Arbitration in Nepal: Laws, Process & Practice

Introduction to Arbitration in Nepal

Arbitration has emerged as a preferred method of alternative dispute resolution in Nepal, especially for commercial and business-related conflicts. As a process that allows parties to resolve disputes outside of the traditional court system, arbitration offers flexibility, confidentiality, and often a quicker resolution compared to litigation. In Nepal, the use of arbitration has gained traction in recent years, particularly in sectors such as construction, international trade, and investment.

The concept of arbitration in Nepal is not entirely new, with its roots traceable to traditional dispute resolution mechanisms. However, the formal legal framework for arbitration in its modern form was established relatively recently. The Arbitration Act, 2055 (1999) is the leading Arbitration Law in Nepal

Nepal’s approach to arbitration reflects a blend of international best practices and local legal traditions. It has adopted of principles from the UNCITRAL Model Law on International Commercial Arbitration, albeit with modifications to suit the Nepalese context.

Our Practice Area: Arbitration and Dispute Resolution

Legal Frameworks for Arbitration in Nepal

The legal framework for arbitration in Nepal is primarily governed by the Arbitration Act, 2055 (1999). This Act serves as the cornerstone of arbitration law in the country, providing comprehensive provisions for the conduct of arbitration proceedings, the appointment of arbitrators, and the enforcement of arbitral awards. The Act applies to both domestic and international arbitrations conducted within Nepal.

Key features of the Arbitration Act, 2055 (1999) include:

1. Party autonomy: The Act emphasizes the principle of party autonomy, allowing parties to determine many aspects of the arbitration process.
2. Limited court intervention: It restricts court intervention in arbitration proceedings, ensuring that the process remains independent and efficient.
3. Enforceability of awards: The Act provides for the recognition and enforcement of both domestic and foreign arbitral awards.
4. Confidentiality: It mandates that arbitration proceedings be conducted in private, unless otherwise agreed by the parties.

In addition to the Arbitration Act, Nepal has ratified several international conventions related to arbitration:

1. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958: Nepal acceded to this convention in 1998, facilitating the enforcement of foreign arbitral awards in Nepal and Nepalese awards abroad.
2. The ICSID Convention (Washington Convention): While Nepal has signed this convention, it has not yet ratified it. Nevertheless, this demonstrates Nepal’s commitment to international investment dispute resolution mechanisms.

The Arbitration Rules, 2059 (2002) complement the Arbitration Act by providing detailed procedures for conducting arbitration proceedings. These rules address various aspects of the arbitration process, including the appointment of arbitrators, conduct of hearings, and issuance of awards.

Criteria & Requirements for Arbitration in Nepal

For a dispute to be eligible for arbitration in Nepal, certain criteria and requirements must be met:

1. Arbitration Agreement: There must be a valid arbitration agreement between the parties. This can be in the form of an arbitration clause in a contract or a separate agreement.
2. Arbitrability: The subject matter of the dispute must be arbitrable under Nepalese law. Certain matters, such as criminal offenses or disputes affecting public interest, are not arbitrable.
3. Capacity of Parties: The parties entering into the arbitration agreement must have the legal capacity to do so.
4. Compliance with Public Policy: The arbitration agreement and the potential award must not contravene public policy or the laws of Nepal.
5. Specific and Definite Dispute: The dispute referred to arbitration must be specific and definite, not vague or hypothetical.
6. Voluntary Submission: Both parties must voluntarily agree to submit their dispute to arbitration.
7. Time Limitation: The arbitration must be initiated within the time frame specified in the agreement or, if not specified, within a reasonable time after the dispute arises.
8. Formality Requirements: The arbitration agreement must be in writing, as per Section 2(a) of the Arbitration Act, 2055 (1999).

Authorities governing Arbitration Proceedings in Nepal

Several authorities play crucial roles in governing and supporting arbitration proceedings in Nepal:

1. Courts: The High Courts and Supreme Court of Nepal have supervisory jurisdiction over arbitration proceedings. They can intervene in matters such as the appointment of arbitrators, challenges to arbitrators, and enforcement of awards.
2. Nepal Council of Arbitration (NEPCA): This is a prominent arbitration institution in Nepal that administers arbitration proceedings and provides rules and guidelines for arbitration.
3. Ministry of Law, Justice and Parliamentary Affairs: This ministry is responsible for formulating policies and laws related to arbitration in Nepal.
4. Nepal Bar Association: While not directly governing arbitration, the Bar Association plays a role in maintaining standards of legal practice, including in arbitration proceedings.
5. Federation of Nepalese Chambers of Commerce and Industry (FNCCI): This body promotes arbitration as a dispute resolution mechanism among its members and sometimes provides arbitration services.

Appointment of Arbitrators in Nepal

The appointment of arbitrators in Nepal is governed by the Arbitration Act, 2055 (1999) and follows these general principles:

1. Party Autonomy: Parties are free to agree on the procedure for appointing arbitrators.
2. Number of Arbitrators: The number of arbitrators shall be odd. If not specified in the agreement, there shall be three arbitrators.
3. Default Procedure: If parties fail to agree on the appointment procedure:

• In a three-arbitrator tribunal, each party appoints one arbitrator, and the two appointed arbitrators select the third arbitrator.
• For a sole arbitrator, if parties cannot agree, either party can request the court to make the appointment.

1. Court Intervention: The High Court can intervene to appoint arbitrators if:

• A party fails to appoint an arbitrator within 30 days of being required to do so.
• The two appointed arbitrators fail to agree on the third arbitrator within 30 days of their appointment.

1. Qualifications: Arbitrators must meet qualifications specified in the agreement or required by law. They must be impartial and independent.
2. Disclosure: Appointed arbitrators must disclose any circumstances likely to give rise to justifiable doubts as to their impartiality or independence.

Initiation of the Arbitration Process

The arbitration process in Nepal is typically initiated as follows:

1. Notice of Arbitration: The party initiating arbitration (the claimant) sends a notice to the other party (the respondent) stating its intention to refer the dispute to arbitration.
2. Content of Notice: The notice should include:

• A demand that the dispute be referred to arbitration
• The names and addresses of the parties
• A reference to the arbitration clause or agreement
• A brief description of the nature and circumstances of the dispute
• The relief or remedy sought

1. Response: The respondent typically has 30 days to respond to the notice of arbitration.
2. Appointment of Arbitrators: The process of appointing arbitrators begins as per the agreement or the default procedure.
3. Preliminary Meeting: Once the tribunal is constituted, a preliminary meeting is often held to establish procedural matters and a timetable for the arbitration.

Arbitration Agreement and its Validity in Nepal

The arbitration agreement is the foundation of the arbitration process. In Nepal, its validity is determined by the following factors:

1. Written Form: The agreement must be in writing. This can include electronic communications.
2. Capacity: Parties must have the legal capacity to enter into the agreement.
3. Arbitrability: The subject matter of the potential dispute must be capable of settlement by arbitration under Nepalese law.
4. Consent: There must be a clear consensus between the parties to submit disputes to arbitration.
5. Certainty: The agreement should be sufficiently certain in its terms.
6. Legality: The agreement must not contravene any law or public policy of Nepal.
7. Separability: The arbitration clause is considered separate from the main contract. Thus, the invalidity of the main contract does not necessarily invalidate the arbitration clause.

Jurisdiction of Arbitral Tribunals in Nepal

The jurisdiction of arbitral tribunals in Nepal is governed by the principle of “Kompetenz-Kompetenz” (competence-competence), which is recognized in the Arbitration Act, 2055 (1999). Key aspects include:

1. Power to Rule on Own Jurisdiction: The arbitral tribunal has the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.
2. Timing of Jurisdictional Challenge: Any objection to the jurisdiction of the tribunal must be raised no later than the submission of the statement of defense.
3. Preliminary or Final Award: The tribunal may rule on a jurisdictional objection either as a preliminary question or in the final award on the merits.
4. Court Review: If the tribunal rules as a preliminary matter that it has jurisdiction, any party may request the High Court to decide the matter within 30 days.
5. Scope of Jurisdiction: The tribunal’s jurisdiction extends to all disputes arising out of or in connection with the agreement containing the arbitration clause, unless otherwise limited by the parties.
6. Interim Measures: The tribunal has the power to order interim measures of protection, which is an aspect of its jurisdiction.

Conduct of Arbitral Proceedings

The conduct of arbitral proceedings in Nepal is characterized by flexibility and party autonomy, guided by the principles of fairness and efficiency. Key aspects include:

1. Procedural Flexibility: Parties have significant freedom to agree on the procedure to be followed by the arbitral tribunal.
2. Equal Treatment: The tribunal must treat the parties with equality and give each party a full opportunity to present its case.
3. Determination of Rules: Failing agreement between the parties, the tribunal may conduct the arbitration in such manner as it considers appropriate.
4. Language: The language of the arbitration is determined by agreement of the parties or, failing such agreement, by the tribunal.
5. Written Statements: The claimant must state the facts supporting its claim, the points at issue, and the relief sought. The respondent must state its defense in respect of these particulars.
6. Hearings and Written Proceedings: Unless otherwise agreed by the parties, the tribunal shall decide whether to hold oral hearings or conduct the proceedings on the basis of documents and other materials.
7. Default of a Party: If the claimant fails to communicate its statement of claim, the tribunal shall terminate the proceedings. If the respondent fails to communicate its statement of defense, the tribunal shall continue the proceedings without treating such failure as an admission of the claimant’s allegations.
8. Expert Appointed by Tribunal: Unless otherwise agreed by the parties, the tribunal may appoint one or more experts to report to it on specific issues.
9. Court Assistance: The tribunal or a party with the approval of the tribunal may request from a competent court assistance in taking evidence.

Procedure of Arbitration in Nepal

The procedure of arbitration in Nepal typically follows these steps:

Step 1: Submission of Claim

1. The claimant submits a detailed statement of claim to the arbitral tribunal and the respondent.
2. The statement should include:

• Facts supporting the claim
• Points at issue
• Relief or remedy sought

1. Relevant documents should be attached to the statement of claim.

Step 2: Submission of Defense & Counter-Claim

1. The respondent submits a statement of defense in response to the claim.
2. If applicable, the respondent may also submit a counter-claim.
3. The defense and counter-claim should address all points raised in the statement of claim.
4. Supporting documents should be attached.

Step 3: Response to Counter-Claim (if any)

1. If a counter-claim is submitted, the claimant has the right to respond to it.
2. This response should be submitted within the timeframe specified by the tribunal.

Step 4: Arbitral Hearings along with Evidence Presentation

1. The tribunal schedules hearings for oral arguments and presentation of evidence.
2. Parties present their cases, including witness testimony and expert opinions.
3. Cross-examination of witnesses may be conducted.
4. The tribunal may ask questions and seek clarifications.

Step 5: Interim Measures for Arbitral Hearings

1. Either party may request the tribunal to order interim measures of protection.
2. The tribunal may require appropriate security in connection with such measures.

Step 6: Preliminary Orders

1. The tribunal may issue preliminary orders on procedural matters.
2. These may include orders related to document production, confidentiality, or scheduling.

Step 7: Arbitration Decision

1. After concluding the hearings and examining all evidence, the tribunal deliberates.
2. The tribunal prepares and issues the arbitral award.

Making of the Arbitral Awards

The making of arbitral awards in Nepal is governed by specific rules and procedures:

1. Decision Making: In arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal shall be made by a majority of all its members, unless otherwise agreed by the parties.
2. Form and Content of Award: The award shall be made in writing and shall be signed by the arbitrator(s). In arbitral proceedings with more than one arbitrator, the signatures of the majority of all members of the arbitral tribunal shall suffice, provided that the reason for any omitted signature is stated.
3. Reasons for Award: The award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on agreed terms.
4. Date and Place: The award shall state its date and the place of arbitration.
5. Delivery of Award: After the award is made, a copy signed by the arbitrators shall be delivered to each party.
6. Types of Awards: The tribunal may make final, interim, interlocutory, or partial awards.
7. Time Limit: Unless otherwise agreed by the parties, the arbitral award shall be made within 120 days from the date on which the arbitral proceedings commenced.
8. Settlement: If the parties settle the dispute during arbitral proceedings, the arbitral tribunal shall terminate the proceedings and, if requested by the parties, record the settlement in the form of an arbitral award on agreed terms.

Correction and Interpretation of the Arbitral Award

The Arbitration Act, 2055 (1999) provides for the correction and interpretation of arbitral awards:

1. Correction of Errors: Within 30 days of receipt of the award, unless another period of time has been agreed upon by the parties:

• A party may request the tribunal to correct any errors in computation, any clerical or typographical errors, or any errors of similar nature.
• If so agreed by the parties, a party may request the tribunal to give an interpretation of a specific point or part of the award.

1. Tribunal’s Initiative: The tribunal may correct any error of the type referred to above on its own initiative within 30 days of the date of the award.
2. Interpretation: If the tribunal considers the request for interpretation justified, it shall make the interpretation within 30 days of receipt of the request. The interpretation shall form part of the award.
3. Additional Award: Unless otherwise agreed by the parties, a party may request, within 30 days of receipt of the award, the tribunal to make an additional award as to claims presented in the arbitral proceedings but omitted from the award.
4. Extension of Time: If necessary, the tribunal may extend the period of time within which it shall make a correction, interpretation or an additional award.

Recognition and Enforcement of Arbitral Awards

The recognition and enforcement of arbitral awards in Nepal is governed by the Arbitration Act, 2055 (1999) and the New York Convention:

1. Domestic Awards:

• An arbitral award shall be recognized as binding and, upon application in writing to the competent court, shall be enforced.
• The party relying on an award or applying for its enforcement shall supply the original award or a copy thereof.

1. Foreign Awards:

• Nepal is a party to the New York Convention, facilitating the enforcement of foreign arbitral awards.
• The party seeking enforcement must provide the original award or a certified copy, the original arbitration agreement or a certified copy, and a certified translation if the award is not in Nepali.

1. Grounds for Refusal:

• Recognition and enforcement may be refused if:
  a) A party to the arbitration agreement was under some incapacity.
  b) The arbitration agreement is not valid under the law to which the parties have subjected it.
  c) The party against whom the award is invoked was not given proper notice or was unable to present its case.
  d) The award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration.
  e) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or the law of the country where the arbitration took place.
  f) The award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

1. Public Policy: Recognition and enforcement may also be refused if the court finds that the subject-matter of the dispute is not capable of settlement by arbitration under the law of Nepal, or the recognition or enforcement of the award would be contrary to the public policy of Nepal.
2. Time Limit: An application for enforcement of a foreign arbitral award must be made within 90 days from the date of the award.
3. Challenges to the Arbitral Award
4. Parties dissatisfied with an arbitral award in Nepal have limited grounds to challenge it, as provided by the Arbitration Act, 2055 (1999):
5. Application for Setting Aside:
6. A party may file an application to set aside the award with the High Court within 35 days of receiving the award.
7. Grounds for Setting Aside:
   a) A party to the arbitration agreement was under some incapacity.
   b) The arbitration agreement is not valid under the law to which the parties have subjected it.
   c) The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.
   d) The award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration.
   e) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the Act.
   f) The subject-matter of the dispute is not capable of settlement by arbitration under the laws of Nepal.
   g) The award is in conflict with the public policy of Nepal.

Court’s Decision:

• The High Court may set aside the award or remit the award to the arbitral tribunal for reconsideration.
• If the award is set aside, either party may initiate fresh arbitration proceedings in accordance with the Act.

No Appeal:

• The decision of the High Court on an application to set aside an award is final and binding.
• However, a party may file a writ petition to the Supreme Court if there are grounds related to constitutional or jurisdictional issues.

Continuation of Arbitral Proceedings:

• The filing of an application to set aside the award does not automatically stay the enforcement of the award.
• However, the party may apply to the court for a stay of enforcement pending the court’s decision on the application to set aside.

Cost and Expenses of Arbitration in Nepal

The costs and expenses associated with arbitration in Nepal can vary depending on the complexity of the case, the number of arbitrators, and the duration of the proceedings.

Arbitration Lawyers in Nepal

Prime Law Associates, led by Pradeep Thapa, is a prominent law firm in Nepal specializing in arbitration and alternative dispute resolution. The firm has represented a diverse clientele including international government agencies and multinational companies in complex arbitration proceedings. The firm possesses in-depth knowledge of both domestic and international arbitration laws and procedures. They have handled arbitrations under various institutional rules including ICC, SIAC, and NEPCA. Prime Law Associates offers services ranging from drafting arbitration clauses to representing clients in arbitration proceedings and enforcement of awards. They have handled arbitrations in sectors such as construction, energy, investment, and commercial contracts.

Conclusion

Arbitration in Nepal has evolved significantly, particularly since the enactment of the Arbitration Act, 2055 (1999). The legal framework now aligns more closely with international standards. The process offers several advantages including flexibility, confidentiality, and potentially faster resolution compared to traditional court proceedings.

However, challenges remain. The enforcement of foreign arbitral awards can sometimes be complicated by local court interpretations of public policy. Additionally, there is a need for more specialized arbitrators and further development of institutional arbitration facilities.

Despite these challenges, the trend towards arbitration in Nepal is positive. With increasing foreign investment and international trade, the demand for efficient dispute resolution mechanisms is growing. As Nepal continues to develop its arbitration framework and practice, it is likely to see an increase in both domestic and international arbitrations.

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