not specify the number of arbitrators, a sole arbitrator is presumed. When parties fail to appoint one, the court may do so.

• Award and Enforcement:
  The decision of the arbitrator, known as the “award,” is not automatically enforceable. It must be filed in a civil court, which then issues a judgment and decree to make it binding.

• Limited Grounds for Challenge:
  An award can only be challenged on specific grounds, such as misconduct by the arbitrator or if the award was obtained improperly.

• Waiver:
  A party loses the right to arbitration if it participates substantially in court proceedings (for example, by filing a defense).

• Interim Relief:
  While arbitrators can grant interim relief, parties often seek such measures from courts for better enforceability.

 

Judicial Intervention and Criticism

The Arbitration Act of 1940 has been widely criticized for allowing excessive judicial interference. Courts can intervene at almost every stage—appointment of arbitrators, proceedings, award challenges, and enforcement.

This judicial oversight often results in delays, high costs, and reduced efficiency, undermining the very purpose of arbitration as a speedy dispute resolution mechanism. Consequently, there is broad consensus that Pakistan’s arbitration law requires modernization.

 

International Arbitration

International arbitration in Pakistan is primarily governed by two statutes enacted in 2011:

1. Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011

   • Incorporates the 1958 New York Convention into domestic law.

   • Ensures that foreign arbitral awards from Convention member states are recognized and enforced by Pakistani courts.

2. Arbitration (International Investment Disputes) Act, 2011

   • Implements Pakistan’s obligations under the ICSID Convention (International Centre for Settlement of Investment Disputes).

   • Provides for enforcement of investment arbitration awards involving foreign investors.

 

Enforcement of Foreign Awards

Under the 2011 Act, foreign arbitral awards can be enforced in Pakistan through the relevant High Court. Enforcement may only be refused on limited grounds specified in Article V of the New York Convention, including:

• The arbitration agreement was invalid under the applicable law.

• A party was not given proper notice or was unable to present its case.

• The award exceeded the scope of the arbitration agreement.

• The arbitral procedure was inconsistent with the parties’ agreement.

• Enforcement would violate Pakistan’s public policy.

If no valid objection is found, the foreign arbitral award is recognized and enforced as a decree of the court, making it legally binding within Pakistan.

 

Arbitration (International Investment Disputes) Act, 2011

This Act provides for the enforcement of awards made under the ICSID Convention. It applies primarily to investment disputes between Pakistan and investors from other member states.

Awards rendered by ICSID tribunals are directly enforceable in Pakistan and carry the same weight as a judgment of a High Court. This ensures that Pakistan fulfills its international commitments to foreign investors and upholds the rule of law in investment matters.

 

Proposed Reforms – The Arbitration Bill, 2024

To address the shortcomings of the 1940 Act, the Arbitration Law Review Committee submitted a draft Arbitration Bill in May 2024. The new legislation seeks to modernize Pakistan’s arbitration framework by aligning it with the UNCITRAL Model Law on International Commercial Arbitration.

The key reforms proposed in the draft bill include:

• Reducing Judicial Intervention: Limiting the role of courts to essential procedural assistance and enforcement.

• Enhancing Party Autonomy: Allowing parties greater control over procedure, choice of arbitrators, and seat of arbitration.

• Clarifying Arbitrator Appointment: Establishing transparent procedures for appointment and challenge of arbitrators.

• Improving Enforcement Mechanisms: Making arbitral awards directly enforceable without unnecessary court proceedings.

• Differentiating Domestic and International Arbitration: Introducing separate provisions tailored to each type.

 

Benefits of Modernization

The proposed reforms offer several advantages for Pakistan’s legal and business environment:

• Increased efficiency and speed in dispute resolution.

• Greater investor confidence and commercial certainty.

• Reduced court backlog through alternative dispute resolution.

• Better alignment with international standards such as the UNCITRAL Model Law and the New York Convention.

• Potential for Pakistan to become a regional arbitration hub for South Asia and the Middle East.

 

Challenges Ahead

Despite these positive developments, several challenges remain:

• Delay in parliamentary approval of the new bill.

• Need for training and accreditation of professional arbitrators.

• Judicial resistance to limiting court authority.

• Lack of institutional infrastructure, such as dedicated arbitration centers.

• Need for increased public and professional awareness about arbitration mechanisms.

 

Conclusion

Pakistan’s arbitration framework operates on a dual system — domestic arbitration governed by the 1940 Act and international arbitration governed by the 2011 Acts. While the current system provides a legal basis for arbitration, the domestic law remains outdated and inconsistent with global practices.

The 2024 Arbitration Bill represents a crucial step toward reform by introducing a modern, efficient, and internationally aligned legal framework. Its enactment would enhance Pakistan’s credibility as a destination for foreign investment and commercial dispute resolution.

Modernizing arbitration law is essential not only for improving access to justice but also for strengthening Pakistan’s economy and legal system in a globalized world.