1. Purpose and Scope of the Arbitration Act
The Arbitration Act, 2055 (1999) was enacted to modernize and update Nepal’s legal framework for arbitration. The preamble states that the Act aims to “make legal provision on arbitration” in order to facilitate the efficient resolution of disputes outside the traditional court system.
Some key objectives of the Act include:
- Providing a comprehensive statutory basis for arbitration in Nepal
- Establishing procedures for the appointment of arbitrators and conduct of arbitration proceedings
- Defining the powers and jurisdiction of arbitrators
- Setting out grounds and processes for challenging arbitral awards
- Providing for enforcement of domestic and foreign arbitral awards
The Act applies to both domestic and international arbitration proceedings conducted in Nepal. It covers commercial and civil disputes that can be lawfully settled through arbitration under Nepali law.
Our Practice Area: Arbitration and Dispute Resolution
2. Key Definitions
The Act provides definitions for several important terms:
Agreement: A written agreement between parties to settle disputes through arbitration. This includes:
- Arbitration clauses in contracts
- Separate arbitration agreements
- Exchanges of letters/communication agreeing to arbitrate
- Submission of a dispute to arbitration without objection
Party: Any party connected with the arbitration proceedings
Arbitrator: An arbitrator or panel of arbitrators appointed to settle a dispute
Dispute: Any dispute that can be settled through arbitration under the Act
These definitions establish the scope of arbitration agreements and proceedings covered by the Act.
3. Settlement of Disputes through Arbitration
3.1 Disputes to be Settled through Arbitration
Section 3 of the Act mandates that disputes shall be settled through arbitration in the following cases:
- Where an agreement provides for arbitration of disputes
- For disputes connected to or arising from such an agreement
- Where parties to a civil suit of a commercial nature apply for arbitration
This gives broad effect to arbitration agreements and allows commercial court cases to be transferred to arbitration with mutual consent.
3.2 Cancellation of Court Records
When parties seek to settle a court case through arbitration under Section 3(2), the court may order cancellation of the suit records. However, cancellation is not allowed if:
- Issues that cannot be arbitrated are inextricably linked to arbitrable issues
- There are valid reasons why the dispute cannot be arbitrated
This allows flexibility to move appropriate cases from litigation to arbitration while safeguarding matters that require court adjudication.
4. Appointment of Arbitrators
4.1 Number of Arbitrators
The Act provides that the number of arbitrators shall be as specified in the arbitration agreement. If not specified, there shall ordinarily be three arbitrators.
An even number of arbitrators must be made odd by appointment of an additional arbitrator.
4.2 Appointment of Arbitrators
Key provisions on arbitrator appointment include:
- The appointment process must start within 30 days of the dispute arising
- Arbitrators named in the agreement are deemed appointed
- Each party appoints one arbitrator, who then appoint the third arbitrator as chair
- The agreement may specify a different appointment procedure
4.3 Court Appointment of Arbitrators
Parties may apply to the Appellate Court for appointment of arbitrators if:
- No arbitrator can be appointed under the agreed procedure
- The agreement is silent on appointment
The application must propose at least 3 potential arbitrators. The court will appoint arbitrators within 60 days, with its decision being final.
4.4 Filling Vacancies
If an arbitrator’s position becomes vacant, it shall be filled within 30 days following the original appointment procedure. If not filled in time, a party may apply to the Appellate Court for appointment within 15 days.
4.5 Arbitrator Qualifications
The Act disqualifies the following persons from being arbitrators:
- Those disqualified from entering contracts under law
- Those punished for crimes involving moral turpitude
- Insolvents and declared bankrupts
- Those with personal interest in the dispute
- Those lacking qualifications specified in the agreement
4.6 Removal of Arbitrators
Grounds for removal of arbitrators include:
- Displaying bias or discrimination
- Engaging in improper conduct or fraud
- Frequently committing mistakes/irregularities
- Failing to attend proceedings without reason
- Acting contrary to principles of natural justice
- Lacking necessary qualifications
Removal requests are decided by the arbitral tribunal, with appeals to the Appellate Court.
5. Arbitration Proceedings
5.1 Submissions and Timelines
The Act prescribes the following timelines for submissions:
| Submission | Timeline |
|---|---|
| Statement of Claim | Within 3 months of dispute arising or arbitrator appointment |
| Statement of Defense | Within 30 days of receiving claim |
| Counter-claim | Along with defense |
| Rejoinder | Within 15 days of counter-claim |
Extensions of up to 7 days may be granted for valid reasons.
5.2 Arbitrator’s Power to Determine Jurisdiction
The arbitral tribunal has the power to rule on its own jurisdiction, including:
- Existence or validity of the arbitration agreement
- Whether the dispute falls within its scope
Jurisdictional challenges must be raised before submitting a defense. Appeals on jurisdictional rulings can be made to the Appellate Court within 30 days.
5.3 Arbitration Procedure
The arbitration procedure shall be as agreed by the parties or as laid down in the Act. Key provisions include:
- Arbitrators must inform parties of hearing dates/times
- Proceedings may continue if a party is absent after notice
- Evidence/hearings conclude with a formal closure order
- Decision must be rendered within 30 days of closure
5.4 Applicable Substantive Law
The substantive law applicable shall be:
- As specified in the arbitration agreement
- If not specified, Nepal law
- Principles of justice and equity, if expressly authorized by parties
The arbitrator must also consider the terms of the contract and applicable commercial usages.
5.5 Powers of Arbitrators
The Act grants arbitrators broad powers, including to:
- Order parties to produce documents/evidence
- Appoint experts
- Inspect relevant places/goods
- Issue interim/interlocutory orders
- Take conditional decisions
- Request court assistance to examine evidence
This equips arbitrators with the authority needed to effectively resolve disputes.
6. Arbitral Awards and Implementation
6.1 Timeline for Awards
Arbitrators must render awards within 120 days of receiving submissions, unless otherwise agreed.
6.2 Decision-Making
For tribunals of 3 or more arbitrators, decisions are by majority. If no majority, the presiding arbitrator’s decision prevails.
Dissenting opinions may be recorded. All arbitrators must sign the award, with reasons noted for any missing signatures.
6.3 Contents of Award
Awards must contain:
- Summary of the dispute
- Reasoning on jurisdiction (if challenged)
- Decisions with reasons/grounds
- Relief granted and amounts awarded
- Interest payable
- Date and place of award
6.4 Correction and Interpretation of Awards
Within 30 days, parties may request:
- Correction of computational/clerical errors
- Interpretation of specific points/parts of the award
- Additional award on claims presented but omitted from award
6.5 Grounds for Setting Aside Awards
Awards may be set aside by the Appellate Court on limited grounds, including:
- Incapacity of a party
- Invalid arbitration agreement
- Lack of proper notice
- Award beyond scope of submission
- Improper composition of tribunal
- Non-arbitrable subject matter
- Violation of public policy
Petitions to set aside must be filed within 35 days of the award.
7. Implementation of Awards
7.1 Domestic Awards
Parties must implement awards within 45 days of receipt. If not implemented, the winning party may petition the District Court for enforcement within 30 days.
The District Court shall implement the award as its own judgment within 30 days.
7.2 Foreign Awards
Foreign arbitral awards may be enforced in Nepal subject to conditions, including:
- Reciprocity with country where award was made
- Award made as per the arbitration agreement
- Proper notice given to parties
- Award final and binding under foreign law
- Application filed within 90 days of award
The Appellate Court reviews applications and forwards compliant awards to the District Court for enforcement.
Foreign awards may be refused enforcement if:
- The dispute is not arbitrable under Nepali law
- Enforcement would be contrary to public policy
7.3 Interest on Awards
Unless otherwise agreed, interest is payable on monetary awards at a rate fixed by the arbitrators, not exceeding commercial bank rates.
8. Additional Provisions
8.1 Costs and Fees
- Parties bear arbitration costs as agreed or determined by arbitrators
- Arbitrator remuneration as agreed or fixed in consultation with parties
- 0.5% court fee payable on amount recovered through award enforcement
8.2 Confidentiality
Arbitration hearings are held in-camera unless parties agree otherwise. Award documents are confidential except for enforcement purposes.
8.3 Court Assistance
Courts may assist arbitration by:
- Appointing arbitrators when parties fail to do so
- Examining evidence at arbitrator’s request
- Enforcing awards and interim orders
8.4 Arbitration Case Files
Arbitrators must maintain case files with all documents/evidence in chronological order. After proceedings conclude, files are submitted to the District Court for safekeeping.
Also Read: Laws of Arbitration in Nepal
Conclusion
The Arbitration Act, 2055 (1999) provides a comprehensive legal framework for arbitration in Nepal. Key features include:
- Giving effect to arbitration agreements
- Flexible procedures for constituting tribunals
- Broad powers for arbitrators to conduct proceedings
- Limited court intervention, mainly in support of arbitration
- Grounds and process for challenging awards
- Enforcement mechanism for domestic and foreign awards
The Act aims to facilitate efficient dispute resolution through arbitration while maintaining necessary safeguards. It largely aligns with international best practices, though some provisions may benefit from further modernization.
Effective implementation of the Act can help establish arbitration as a preferred mode of commercial dispute resolution in Nepal. This can enhance the ease of doing business and support Nepal’s economic development goals.
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