Arbitration in Pakistan: The Arbitration Act 1940, Court Intervention, and the Proposed 2024 Reform Bill

Arbitration is meant to be a faster, cheaper, and more private alternative to courtroom litigation. In Pakistan, however, the law governing it dates back to the British colonial era. The Arbitration Act 1940 (Act X of 1940) was enacted on 11 March 1940 and remains the principal statute governing domestic arbitration proceedings and the enforcement of domestic arbitral awards. While international arbitral awards are governed separately under the Recognition and Enforcement of (Arbitration Agreements and Foreign Arbitral Awards) Act 2011, the 1940 Act still determines how most commercial and civil disputes are arbitrated inside the country.

For businesses operating in Pakistan, understanding the mechanics and limitations of the 1940 Act is essential. An arbitration clause in a contract is only as good as the legal framework that supports it. This article sets out how arbitration works under the current law, where its problems lie, and what the proposed reform bill could change.

The Three Modes of Arbitration Under the 1940 Act

The Arbitration Act 1940 provides for three distinct modes of arbitration, each with different levels of court involvement.

The first mode, governed by Chapter II (Sections 3 to 19), is arbitration without the intervention of the court. This applies where parties have entered into an arbitration agreement and choose to appoint an arbitrator privately, without filing any court application. The arbitrator conducts proceedings, receives evidence, and makes an award. The award must then be filed in court under Section 14 to be enforceable. Once filed, the court may pronounce judgment in accordance with the award under Section 17, unless grounds for setting aside exist under Section 30.

The second mode, under Chapter III and specifically Section 20, is arbitration with the intervention of the court where no suit is pending. Here, a party applies to the court to refer an existing dispute to arbitration. The court appoints an arbitrator, and the proceedings are conducted under court supervision. This is commonly used where one party refuses to cooperate with a privately appointed arbitrator, or where the arbitration agreement does not specify a mechanism for appointment.

The third mode arises under Order XXIII Rule 3 of the Code of Civil Procedure 1908 read with Section 21 of the Act, where a suit is already pending and the parties agree during the course of litigation to refer the matter to arbitration. The court then refers the dispute to an arbitrator and stays the suit. This mode often appears in property and commercial disputes where initial hostility gives way to a willingness to settle.

The Arbitration Agreement: Requirements and Scope

Section 2(a) of the Act defines an "arbitration agreement" as a written agreement to submit present or future differences to arbitration, whether or not an arbitrator is named. The agreement must be in writing. Oral arbitration agreements are not recognized under the Act.

The scope of what can be arbitrated is broad in principle. Commercial disputes, partnership disputes, construction claims, landlord-tenant disagreements, and contractual interpretation questions can all be submitted to arbitration. However, the case law has developed certain exclusions. Matters involving public policy, criminal offences, questions of personal status (such as marriage or guardianship), and disputes where a specific statutory forum has been designated may be considered non-arbitrable. The test, generally, is whether the dispute involves rights in personam (arbitrable) or rights in rem affecting third parties or the public interest (non-arbitrable).

Appointment of Arbitrators and Umpires

The Act permits the parties to agree on the number and identity of arbitrators. Where an agreement specifies a sole arbitrator or a panel, the parties are expected to comply. If they fail to do so, the court has the power under Section 8 to appoint an arbitrator. Similarly, where two arbitrators are appointed and they fail to agree, the court may appoint an umpire under Section 8(1)(b).

There is no express requirement in the Act for arbitrator qualifications. Unlike the UNCITRAL Model Law, which allows parties to specify qualifications, the 1940 Act leaves this entirely to the agreement. In practice, retired judges, senior lawyers, or industry experts serve as arbitrators in Pakistan. An arbitrator must, however, be impartial and must disclose any interest in the subject matter of the dispute.

Procedure: Flexibility and Its Limits

One area where the 1940 Act offers genuine latitude is procedure. The Act does not prescribe a mandatory procedure for arbitral proceedings. Parties are free to agree on how evidence will be received, whether oral hearings will be held, and what rules will govern the process. They may also adopt the rules of an arbitral institution such as the ICC, LCIA, or the Islamabad Centre for International Arbitration (ICIA).

In the absence of an agreed procedure, the arbitrator has discretion to conduct proceedings in a manner considered appropriate. Section 12(2) gives the arbitrator the power to administer oaths. Under Section 43 of the Act, the Limitation Act 1908 applies to arbitration as it applies to proceedings in court, meaning claims must be brought within the applicable limitation period.

A significant gap in the Act, however, is the absence of any power for the arbitrator to grant interim relief. Unlike modern arbitration statutes in England (the Arbitration Act 1996, Section 38) or India (the Arbitration and Conciliation Act 1996, Section 17), the 1940 Act gives arbitrators no authority to order interim measures such as asset freezing orders or preservation of evidence. Parties must approach the court for interim relief, which introduces delay and defeats one of the core advantages of arbitration.

Enforcement of Awards

Under Section 14, when an arbitrator or umpire makes an award, they must sign it and give notice to the parties. The award must then be filed in court. Section 17 provides that the court shall, upon application, pronounce judgment according to the award and enter a decree. This step is mandatory. An arbitral award in Pakistan has no self-executing force. It must be converted into a court decree before it can be enforced through execution proceedings.

This requirement is one of the most criticized features of the 1940 Act. In jurisdictions that have adopted the UNCITRAL Model Law, an arbitral award is treated as binding and enforceable without the additional step of court confirmation. The Pakistani requirement adds time and cost to the process and creates an opportunity for the losing party to challenge the award at the enforcement stage.

Setting Aside Awards Under Section 30

Section 30 of the Act permits a court to set aside an arbitral award on the following grounds: the arbitrator or umpire committed misconduct in the proceedings; the award was made after the issue of a superseding order by the court, or after arbitration proceedings had become invalid under Section 35; or the award was improperly procured or is otherwise invalid.

The term "misconduct" under Section 30 has been interpreted broadly by Pakistani courts. It includes not only moral misconduct but also technical misconduct, such as failing to consider material evidence, exceeding the scope of the reference, deciding on matters not referred to arbitration, or failing to give a party a proper opportunity to present its case. This broad interpretation means that challenges to arbitral awards in Pakistan are frequent and often successful, which undermines the finality that arbitration is supposed to offer.

The Supreme Court of Pakistan has, on multiple occasions, cautioned against treating the setting aside of an award as a routine appellate exercise. In PLD 2005 SC 484, the Court observed that courts should not substitute their own judgment for that of the arbitrator merely because they would have reached a different conclusion. However, in practice, lower courts sometimes re-examine the merits of the dispute under the guise of reviewing for misconduct.

The Problem of Excessive Court Intervention

This is the central criticism of the 1940 Act. The statute permits judicial intervention at virtually every stage: before arbitration (to stay proceedings, appoint arbitrators, or determine the validity of the agreement), during arbitration (to issue interim orders, summon witnesses, or extend time), and after the award (to set it aside, modify it, or remit it for reconsideration under Section 16). The cumulative effect is that a domestic arbitration in Pakistan can be delayed by years of interlocutory court proceedings.

A 2025 study by the Delos Dispute Resolution Centre found that the average duration of a domestic arbitration in Pakistan, including court proceedings, was significantly longer than in countries with UNCITRAL-aligned statutes. The report noted that "the 1940 Act is a relic of colonial times which leaves open the door to judicial intervention at many levels such that local litigants do not see arbitration as having any major advantages compared to litigation in domestic courts."

This perception has real consequences. Pakistan ranks poorly in international surveys of arbitration-friendliness, and foreign investors frequently insist on offshore arbitration clauses governed by the laws of Singapore, London, or Dubai. The lack of a modern domestic arbitration law is a competitive disadvantage for the country.

The Draft Arbitration Bill 2024: Proposed Reforms

In May 2024, the Advisory and Law Reform Commission (ALRC) presented a Draft Arbitration Bill to the Federal Minister for Law and Justice. The Bill, if enacted, would replace the 1940 Act entirely and bring Pakistan's domestic arbitration regime into line with the UNCITRAL Model Law on International Commercial Arbitration 1985, as amended in 2006.

The Bill's key reforms include the following. First, it reduces the grounds for judicial intervention. Courts would be limited to essential procedural assistance, such as the appointment of arbitrators where parties fail to agree, and enforcement of awards. The Bill introduces a prima facie standard for courts considering a stay of proceedings in favour of arbitration: if there is prima facie evidence of a valid arbitration agreement, the court must stay proceedings and refer the matter to arbitration.

Second, the Bill grants arbitrators the power to order interim measures. This would eliminate the current need for parties to approach the court for injunctions or preservation orders during arbitration proceedings.

Third, the Bill eliminates the requirement to enter awards as a "rule of the court." Awards would become directly enforceable, as in most modern arbitration jurisdictions, unless set aside or suspended. This alone could save months of procedural delay.

Fourth, the Bill distinguishes between international and domestic commercial arbitrations. Parties to international arbitrations would have greater autonomy over procedure and choice of law. An arbitration would qualify as "international" if one party's place of business is outside Pakistan, or if the parties agree to apply foreign institutional rules or a foreign governing law.

The Bill draws on the Indian Arbitration and Conciliation Act 1996, the English Arbitration Act 1996, and the arbitration laws of Singapore and Malaysia. If enacted, it would represent the most significant reform of dispute resolution law in Pakistan in over eight decades.

Practical Considerations for Businesses

Until the reform bill is enacted, businesses drafting arbitration clauses for contracts governed by Pakistani law should take several precautions. The clause should specify the number of arbitrators, the method of appointment, the seat of arbitration, and the procedural rules to be followed. Where possible, parties should agree on institutional arbitration (such as ICIA rules) rather than ad hoc arbitration, as institutional rules provide a structured framework that can reduce delays.

Businesses should also consider whether offshore arbitration is appropriate. For cross-border transactions involving Pakistani parties, an arbitration seated in London, Singapore, or Dubai may offer a more predictable enforcement regime. Foreign arbitral awards are enforceable in Pakistan under the 2011 Act, which is based on the New York Convention. Domestic awards under the 1940 Act do not enjoy the same streamlined enforcement.

For disputes that must be arbitrated domestically, parties should be prepared for the possibility of court applications at various stages. Building in time for potential interlocutory proceedings is realistic rather than pessimistic. The selection of a well-qualified and experienced arbitrator can also reduce the risk of the award being set aside for procedural misconduct.

Conclusion

The Arbitration Act 1940 served its purpose for a different era, but it is now out of step with international practice and with the commercial needs of a growing economy. The excessive court intervention it permits, the lack of interim relief powers for arbitrators, and the cumbersome enforcement process make domestic arbitration in Pakistan less attractive than it should be. The Draft Arbitration Bill 2024 offers a path toward reform, bringing Pakistan into alignment with the UNCITRAL Model Law and the practice of its major trading partners. Whether and when Parliament enacts the Bill will be a significant indicator of Pakistan's commitment to improving its dispute resolution infrastructure and its investment climate.