Drafting an Arbitration Clause for Pakistani Contracts

Arbitration clauses are typically the last paragraph of a contract, drafted quickly from a precedent nobody reads. That paragraph then determines whether a future dispute is resolved efficiently or spends a year in court over how to appoint an arbitrator. It is worth ten minutes at signature.

The essential elements

If you fix only one thing, fix the appointment mechanism with a default. A clause that provides what happens when a party refuses to appoint removes the single most common route into court, which is exactly what the clause was meant to avoid.

Getting the scope right

Draw it broadly. Narrow wording invites arguments that a particular claim falls outside the clause, which is litigated in court - the opposite of the intention.

Preferable formulations cover any dispute, difference or claim arising out of or in connection with this agreement, including its existence, validity, breach or termination. Narrow phrasing such as "disputes under this contract" can be argued not to capture claims about formation or termination.

Also consider:

• Whether related agreements are covered, where a transaction spans several documents.
• Whether tort claims connected to the contract are included.
• Carve-outs - for instance preserving the right to seek urgent injunctive relief in court.

The appointment mechanism

Specify precisely:

1. How many arbitrators. One is cheaper and faster; three suits larger or technically complex disputes.
2. Who appoints. For three: one each, with the two appointing the chair.
3. Time limits for each appointment.
4. The default - a named appointing authority, or an application to court - if a party fails to appoint within the period.
5. Qualifications where the subject matter is technical.
6. Replacement if an arbitrator resigns, dies or is removed.

Naming a specific individual as arbitrator in the contract is a common and risky choice. If that person is unavailable, unwilling or has become connected to a party by the time a dispute arises, you are back to negotiating - or to court. Specify a mechanism, not a person.

Seat, venue and governing law

Three distinct concepts that get conflated:

• Governing law - the law applied to the substance of the contract.
• Seat - the legal home of the arbitration, determining which courts supervise it.
• Venue - where hearings physically take place, which can differ from the seat.

For a domestic Pakistani contract, all three are typically Pakistan. For cross-border contracts these become substantive negotiating points, and the seat is the most consequential because it decides the supervisory court and affects enforcement.

Consider also stating the law governing the arbitration agreement itself, which can differ from the law of the contract and has produced significant litigation internationally.

Clauses that cause problems

• "Disputes shall be settled by arbitration." No mechanism, no seat, no default. Guaranteed court application.
• Naming an individual arbitrator who may be unavailable years later.
• "Either party may refer to arbitration or court" - an optional clause that resolves nothing.
• Inconsistent clauses where one paragraph gives exclusive jurisdiction to a court and another requires arbitration.
• Unrealistic time limits that cannot be met and are then breached.
• Referring to non-existent institutional rules or a misnamed institution.
• Copying a clause from an unrelated jurisdiction without checking it works in Pakistan.

The inconsistency problem is more common than it sounds. Contracts assembled from multiple precedents frequently contain both an arbitration clause and a court jurisdiction clause. When a dispute arises, the first fight is about which one applies - and it happens in court.

Pre-signature checklist

1. Is the scope drawn broadly enough to cover formation, validity and termination?
2. Is the number of arbitrators stated?
3. Is the appointment mechanism complete, with time limits?
4. Is there a default if a party refuses to appoint?
5. Is the seat stated?
6. Is the governing law stated?
7. Is the language stated?
8. Does any other clause in the contract contradict it?
9. Is urgent injunctive relief preserved if you may need it?
10. For cross-border deals, will the award be enforceable where the assets are?

Run this before signature, not when the dispute arises. See how arbitration works in Pakistan for the framework the clause operates within.

What a complete clause looks like

Rather than a form to copy blindly, here is the structure a workable clause follows, with the reasoning:

1. Submission. "Any dispute, difference or claim arising out of or in connection with this Agreement, including its existence, validity, breach or termination, shall be referred to and finally resolved by arbitration."
2. Number. State one arbitrator, or three.
3. Appointment. For three: each party appoints one within a stated number of days of a written request; the two so appointed appoint the third.
4. Default. State what happens if a party fails to appoint within the period - a named appointing authority, or an application to the competent court.
5. Seat. Name the city and country.
6. Governing law. Of the contract, and consider stating the law of the arbitration agreement.
7. Language. State it.
8. Interim relief. Preserve the right to apply to a court for urgent relief without breaching the clause.

Have any clause reviewed against Pakistani practice before signing rather than adopting one from a foreign precedent. A clause drafted for another jurisdiction's arbitration statute can produce exactly the uncertainty it was meant to prevent - see the framework it must operate within.

Frequently asked questions