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Nepalese geography

Nestled in the Himalayan region between two giants, China and India, landlocked Nepal – with an area of 147,181 square kilometres and capped with the tallest mountain in the world, Mount Everest – has always remained independent. Because of this, Nepalese society has always demonstrated a unique nationalistic character. Due to its comparatively small agro-based economy, with a very low and unsustainable GDP growth rate constrained by various factors (eg, landlocked geography, poor infrastructural development, limited or untapped resources, lack of proper education and skill, mass of unskilled human resources, technological deficiency, unstable politics, inconsistent government policy, etc), Nepal’s alarmingly fast-growing import market is resulting in an annual trade deficit – a trend that is ever-increasing. Nepal has considerable potential in its water resources, which can be attitributed to the rivers originating from the Himalayas; however, it has to date failed to prepare a strategic plan for the proper and timely development of this sector. Nepal also has untapped natural resources and is rich in botanical products. In the view of economists, a stable government with a stable policy, and the timely implementation of projects with considerably high investment, can boost growth in a sustainable manner.

The culture of mediation within the centralised community

Due to the mountainous and difficult terrain of Nepal, there have always been severe constraints for rulers in accessing remote areas. The alternative in areas where an effective state mechanism is absent is for communities to adopt a culture of resolving civil disputes locally, and accepting the decisions of local elderly civilians. In accordance with tradition, it is normally delivered by five such civilians who are called pancha, a term that has since fallen out of favour through misuse by the strong royal political regime whose rights were limited by the people’s uprising of 1990. For centuries, this dispute settlement mechanism demonstrated access to justice in some form. Unless the court administers a mediation in civil disputes already pending, this mediation or dispute-resolving mechanism by the pancha has a moral and civil binding effect, rather than a legal one. The rural population has mostly respected and even willingly recognised such decisions taken in their community. Even in today’s judicial and quasi-judicial proceedings, various facts related to issues or disputes are determined through the sarjamin (a fact-finding process in which the statements of local persons are recorded and a majority voice recognised). This socially acceptable form of dispute resolution mechanism has given rise to the acceptability of the arbitration process – which has not come as a surprise to Nepalese society.

Legal recognition of arbitration as mode of dispute settlement

The Development Board Act, 1956 (amended in 1964), enacted the provision of arbitration as dispute settlement mechanism in the contract in which a development board is a party. With this Act, the government of Nepal had the right to form a development board as an incorporated body and with limited autonomy for the purposes of implementation of any particular project or development work. It was obvious not only that several contracts were essential to implement the objective of the development board, but also that disputes could be expected. To alleviate the risk of delay in the settlement of disputes through normal court procedures, the Act envisaged the provision of arbitration.

Despite the fact that the Development Board Act, 1956, incorporated such provision, there was no specific law governing arbitration or the procedure to administer such arbitration. Even in the absence of a specific law governing arbitration, the Supreme Court in one decision (Anang Man Sherchan v Chief Engineer, Nepal Law Digest/Ne Ka Pa, 2020, decision No. 220, Page 201, Full Bench) directed the parties to refer the dispute before arbitration, since they had mutually agreed to arbitratrate the dispute. This was a landmark development; however, there remained a risk for the execution of the arbitral award, because according to the normal execution procedure in the Civil Code only the decisions of the courts of Nepal were then executable.

The need for a separate law relating to arbitration

With growing imports from foreign countries, as well as the industrialisation and commencement of many developmental activities in the area of roads, irrigation, hydropower, transmission lines, exploration of minerals and petroleum products, etc, several contracts were signed in the 1960s. The parties also had to face a growing number of disputes arising out of the contract and the need was felt for specialised attention for resolution of such disputes. Many of the contracts were for the implementation of works funded by international funding agencies (eg, the World Bank, the Asian Development Bank, JICA, etc), and their respective procurement guidelines also required disputes under the contracts to be resolved by arbitration. Many agreements contained a dispute resolution mechanism by international arbitration rules (eg, the ICC Rules, the UNCITRAL Rules, etc). The Foreign Investment and Technology Act, 1981 (since replaced by the Foreign Investment and Technology Transfer Act, 1992) also required the settlement of disputes between foreign and local investors by arbitration under UNCITRAL Arbitration Rules, unless the Department of Industry consented to apply any other rules of arbitration. This new enactment prompted the need for a separate law to conduct arbitration in Nepal and also to enforce foreign awards.

Taking into consideration the requirements of the funding agencies and the Foreign Investment and Technology Transfer Act, 1981, the royal regime (as it then was), through the legislature, enacted the Arbitration Act, 1981 (since replaced by the Arbitration Act, 1999). It allowed the parties to decide the number of arbitrators in their arbitration agreement and, if the parties failed to prescribe such number, provided that statutorily there could be only one arbitrator under that Act. The district court (the trial court) was prescribed as the appointing authority in the event that the parties failed to name such appointing authority. The Act also prohibited the filing of any case in the courts of Nepal if the agreement had a pre-agreed provision for arbitration as the dispute settlement mechanism. In the absence of an arbitration agreement, the Contract Act required the parties to file their suits or claims before district courts; however, even if such case were already filed, the parties were given the liberty to agree to withdraw such pending cases from the court for referral to arbitration. While there was no provision for appeal against the arbitral award, the Act allowed the parties to file a review or revision petition at the (then) regional court (later converted into an appellate court by the Constitution of the Kingdom of Nepal, 1991), for the correction of the arbitral award under limited grounds.

An award was liable to be set aside if the court was satisfied that the award:

  • was biased or mala fide;
  • was secured in a fraudulent manner or under duress or undue influence;
  • went against any prevailing law;
  • was inherent with apparent legal errors;
  • was vague and meaningless;
  • went against any condition stipulated in the agreement; or
  • was based on a wrong principle.

These conditions gave a wide range of authority to the court to nullify the awards; if so nullified, the court was allowed either to send the file back with a directive to the original arbitrator(s) to initiate fresh proceedings. In Krishna Chandra Jha v Dinesh Bhakta Shrestha (Nepal Law Digest/Ne Ka Pa, 2059 decision No. 7069, Page 285, Full Bench), the Supreme Court decided that the appellate court’s authority, in the event of a challenge to the arbitral award, was limited to correctional jurisdiction only.

This Act introduced the procedure for execution of arbitral awards by the court as its own judgment.

Awards rendered in a foreign country, in agreements signed by a resident of Nepal that contained the provision of arbitration in any foreign country, in accordance with the law of that foreign country, were also made executable in Nepal by this Act. However, execution of a foreign arbitral award was allowed only if:

  • the arbitrator had been appointed in accordance with the provision of the agreement or the law of the country where the award had been rendered;
  • the parties had been informed of the proceedings in a timely manner as a right of the hearing;
  • the award was based solely on the conditions stipulated in the agreement; and
  • the award had attained finality under the law of the country where it was made.

As a reciprocity provision, the Act prohibited enforcement of an award rendered in any foreign country that did not itself enforce an award rendered in Nepal in accordance with the prevailing Nepalese law.

The need for a change

Because of the people’s movement in 1990 for democracy, and following promulgation of the new Constitution of the Kingdom of Nepal in 1991 (which paved the way for a democratically elected government), a new dimension was opened in the commercial and industrial arenas in Nepal, with an enhanced scope for, and interest in, foreign investment. Advances in the fields of hydropower, infrastructure development and mineral exploration also gained momentum. As a result of these economic activities and the exposure of Nepal to the developed nations, imports of commercial and consumable goods and the export of Nepalese products substantially increased; consequently these activities gave rise to disputes. With increased interest from foreign financing agencies in development projects, and the expansion of economic activity beyond Nepalese borders, the nature of contracts and related disputes also changed significantly and the need for international arbitration gradually emerged. On 26 September 1997, the House of Representatives declared having acceded the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention 1958) and published this declaration in the Nepal Gazette on 27 September 1997. Besides this, court intervention during the arbitration process, as well as in nullifying the awards under the broad authority granted to the court by the law, became a big concern for litigant parties. There was a growing demand to limit court intervention in the arbitration process and in the review or correction of the award. With a fast-growing scope for domestic and international arbitration, such appropriate changes in the arbitration law became inevitable. Consequently, the new Arbitration Act 1999 (2055 BS) was enacted, adopting the recognised principles and procedures of UNCITRAL Model Law. This Act repealed and replaced the Act of 1981.

The Arbitration Act 1999 (2055 BS)

Arbitration agreement

The Act requires such arbitration agreement among the parties to resolve disputes by arbitration. For clarity, this Act defines the term ‘agreement’ and includes the following:

  • any contract that contains a provision for arbitration or any separate agreement signed in connection therewith; or
  • any letter, telex, telegram or telefax, or any other similar message, exchanged between the concerned parties through a mode of communication of which records can be maintained in a written form that provide for referral of their disputes to arbitration; and
  • if one party submits a claim and refers any dispute to arbitration, and the other party submits their defence against the claim without rejecting the proposal to refer the dispute to arbitration, such conduct also amounts to an arbitration agreement.

If there is such arbitration agreement in the manner as detailed above, recourse to arbitration becomes mandatory and no suit in such a dispute may be filed in any court of Nepal. In Rakesh Kumar v Ram Krishna Rawal (Nepal Law Digest/Ne Ka Pa, 2066 decision No. 8078, page 272, Division Bench), the Supreme Court clearly established the principle that no court will have primary jurisdiction over a dispute arising out of a contract in which parties have agreed upon arbitration as the form of dispute resolution.

The Act also allows – indeed, it encourages – litigating parties, in a pending civil suit of a commercial nature that may be arbitrated, to separately agree to an arbitration agreement and apply to the court for withdrawal of the case for referral to an arbitrator or arbitral tribunal. Such application must contain the names of the agreed arbitrators and a declaration that the parties agree to abide by the arbitrators’ conclusion. If the court is satisfied that the pending suit is of an arbitrable commercial nature, the court may order cancellation of the record of such civil suit and advance it for settlement through arbitration.

Rules of arbitration

Except where the prevailing law requires arbitration to be conducted in accordance with any specific arbitration rule, the parties to an arbitration agreement are free to choose the set of rules for such arbitration or to determine the procedure. In the event of failure to reach an agreement on the arbitral procedure, and unless any law prescribes such rule, the procedure contained in the Arbitration Act, 1999, has to be followed. Statutorily, under the Foreign Investment and Technology Transfer Act, 1992, disputes between permitted foreign and domestic investors must be resolved by arbitration conducted under the UNCITRAL Arbitration Rules with Kathmandu as the venue. However, this strict provision concerning the procedure of the arbitration rule and the venue is relaxed in the event of dispute between a foreign investor and the domestic investor of a joint venture company that contains fixed-asset investment exceeding 500 million Nepalese rupees, and where parties are allowed to select the arbitration rules and venue of their choice.

Notice of arbitration

There is no clear provision of a ‘notice’ requirement in the Act for arbitration, giving rise to a confusion when determining the date on which arbitration is deemed to have commenced. The Act simply states that the process of appointing an arbitrator shall commence within 30 days from the date that the cause of action for dispute resolution arose. Furthermore, in the event that the arbitrator or arbitrators are named in the arbitration agreement, the claim has to be presented before the arbitrator(s) within three months of the date on which such dispute arose. Similarly, in the event that no arbitrator has been named, the claim has to be filed within three months from the date the arbitrator(s) are appointed. In the latter case, though not expressly written in the Act, it is clear that the date for appointing the arbitrators should be the date of the last appointment that fully constituted the tribunal, if there is more than one arbitrator.

Courts in Nepal take the issue of statutory limitation extremely seriously. In Rajendra Man Sherchan v Appellate Court, Patan (Nepal Law Digest/Ne Ka Pa, 2064 decision No. 7823, page 326, Division Bench), the Supreme Court interpreted that, under Arbitration Act, 1999, the process of appointing an arbitrator must commence within three months from the date on which the dispute arose.

Appointment of the arbitrator

The arbitration agreement can prescribe the number of arbitrators; however it must be an odd number. If such agreement provides for an even number, the arbitrators so appointed must appoint one more so that the tribunal comprises an odd number of arbitrators. If the parties fail to determine such number in the arbitration agreement, statutorily the tribunal shall consist of three arbitrators: one to be appointed by each party and the third by the party-selected arbitrators. All arbitrators must take an oath of impartiality and independence before commencing arbitration. The format of such oath is statutorily prescribed in the Act.

The Act also requires the parties to designate the appointing authority. In the case of a sole arbitrator, or if either party fails to appoint their arbitrator, or if the two arbitrators fail to appoint the presiding arbitrator, such appointing authority may be required to fill the void. If the parties have failed to name such appointing authority, the appellate court of the competent jurisdiction over the venue of arbitration acts as the statutory appointing authority. This has always prompted questions around the scenario where the governing rules of arbitration have been prescribed in the arbitration agreement, but the parties have failed to name the appointing authority. There are many instances where the incorrect drafting of an arbitration agreement or an erroneously named appointing authority has created extreme confusion and delay in resolving the dispute. The author of this chapter has seen some fundamental errors in some government as well as private contracts, where the Chief Justice of the Supreme Court of Nepal or some other court judge or attorney general was named as either the arbitrator or the appointing authority. Such incorrect drafting led the parties to resolve the fundamental procedural requirement through the normal legal recourses that excessively delayed dispute resolution by arbitration. In addressing the issue relating to the appointing authority in arbitrations where parties have agreed to follow some internationally accepted arbitration procedure, the Supreme Court, in Bikram Pandey v Ministry of Physical Planning and Construction (Nepal Law Digest/Ne Ka Pa, 2067 decision No. 8437, page 1346, Division Bench), took a stand that the parties may agree to adopt internationally recognised rules, such as the UNCITRAL Arbitration Rules, as an agreed condition in a contract to govern arbitration, but that such rules cannot have a superseding effect over the national law in terms of the appointing authority, unless the appointing authority is clearly prescribed in the agreement. The Court further interpreted that even if the parties agreed to conduct arbitration under the UNCITRAL Arbitration Rules, their failure to name an appointing authority in the arbitration agreement will not give automatic authority under UNCITRAL Rules to designate an appointing authority. Thus, the party that fails to appoint an arbitrator under the UNCITRAL Arbitration Rules will not have the right to claim that the appointing authority in such situation should automatically be the Permanent Court of Arbitration. Instead, the Supreme Court concluded that the relevant party can move their petition to the appellate court against such failure to appoint an arbitrator, and that the appellate court shall have such statutory jurisdiction to appoint, all in accordance with Arbitration Act, 1999.

Once an arbitrator is appointed, the position may only fall vacant if the arbitrator resigns, refuses to act as arbitrator, dies, becomes disqualified or is removed by the arbitrator(s) or the appellate court. If the position falls vacant, the new appointment must be made by the same procedure with which the arbitrator was originally appointed. The appellate court is statutorily required to prepare a panel of potential arbitrators along with details of their qualifications, experience, addresses and other contact information. Such lists are also sent to the Supreme Court for their records.

Qualification of arbitrators

The Act states that persons who fall under the following criteria shall be disqualified for appointment as arbitrators:

  • they are ineligible to sign a contract under prevailing laws;
  • they have been punished by a court on criminal charges involving moral turpitude;
  • they have become insolvent or been declared bankrupt;
  • they have a personal interest in the dispute required to be settled through arbitration; or
  • they do not have the eligibility or qualification as specified in the agreement.

Before signing the oath, the arbitrator must clarify any matters that may raise reasonable doubt about his or her impartiality or independence. This oath must be signed by arbitrators on two copies of a prescribed form, one of which has to be filed before the appellate court.

Removal of arbitrators

The Act allows the parties to prescribe the preconditions and procedures in the agreement for removal of arbitrators. In the absence of this, either party may apply before the arbitrators for removal of any arbitrator upon happening of an event where:

  • an arbitrator clearly shows bias instead of working in an impartial manner;
  • an arbitrator engages in improper actions or commits fraud in the course of arbitration;
  • an arbitrator frequently makes mistakes or creates irregularities in the arbitration proceedings;
  • an arbitrator fails to attend more than three meetings without providing satisfactory reason and with the intention of delaying proceedings;
  • an arbitrator takes any action that is opposed to the principles or rules of natural justice, or
  • an arbitrator lacks the requisite qualifications or ceases to be qualified.

An application with reference to any of these criteria must be filed before the arbitrators within 15 days of being made aware of any of these conditions. If the arbitrator named in such complaint does not resign, or if the other party in the arbitration fails to accept such accusation, the arbitrators must take a decision within 30 days of the application. Against such decision, a complaint may be filed with the appellate court whose subsequent decision shall be deemed as final. This provision fails to address a situation where the arbitrator or the tribunal fails to take a decision within 30 days. Besides this, the unanswered question arises as to who may file such complaint against the decision of the tribunal to remove an arbitrator. It seems that the locus standi has also been intentionally left open to give the accused arbitrator an opportunity restore his or her reputation and for the disputing parties to be satisfied.

Cost of arbitration and arbitrator’s fee

Parties have a right to determine how they intend to deal with the issue of fees while signing the arbitration agreement, but most contracts fail to do so. Therefore, the costs of arbitration and remuneration fees are fixed by the arbitrator in consultation with the parties; they also depend on the nature of the dispute and claim. In the absence of institutional arbitration, payments are made to an ad hoc bank account from which expenses are disbursed. In domestic arbitrations, the Nepal Council of Arbitration’s (NECPA’s) guidelines are mostly followed, while in arbitration involving international contracts the ICC Rules and UNCITRAL Rules are also taken as guideline to determine the remuneration. Except where otherwise provided in the agreement, the Act states each party must bear the expenses required for the arbitration proceedings in the proportion prescribed by the arbitrator, taking into account the relevant circumstances.

The venue and language of arbitration

The venue of the arbitration is the venue mentioned in the agreement; if no such venue is mentioned, however, then the parties shall determine the venue. In case of failure by the parties to agree on a venue, it shall be as determined by the arbitrator within 15 days of his or her appointment. For such determination of venue, the Act requires the arbitrator to consider relevant and reasonable circumstances. For the purposes of witness statements, expert opinions and the inspection of any document, object or place, the arbitrators may determine a place as they deem appropriate, unless the parties have made any other arrangements. This provision sometimes gives rise to the question of whether the arbitrators are free to hold their meetings and hearings in places other than the designated venue. During the 10 years of political conflict prior to the Comprehensive Peace Accord concluded between the government of Nepal and the Communist Party of Nepal (Maoist) on 21 November 2006, most arbitrations involving foreign parties or arbitrators conducted their hearings and sittings outside Nepal, citing security reasons, but still maintained that the venue would continue to be prescribed in the agreement. Practically, such sittings and hearings were conducted at other places with the consent of the parties and no disputes were reported to have arisen as a result.

The Act requires arbitration proceedings to take place in the language specified in the agreement; failing this, the parties may determine the language. If the parties fail to agree on this, then the language of the agreement shall be applied.

Claims, defence, counterclaims and limitations

Unless the agreement provides otherwise, a claim before the arbitration must be filed in writing within three months from either the date on which the cause of dispute arose (in the event that the agreement names the arbitrator) or from the date on which the arbitrator was appointed (if the arbitrator has not been named in the agreement). Such a claim must be made in writing and provide in explicit detail the subject matter of the dispute, the remedy sought and the relevant evidence. A copy must be given to the other party. The respondent to this must submit its objection to or defence of the claim so filed, along with the counterclaim (if there is one), within 30 days of receipt of the claim. In the case of a counterclaim, the claimant may file a rejoinder against it within 15 days. On the reasonable request of the relevant party, and within 15 days the prescribed time having lapsed, the arbitrators may extend the period for submission of statement of defence, counterclaim or rejoinder by a maximum of seven days.

Even if the respondent fails to respond to the claim in writing within the prescribed period, the claims are not automatically deemed to be accepted and the arbitrators must make a decision having analysed the available evidence. The failure of any party to appear on the hearing date does not prohibit the arbitrators from deciding on the referred disputes.

The arbitrator’s power to determine the jurisdiction

One of the unique features of the Act is the arbitrator’s power to determine the jurisdiction. If any party claims that the arbitrator has no jurisdiction over the dispute referred to the him or her for settlement, or that the contract out of which the dispute has arisen is itself illegal or null and void, such claim on the jurisdiction has to be filed before the arbitrator prior to filing of the statement of defence and the counterclaim. The arbitrator has to address this issue prior to the commencement of further arbitration proceedings and take a decision on whether the arbitrator has jurisdiction and on the validity or effectiveness of the contract. There is no time limit prescribed for an arbitrator’s decision on jurisdiction; however, once such decision is taken on a jurisdictional issue, the party that is not satisfied with the decision may file a petition before the appellate court within 30 days of receipt of the arbitrator’s decision. If so challenged, the decision of the appellate court on the matter becomes final.

Even if the validity or effectiveness of a contract is questioned, a provision for the arbitration agreement for the settlement of disputes is regarded as a valid, independent agreement and remains unaffected, even if the arbitrator decides that the contract is illegal or null and void. On the other hand, the mere filing of a petition with the appellate court against an arbitrator’s decision on jurisdictional issues does not prejudice the power of the arbitrator to continue the proceedings and pronounce the decision before the petition is finally disposed of by the court. Sometimes it poses a risk and all procedures adopted until then may become futile.

Arbitrator’s authority

The arbitrator’s authorities under the Arbitration Act include all such requirements that normal procedural law provides to the trial courts. Under such authority, the arbitrator can: order the parties to appear and submit documents and record their statements as required; record statements of witness; appoint an expert and seek their opinion or request examination on any specific issue; and inspect the concerned place, object, product, structure, production process or any other related matter which are connected with the dispute, etc. If there is any material or object that is likely to be destroyed or damaged, the arbitrator’s rights extend to selling them in consultation with the parties and keeping the sale proceeds as a deposit. The arbitrator can also issue a certified copy of the document in his or her possession. At the request of either party, the arbitrator can also exercise the power to issue preliminary orders or interim or interlocutory orders on issues related to the dispute, and also to take a conditional decision. Such orders may be challenged to the appellate court within 15 days of the date of receipt of the decision. The appellate court’s decision shall be deemed final.

Principles of justice and conscience, and natural justice

If Nepalese law is the governing law for arbitration, the arbitrator has to follow substantive law, except otherwise provided for in the agreement. Arbitrators are allowed to settle the dispute according to the conditions stipulated in the relevant contract; for this purpose the arbitrator has to pay attention to the commercial usages applicable to the transaction concerned. However, the arbitrator can settle the dispute as per the principles of justice and conscience, or natural justice, provided the disputing parties explicitly authorise the arbitrator to do so. These provisions may give rise to various questions and in interpretations. In Krishi Samagri Company v Appellate Court Patan (Nepal Law Digest/Ne Ka Pa, 2064 decision No. 7905, page 1558, Division Bench), the Supreme Court required the interpretation of contracts as per the agreed conditions and, in its absence, the arbitrator may refer to the background of the contract, earlier correspondences, the generally accepted principles of the contract, international practices, court precedence, etc.

Issues that may not be arbitrated

A circumstance may arise with any issue during arbitration that is inextricably linked with any other issue on which the arbitrator cannot pronounce a decision. If such situation arises, the arbitrator must refrain from taking a decision on that particular issue and the parties have to be informed accordingly. Either party is free to file a complaint petition to the appellate court within 35 days of receipt of notice. There is no time limit for the court to decide on such issue, but it is obvious that the arbitration will be on hold regarding that particular issue until the court delivers a decision.

Amicable settlement during pendency of arbitration

During the arbitral proceedings, parties may agree on a compromised settlement. For this, the parties may submit an application to the arbitrator explicitly stating the conditions under which they would like an amicable settlement. If the parties agree, they may sign a deed for such compromise before the arbitrator; this deed is not subject to challenge before the appellate court. However, on issues concerning actions not taken according to the deed of compromise, either party may approach the court in the event that the other party fails to comply with the same.

The arbitral award

If there are three or more arbitrators, it is preferable to have a unanimous decision. If not, then the majority decision prevails. However, if such majority cannot be ascertained due to the different opinions of the arbitrators, the Act recognises the opinion of the presiding arbitrator, unless there is any restriction or specified procedure already prescribed in the agreement itself. The arbitrator is free to express a dissenting opinion. Sometimes, an arbitrator may either fail or refuse to sign for some reason; in this case the remaining arbitrators must sign the award, explaining the reason for the failure of any other arbitrator to sign.

All awards must contain:

  • the brief particulars of the matter referred for arbitration;
  • the issue of jurisdiction, if so raised by any party, and grounds for deciding that the matter falls under the jurisdiction of arbitration;
  • the decision, and grounds of the decision, of the issue arbitrated;
  • entitlement to and quantification of claims or counterclaims,
  • the interest on the amount to be realised as per the agreement, along with the additional rate of interest to be charged pending execution of award following the expiry of the self-execution period (45 days from the date of delivery of the award); and
  • the place and date of award.

While deciding on the pendente lite interest, the law allows the arbitrator to apply a normal commercial-bank interest rate. Such award has to be read out in the presence of the parties and a written copy has to be delivered to each party with a record of such delivery. In case any party is absent, or any party is present but refuses to receive a copy of such award, a notice must be formally served along with a copy of the award to said party, detailing the party’s absence or refusal of acceptance.

While the arbitral award is regarded as final and binding, it may only be corrected by the decision of the appellate court requiring the arbitrator or the tribunal to correct such error of law or under provision of contract. Such order for correction can be issued by the appellate court after hearing the petition of either party for the setting aside of the award. In rare cases, the arbitral award and decision of the appellate court refusing to set aside the award have been challenged through a writ petition at the Supreme Court on the basis that the petitioner has exhausted all available remedies and that there were gross violations of law. In Ministry of Finance v Appellate Court Patan (Writ No. 2898 of 2059, Date of order 2069), the Supreme Court issued a writ of certiorari to cancel the arbitral tribunal’s award on the ground that the award failed to identify the precise provision of the contract under which the award was based. Upon cancellation of the award, the Supreme Court ordered both parties to re-initiate the arbitration proceeding. However, it is rare for the Supreme Court to intervene in cases.

In the case of errors of arithmetic, printing or typing, or similar minor errors, and for insertion of omitted particulars that do not prejudice the substance of the decision in the case, such correction may be carried out if:

  • the arbitrator finds there are such errors and decides to make appropriate corrections within 30 days of rendering the award; or
  • either party observes any mistake in the award and applies to the arbitrator for a correction within 30 days of receipt of a copy of the award, and where the arbitrator agrees to such mistake.

The correction has to be made within 15 days of receipt of the application of the party. In addition, if the arbitrator has not given any decision on any issue from among the disputes raised in the claim of either party, the concerned party may obtain the consent of the other party and submit an application for a decision limited to that issue within 30 days of the date of delivery of the decision by the arbitrator. In such case, a supplement to the award may be delivered within 45 days of the date of application on such issue only. The Act also allows either party to seek an explanation on any part of the award that the party considers ambiguous or vague. Such application should be filed before the arbitrator within 30 days from the date of delivery of award, with a copy of such petition to the other party. In the event of such request, the arbitrator may issue clarification within 45 days on such issues raised.

Setting aside of the award by the court

This is one of the major concerns of arbitrating parties. Since not all parties can always be satisfied, there is a trend to file a challenge or take up the matter with the court for final determination. For this reason, parties may attempt to have the award rejudged through court to satisfy themselves that the dispute has ultimately been heard by said court. Under the old Arbitration Act of 1981, the conditions for the setting aside of the award were very broad, and many cases had been filed against arbitral awards. In 1999, the new Arbitration Act limited the authority of the courts to set aside the award.

A party dissatisfied with the arbitral award may move an application, within 35 days, before the appellate court to set aside the award and correct it on the grounds that;

  • any party to the agreement was not competent, for any reason, to sign the agreement when it was entered, or the agreement was not valid under the law of the nation that governed jurisdiction over the parties, or such law was not clear and the agreement was not valid under the laws of Nepal;
  • due notice was not served to the party, in a timely manner, during the appointment of the arbitrator or concerning the arbitration proceedings;
  • the decision was taken on a subject that was not referred to an arbitrator or against the mandate given to the arbitrator; or
  • except when an agreement has been signed that is contrary to the laws of Nepal, the procedure to appoint an arbitrator or other procedures adopted therein failed to adhere to the agreement signed between the parties – or, if no such agreement is available, against provisions of this Act.

In addition to the above, the appellate court is also authorised to set aside the award if the dispute settled by the arbitrator was not within the arbitrator’s jurisdiction and shouldn’t have been decided by the arbitrator under the laws of Nepal, or if the decision taken by the arbitrator was likely to be detrimental to the public interest or public policy.

The Supreme Court has announced, repeatedly, that by the very nature of disputes referred to arbitration, they must be concluded based on merit and through that process only. In Roads Department v Waiba Construction Pvt Ltd (Nepal Law Digest/Ne Ka Pa, 2067 decision No. 8479, page 1685, Division Bench), it has been established that an arbitral award based on analysis and examination of the facts should not be judged by the courts, and that the arbitrator is the last judge in such matter. The reference was given in the matter of construction-related contract in which disputes of a technical nature arose.

Enforcement or execution of award

Domestic arbitration award

A fundamental requirement of arbitration is the need for self-execution within 45 days of receipt of a copy of an award. During this self-execution period, no interest accrues. However, if the award is not executed within the 45-day time limit, the concerned party may file an execution petition at the district court, having jurisdiction within 30 days from the date of expiry of the self-execution period of 45 days. While the Act envisages that the district court shall ordinarily execute the award within 30 days (as if it is its own judgment), practically speaking this is impossible since the district court has to check the finality of the award. In Anil Kumar Pokharel v District Court Kathmandu and others (Nepal Law Digest/Ne Ka Pa, 2064 decision No. 7836, page 460, Division Bench), the Supreme Court interpreted that where either party files a petition for the setting aside of an arbitral award, said award shall not be deemed final until the decision of the appeal court.

The Arbitration (Court Procedures) Rules, 2002 (2059 BS) require that such petition for the setting aside of the award must be heard within 15 days after the other party has been notified and has duly appeared at the court, but practically speaking it takes about a year to conclude the matter at the appellate court if the issues are of a complex or technical nature. Even after such final decision by the appellate court, the district court has to issue a 35-day notice to the relevant party for execution of the award, and an amount is demanded by the court for payment to the applicant as per the award. Because of a lack of strict procedure and accountability, many parties actually defy such notice in an attempt to frustrate the applicant. In such case, it is down to the applicant to find the property details of the other party against whom execution has been demanded and provide such information to the court for attachment. If the other party is a government, the execution becomes more and more complex since the court has limitations in, or will try to avoid, attaching government property. In many instances, government bodies (ministries, departments, etc) are found to have ignored such execution notices of the court for a long time. There are many instances where such execution has taken years. There is a need for strict compliance requirements and accountability with the government officials to expedite such procedure. This wait-and-see period is frustrating for the concerned party who have waited for long to secure an award.

Foreign arbitration award

A party intending to execute, in Nepal, an award from a foreign country, must submit an application to the appellate court along with an original or certified copy of the arbitrator’s award; an original or certified copy of the agreement; and certified translations of both into Nepalese. Since Nepal has acceded to accept the New York Convention of 1958, it is obliged to execute the foreign award emanating in the countries that are party or have acceded to such convention. However, before ordering for execution, the court shall verify whether:

  • the arbitrator was appointed and award was made according to the laws and procedure mentioned in the agreement;
  • the parties were notified about the arbitration proceedings in time;
  • the award was made according to the conditions mentioned in the agreement or upon being confined only to the subject matters referred to the arbitrator;
  • the award was final and binding on the parties according to the laws of the country where the award was made;
  • the laws of the country of which the petitioner is a national, or the laws of the country where arbitration proceedings were conducted, contain provisions under which arbitration award given in Nepal can be implemented; and
  • the petition was filed for the execution of the award within 90 days from the date of award.

Only if the appellate court is satisfied that the above conditions are available shall it forward the award to the district court of competent jurisdiction for execution. However, no award rendered in a foreign country can be executed in Nepal if the issues on which the award has been rendered cannot be settled through arbitration under the laws of Nepal, and if the implementation of the award is detrimental to public policy. These circumstances are yet to be addressed by the courts of Nepal; hence, no clear interpretation of ‘public policy’ is available.

Fee for enforcement of award

The statutory fee for enforcement of award through courts is 0.5 per cent of the amount received through the implementation of the award. If the amount of the award cannot be quantified, but its value can nonetheless be determined, a fee amounting to 0.5 per cent of the current market value or amount of the action to be taken shall be payable. If the value cannot be quantified, the execution fee shall be 500 Nepalese rupees. All amounts paid to the court may also be recovered from the other party if the concerned party files an application before the district court.

Record of arbitration

Upon completion of the arbitration proceedings and delivery of the award, the arbitrator shall prepare the case file of the document, evidence, statement of the concerned persons, award and all other relevant documents related to the arbitration and submit such case file to the district court, where such records are archived.

There are some institutional arbitrations involving the Nepalese government or, more recently, administered by International Chamber of Commerce (ICC)/the International Court of Arbitration (ICA). In such case, the case files retained by the ICC/ICA is not automatically transferred to the district court in Nepal. This lack of clarity amongst the parties, the arbitrators and the ICC has caused some inconvenience in matters of execution, because the court has to verify the submissions made by the party requesting execution and, in the absence of such original documents at the court, the execution procedure cannot proceed. For parties of ICC-administered arbitration, it is advisable to give this information to the arbitrators (mainly foreign nationals) and seek an order to send a duly certified copy of the arbitration documents for the district court’s archive.

Court interventions – a growing concern

Arbitration as an effective alternative dispute resolution mechanism is very slowly gaining momentum but is yet to gain a foothold – or the confidence of many. In many instances, court officials also treat arbitration as a parallel procedure competing with the court. This causes confusion and inconvenience in many instances and prompts court intervention whenever such opportunity arises. Sometimes parties who are uninterested in the arbitration attempt to misuse the court’s jurisdiction and arrange for the interventions to frustrate the other party. Such interventions either are in the form of a petition for injunction and interim or stay order, or a repeated petition for determination of jurisdiction. In many instances the arbitral awards are nullified entering into the merit as if it is hearing an appeal; despite that, the scope for challenging the award is very limited and the court is not supposed to enter into merit of the dispute.

Under the Arbitration Act, a court’s role is limited to;

  • the appointment of an arbitrator, if so demanded by a party, or the appointment of a presiding or third arbitrator, or removal of arbitrator by acting on the petition of either party;
  • challenging the arbitrator’s determination of jurisdiction;
  • challenging the issuance of preliminary orders, or interim or interlocutory orders, or a conditional decision;
  • setting aside the award on limited grounds; and
  • execution of the award.

Excepting the above, in theory no court has jurisdiction over any other matter required to be addressed by the Arbitration Act itself, but in practice time and again we find a court’s interventions or interest in the arbitration process and award. There is a need for proper awareness in the legal community to alleviate such court intervention.

Institutions providing arbitration support in Nepal

The Nepal Council of Arbitration (NEPCA) was founded in 1991 as a non-governmental and not-for-profit organisation to provide institutional support for arbitration for resolution of commercial disputes. It mainly provides administrative services for ad hoc arbitration. It also acts as an appointing authority at the request of the parties. It has maintained a panel of experts eligible to act as arbitrators and can provides a list thereof if so required. It aims to provide services for institutional arbitration; however, at present it is involved in ad hoc arbitration only. It has its own rules of arbitration that are presently being adopted in various contracts. The rules also provide the fee structure for arbitrators and for administering the proceedings.

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