Arbitration & ADR

Drafting an Arbitration Clause That Actually Works

An arbitration clause is agreed at the end of a negotiation, when everyone is tired and nobody expects a dispute. It is then relied on years later, in the middle of one, by parties who have stopped cooperating. Clauses that fail this transition are called pathological, and they are extremely common.

Why bad clauses survive negotiation

Because nobody tests them. A clause is copied from a previous contract, or from a template of unknown origin, and reviewed by people focused on price and delivery. The defects only surface when one party wants to arbitrate and the other has an incentive to obstruct — at which point every ambiguity becomes a preliminary application, and the "faster, cheaper" process spends a year in court establishing where and how it should happen.

Mandatory, not permissive

Start with the single most consequential word. A clause providing that disputes may be referred to arbitration creates an option, not an obligation — and a party that prefers court proceedings can argue it is not bound. Use "shall be referred to and finally resolved by arbitration."

Scope

Draft the scope broadly unless there is a reason not to: "any dispute, controversy or claim arising out of or in connection with this contract, including any question regarding its existence, validity, breach or termination."

Narrow wording such as "disputes arising under this contract" invites arguments that a claim in tort, or a claim that the contract was void from the outset, falls outside the clause. The result is parallel proceedings — arbitration on some claims, litigation on others, and a jurisdictional fight about which is which.

The seat

The seat is the legal home of the arbitration, and it determines which courts supervise the process — appointing arbitrators where the parties cannot, hearing challenges to the award, and granting interim relief. It is not the same as the venue where hearings physically take place.

A clause without a seat is a clause with an unresolved dispute built into it. If the seat is Pakistan, the Arbitration Act, 1940 governs the supervisory framework, including the Section 30 grounds for setting aside — see our page on challenging an arbitral award. If the seat is abroad, the resulting award is a foreign award, enforceable in Pakistan under the Recognition and Enforcement Act, 2011 and the New York Convention.

That distinction has real consequences. The 1940 Act's set-aside grounds are broader than the Model Law standard applied in most international seats, which means a Pakistan-seated award is more exposed to challenge than one seated in a Model Law jurisdiction. For a substantial cross-border contract, that is a point worth deciding deliberately rather than by default.

Institutional or ad hoc

Institutional arbitration adopts an established set of rules and an administering body. The advantage is that the rules already answer the questions the parties forgot — how arbitrators are appointed if a party refuses to cooperate, how challenges to an arbitrator are decided, how fees are handled. When one side is deliberately obstructive, this machinery is what keeps the process moving.

Ad hoc arbitration has no administering institution. It can be cheaper and more flexible for sophisticated parties, but it depends far more heavily on the clause being complete — because there is no institution to fill the gaps.

If you name an institution, name it precisely and confirm it exists. Clauses referring to invented or misdescribed bodies are a classic pathology, and they leave the parties in court arguing about what was meant.

Number of arbitrators and appointment

Specify the number — one or three. A sole arbitrator is faster and cheaper and suits most mid-value commercial disputes; a three-member tribunal suits high-value or technically complex matters.

Then specify the appointment mechanism, including what happens if a party does not appoint. This is the most frequently omitted provision and the one most frequently exploited. An institutional clause handles it automatically. An ad hoc clause must say so expressly, with a named appointing authority — otherwise the innocent party's first step is a court application, before the arbitration has even begun.

Language

One line, easily forgotten, expensive to omit in a cross-border contract. Without it, parties argue about the language of the proceedings and about whether documents must be translated — with real cost implications where the record is voluminous.

Governing law

Specify the law governing the contract. Sophisticated clauses also specify the law governing the arbitration agreement itself, which is not always the same and has generated substantial litigation internationally where left unstated.

Clauses to avoid

• Referring to both arbitration and the exclusive jurisdiction of a court. This contradiction is remarkably common where two templates were merged, and it produces exactly the dispute the clause was meant to prevent.
• Multi-tier clauses with vague preconditions. Requiring "good faith negotiations" before arbitration is fine — provided the clause says for how long and how the period is triggered and ends. Otherwise it becomes a jurisdictional objection that the precondition was not satisfied.
• Inconsistent clauses across related contracts. Where a main contract, guarantee and side letter carry different dispute clauses, a single commercial dispute fragments across forums.

The practical test

A good clause answers, without reference to anything outside itself: who decides, how are they chosen, where does it happen, under what rules, in what language, and under which law? If any of those has no answer on the face of the clause, that is the answer a court will end up supplying — slowly, and at the parties' expense.

For clauses in shareholder documents specifically, see our page on what a shareholders' agreement should say.

This article is general information about Pakistani law and procedure, not legal advice for any specific matter. If this touches on something you're currently facing, get in touch and we'll advise on your facts directly.