The Dawn of the New ERA

 In Pakistan's business environment, arbitration is quickly evolving from a frequently disregarded alternative to a vital component of conflict resolution. It is imperative that the nation update its arbitration framework in order to attract foreign investment and raise its ranking for ease of doing business. This Blog explores the opportunities and difficulties that characterize arbitration in Pakistan today, as well as the current legal system and the revolutionary new laws that are on the horizon.

The Existing Framework

The outdated Arbitration Act, 1940 (the "1940 Act") has served as the cornerstone of domestic arbitration in Pakistan for many years. The English Arbitration Act of 1889 served as the model for this colonial-era pre-partition law. While it served its purpose for a time, its limitations in the face of modern international commerce have become glaringly apparent.

Important Aspects of the 1940 Arbitration Act

The most significant critique of the 1940 Act is the broad scope it grants to the courts. Judges are allowed to intervene at multiple stages from the appointment of an arbitrator to the setting aside of an award on grounds that include an “error of law apparent on the face of the award”

The framework primarily caters to ad hoc arbitration, where the parties and the tribunal manage the process without the assistance of an established arbitral institution. Procedural ambiguities and delays may result from this.The 1940 Act is not based on the UNCITRAL Model Law, the global standard for international commercial arbitration, which has resulted in Pakistan's domestic regime being out of step with most international jurisdictions.

International Arbitration

Pakistan made a major step toward global alignment in international commercial arbitration, even though domestic law lagged:The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") was signed by Pakistan in 1958.The New York Convention's provisions were ultimately put into effect by this Act, which established a pro-enforcement framework for foreign arbitral awards.Due to this dual system, a purely domestic arbitration is still bound by the outdated 1940 Act, while the enforcement of a foreign arbitral award seated in a New York Convention state is governed by a contemporary, pro-arbitration law (the 2011 Act).

The Draft Arbitration Act, 2024

Pakistan's arbitration landscape is about to undergo a long-awaited legislative overhaul. Acknowledging the shortcomings of the 1940 Act, the government introduced the Draft Pakistan Arbitration Act, 2024 (the "Draft Act") through a special committee. This law represents a significant advancement in modernization.

The Draft Act's highlights

The Draft Act, which mainly draws from the UNCITRAL Model Law, is specifically intended to bring Pakistani laws into compliance with global best practices.

Feature	Old Regime (Arbitration Act, 1940)	New Regime (Draft Arbitration Act, 2024)	Impact
Foundation	Based on the outdated English Arbitration Act, 1889.	Based on the UNCITRAL Model Law.	Global alignment and increased predictability.
Judicial Intervention	Extensive, with grounds to set aside for "error of law on the face of the award."	Minimalistic and supportive, limited to procedural integrity (e.g., due process, public policy). Courts cannot review the merits of the award.	Upholds the finality of the award and speeds up the process.
Scope	Governs only domestic arbitration.	Aims to govern both domestic and international commercial arbitration seated in Pakistan.	Creates a unified, coherent legal framework.
Jurisdiction	Original jurisdiction often lies with lower-tier Civil Courts.	Original jurisdiction for domestic matters moves to District Courts, and for international commercial matters, to High Courts.	Ensures matters are heard by higher, more competent judicial forums, promoting efficiency.
Arbitrator Independence	Vague qualifications.	Extensive guidelines for independence and impartiality, inspired by the IBA Rules on Conflict of Interest.	Promotes transparency and trust in the arbitral process.

 The Draft Act's successful implementation is expected to:

By drastically curtailing the grounds for judicial review, it makes arbitration a final, not merely a preliminary, step.

It signals to the international business community that disputes will be resolved efficiently and predictably, under internationally recognized standards.

By promoting a more structured environment, it supports the development of local arbitral institutions.

Opportunities and Difficulties in the Modern Era

The current state of arbitration in Pakistan offers both opportunities for growth and challenges for practitioners, despite the exciting legislative progress.Enduring Difficulties

Judicial Reluctance and Training: Adopting the minimalist interventionist approach mandated by the New York Convention and the Draft Act presents a learning curve for the judiciary, which has historically been used to the supervisory role under the 1940 Act. The finality of awards has been compromised by judicial overreach in the past.Vagueness of "Public Policy": In the past, some courts have interpreted the NYC Act's "public policy" refusal ground broadly, which has resulted in awards being set aside on dubious grounds. Although the Draft Act makes an effort to limit this scope, judicial restraint is still crucial.

Underdeveloped Arbitral Institutions: Pakistan lacks robust, internationally recognized arbitration centers, forcing most complex international disputes to be seated abroad (e.g., Singapore, London).

Digital Divide: The existing laws do not explicitly cater to the nuances of Digital Arbitration or Online Dispute Resolution (ODR), which are becoming standard practice globally.

Opportunities for Growth

A "Pro-Enforcement" Judiciary: Recent landmark decisions by the superior courts, particularly the Supreme Court of Pakistan, have generally demonstrated a pro-enforcement bias in international arbitration cases, setting positive precedents for the future.

The Government as a Litigant: The Supreme Court has unequivocally held that when the government engages in commercial activities, it is not exercising sovereign power and must be treated on par with ordinary litigants, eliminating a potential disadvantage for private parties.

Investment Disputes: Pakistan is a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), which is crucial for protecting foreign direct investment through investor-state arbitration.

Cross-Border Transactions: The clarity provided by the 2011 Act for foreign awards, and the anticipated clarity from the 2024 Draft Act for all seated arbitrations, makes the inclusion of an arbitration clause in international contracts involving Pakistani parties a more secure and strategic choice than traditional litigation.

 Conclusion: Looking Ahead

The journey of arbitration in Pakistan is at a critical juncture. The transition from the colonial-era Arbitration Act, 1940 to the modern, UNCITRAL-inspired Draft Arbitration Act, 2024 signifies a serious and commendable commitment to creating a world-class dispute resolution environment.

For businesses, especially foreign investors, this shift offers a promise of faster, more confidential, and more predictable outcomes, insulating their commercial disputes from the notoriously slow domestic courts. While challenges related to judicial training and institutional development remain, the legislative intent is clear: Pakistan is moving towards becoming an arbitration-friendly jurisdiction.

Navigating this evolving landscape requires expert legal counsel who understand the intricacies of the two legal regimes and the emerging judicial trends. As the Draft Act moves closer to enactment, the era of arbitration as a true alternative to litigation will finally dawn, offering an efficient engine for commercial growth and a vital safeguard for investment in Pakistan.

Arbitration in Pakistan: Learn the differences between the old Arbitration Act 1940 and the proposed Pakistan Arbitration Act 2024.

Foreign Arbitral Awards Enforcement: Understand how the New York Convention and the 2011 Act streamline the enforcement of foreign arbitral awards in Pakistan.

Commercial Dispute Resolution: We provide expert legal guidance on commercial dispute resolution in Karachi, Lahore, and Islamabad.

UNCITRAL Model Law Pakistan: Stay informed on Pakistan's move towards the UNCITRAL Model Law for modern arbitration.

Pakistani Arbitration Law Firm: Partner with AIC Law Firm, a leading Pakistani arbitration law firm, for efficient and binding dispute resolution.

Contact AIC Law Firm today to discuss how the shift in Pakistani arbitration law impacts your contracts and ensures swift justice for your commercial ventures.