Arbitration is a legally and commercially accepted dispute resolution mechanism in Nepal, and its acceptance can be judged by the increased attention it is receiving from contracting parties and the growing number of arbitration proceedings conducted in the country. Parties aim for an arbitration clause that will produce mandatory consequences for the parties with no (or minimal) intervention from the judiciary prior to or after the award, a clear dispute settlement demarcating the parties’ liability without further reference to any other cumbersome procedure, and speedy judicial enforcement. The Nepalese Supreme Court has repeatedly ruled that there is no right to appeal against an arbitral award and that the jurisdiction of the appellate court is of a correctional nature, not on the merits of the case, but on limited grounds, such as the validity and legality of the contract, the right to be heard, the issue of jurisdiction, the arbitrability of the dispute under Nepalese law and awards that are against public policy or the public interest. Even within that limited jurisdiction there is scope for interpretation, and many interpretations depend on the wisdom of judges.
In principle, arbitration is preferred because both parties have the right to appoint an arbitrator of their choice, who for the most part are recognised experts or experienced in the fields related to the dispute, or known to the parties. Apart from this, the statutory provision that the arbitration award can be enforced by courts as if it were a court decision gives confidence to the litigating party. Despite this background, in practice parties often find the process frustrating for various reasons. Some examples of the negative aspects of arbitration in Nepal are briefly explained in this article. This should not be taken as a criticism of any party to the contract, the court, the judges or the government, but as a warning to take appropriate measures at the time of signing the contract, for risk analysis, for conceptual clarity and so on. Some of the frustration can be attributed to the bad drafting of contract provisions, particularly the arbitration clause, or to the lack of conceptual clarity among parties to the contract, judges in court and even court officials, whether during the hearing of a challenge to an arbitral award or during its execution.
Some of the common issues that can render arbitration clauses defective are dealt with in this article. Such defective arbitration clauses, if not properly analysed or evaluated at the time of signing, or if simply ‘cut and pasted’ from other bad or irrelevant contracts, ultimately fail to deliver. Often the suffering party will blame the principles or concepts behind the arbitration, despite the fact that they had willingly signed the contract. Any arbitration provision in an agreement is expected to deliver a result, but in the absence of proper care at the time of the drafting of an agreement, and particularly the arbitration clause, a badly drafted arbitration provision will certainly increase uncertainty, take up a potentially unlimited amount of time and attribute unexpected costs to the parties. Such provision may ultimately result in the abandonment of arbitration or may never be enforceable as an arbitration clause. Such ‘pathological clauses’ also invite court intervention in many instances, and benefit the hostile party that does not wish to participate in the arbitration process, since that party may be in a beneficial position if arbitration does not take place. Recently, there have been many instances where courts have avoided unnecessary intervention before, during or even after arbitration, but there are a few examples of judges who see arbitration as a parallel or competitive process to court proceedings and they prefer to retain superiority in dispute settlement. In one example, an award was set aside after a challenge against it was heard only because, in the decision part of the process, the tribunal did not mention the particular clauses of the contract under which one party’s entitlement was determined. Despite the fact that all such clauses were mentioned in the claim, rejoinders and arguments by the parties and were even recorded in the award, the decision was set aside and sent back for correction because, in the last paragraph of the award, the relevant provisions of the contract were not mentioned. This did not change the outcome of the process, and only served to waste the time and money of the parties involved. In another contract in Nepal, the parties showed a clear intention to arbitrate and resolve the dispute arising from the contract, but the contract stated that the ‘Chief Justice of Nepal shall be the sole arbitrator’. In another contract, the parties unilaterally stated that the ‘Chief Justice of Nepal shall act as appointing authority’. Another example is that of a major contract in which the parties agreed to first refer all disputes to a dispute adjudication board (DAB), whose recommendations could only be challenged by invoking arbitration; but there was no provision to form the DAB. Unlike for the appointment of an arbitrator by the Appellate Court, as prescribed in the Arbitration Act, there is no similar provision for appointment of DAB members. Failure to name DAB members caused a substantial delay, until both parties mutually agreed in good faith to waive the DAB requirement so as to make arbitration provision workable. In another contract, it stated that a DAB decision, if not challenged, shall become final and binding and be enforceable by the courts of Nepal. Unfortunately, the Nepalese legal system does not provide any mechanism for the enforcement of DAB recommendations or decisions, and such enforcement is limited to foreign and domestic arbitral awards. On rare occasions, contracts have been drawn up where parties have accepted both platforms concurrently (ie, the court and arbitration). One such contract stated that the contract and arbitration would be governed by domestic laws, that the courts of a particular location should have jurisdiction and that the parties would have the choice as to whether to resort to arbitration or otherwise.
In yet another contract, parties agreed to refer the dispute to arbitration to be conducted by the Rules of the International Chamber of Commerce (ICC) in Paris. Whether the word ‘Paris’ indicated the venue of arbitration or the address of the ICC was subject to interpretation. The contract amount was fairly small and the claim was also minimal, meaning it was beyond the claiming party’s capacity to resort to institutional arbitration in Paris. The claimant abandoned the right to claim because of the complexity and lack of capacity to deal with the arbitration proceeding in Paris. When asked, the party simply stated that they were in a hurry to sign the contract and never gave any importance to (and possibly never read) the dispute settlement clause during signing. The parties lacked even basic information about the difference between administered and ad hoc arbitration, number of arbitrators, method of selection, choice of arbitration rules and importance of designating the place of arbitration. Likewise, in a contract between a government department and a contractor for the construction of a bridge, the contract simply stated that arbitration should be conducted in accordance with the Arbitration Rules of Nepal. However, while there was an act of Parliament (the Arbitration Act in force), the government had not formulated any rules under such Act. As the government did not respond to the contractor’s notice for the appointment of an arbitrator, the contractor had to approach the District Court (under the earlier Arbitration Act, 2038 of 1981), who appointed a justice of the Appellate Court as arbitrator. Both parties accepted the appointment and cooperated with the arbitrator, but the award delivered by such arbitrator (a sitting judge) was ultimately nullified by the Supreme Court because the Constitution did not allow any sitting judge to be appointed for work other than in court (with only a few exceptions). The court further directed the government to formulate a rule to conduct such arbitration (Supreme Court Bulletin, year 10, vol 8, p 5) but without prescribing a time limitation. In the absence of such a rule being in place, the arbitration proceeding remained in limbo for a decade until a high-ranking government official took the initiative to resolve the dispute under the new Arbitration Act. This new arbitration agreement paved the way for arbitration to begin and the dispute was ultimately resolved. This proves that a commitment from a responsible official in a government ministry or department can make a difference to getting disputes resolved more quickly, provided there is a will to resolve them.
These are a few instances that do not represent the level of intelligence or ability of the drafters of the contracts, the working of the judiciary, or the government or society as a whole. Recently, many employees and clients have emphasised this clause and taken time to analyse what provisions will deliver better results. There are also many responsible government officials who fully respect the courts and give importance to arbitration. These examples only serve to highlight for the reader how an alternative dispute resolution mechanism develops over a period of time, why conceptual clarity is essential and how important it is to carefully draft the arbitration clause in an agreement.
Nullification of an award by courts in Nepal
The courts adopt a conceptually modern approach that entails refraining from unnecessary intervention in arbitral proceedings so as to uphold the arbitration clause and make it effective, rather than adopting an interpretation that impugns such clause. Many court decisions have demonstrated a pro-arbitration approach, although few courts have considered the merits of disputes or interpreted their own findings.
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 ruled that, under the Arbitration Act, 1999, the process of appointing an arbitrator has to commence within three months from the date the dispute arises. Similar orders on limitation were issued in Nepal Industrial and Commercial Bank Ltd v Arbitrators and others (Writ No. 062-WO-2886, decision date BS 2069.6.1/17 September 2012) and certain other cases by the Supreme Court, therefore the contracting parties must remain extremely cautious as regards matters of limitation and the reasons for referring a dispute to arbitration, the time taken to appoint an arbitrator and the procedural time limitation for appointing an arbitrator or filing a claim.
In Bikram Pandey v Ministry of Physical Planning and Construction (Nepal Law Digest/Ne Ka Pa, 2067 Decision No. 8437, p1346, Division Bench), the Supreme Court came up with a new interpretation to simplify the arbitration procedure. It ruled that internationally recognised rules like the UNCITRAL Arbitration Rules may govern arbitration, but when such rules come into conflict with domestic laws the provisions of domestic law will apply. The Supreme Court further ruled that, even if the parties agree 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 the UNCITRAL Rules to designate an appointing authority and that the Appellate Court will have jurisdiction to act as appointing authority.
In many recent challenges over arbitral awards against government organs or entities, the government has argued that the award would increase the financial liability of the Treasury, which was never considered at the time of the signing of the contract, and that such additional burden on the Treasury is against public policy as the burden will be shifted to the public and be collected via taxes. It can only be termed as an ‘emotional encashment’ of the situation, rather than a plea on the merits of the case.
Enforcement of an arbitral award by the courts
When statutory arbitration was first recognised by the Development Board Act, 1956 (amended in 1964), there was no supporting legal provision to enforce arbitral awards. After about three decades, the Arbitration Act, 2038 was enacted. Despite the fact that there was no legal backing to enforce an arbitral award, in Anang Man Sherchan v Chief Engineer (Nepal Law Digest/NeKaPa 2020, decision No. 220, page 201, Full Bench) the Supreme Court concluded that arbitration was an alternative remedy prescribed by the Development Board Act. At the same time, this decision could also have directed the District Court to execute the award as if it were a court decision. Had this been done, it may not have been necessary to wait for over two decades for enforcement of the Arbitration Act 2038, which required the District Court to enforce an arbitral award as if it were its own decision. The normal execution procedure for court decisions (or arbitral awards) is prescribed in the Civil Code (Muluki Ain) of 1963 in the chapter on punishment. No. 42 of the chapter on punishment has hardly been amended to cope with the spirit of alternative dispute resolution and developments in concepts and laws relating to arbitration, and it states that the party seeking enforcement from the other party should identify property from which the recovery has to be made. While the chapter on punishment that requires application for execution within three years to be filed at the District Court, the Arbitration Act contains a specific provision regarding applying for the execution of an award within 30 days if the award is not self-executed within an initial 45 days from the date of receipt of the award by the party against whom it has been delivered. Apart from the above time limitation, all other procedures for the District Court to execute an award are the same as under general law. There is no time limitation for the execution of an award. In many instances, often involving government ministries, departments or other entities, court notices do not even receive a response despite repeated reminders, and yet the District Court still finds it difficult to take immediate action to enforce the award. If the award is against any natural person or company or other public establishment, the person requesting execution of an award must locate the property, bank account numbers or other particulars of the property to be withheld and recovered, but this does not apply against the government.
Aside from such lengthy execution procedures where the property from which the recovery has to be made must be identified by the beneficiary, such execution becomes cumbersome if the recovery is to be made from a government ministry, department or project. In one of the rare but notable case in which an award was delivered over a decade ago, partial payment was made after an out-of-court settlement and the rest was withheld under various pretexts, including the issuance of tax deduction at source. In fact, there was no provision for tax deduction at source on the payment under court order and that tax liability should have been dealt with separately by the beneficiary. Even if the question of tax was raised, no such amount has been deposited with the tax authority for over two years. This raises the question of the accountability of the government officials who deal with it, although there are barely any mechanisms available to do so. Such actions only create confusion and raise questions of trust and faith in government authorities. This does not mean that all government bodies deal with courts in a similar fashion, but there are few who comply with court notices after the arbitral award has been finalised. 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, in the event that either party files a petition to set aside an arbitral award, such award shall become final after the Appellate Court endorses it. This means that the whole process of execution has to wait until the Appellate Court decides on the challenge, if any. If not challenged, the award becomes final and binding on the parties. Therefore, even if, conceptually, arbitration is regarded as a faster process, the bottleneck is the execution of an award where the beneficiary has to identify the property from which recovery should be made, and in the absence of any specific authority that keeps such records it becomes investigative work for the party seeking recovery. For foreign companies or citizens, it becomes more difficult to perform such execution in a short time if the other party is hostile or disobedient.
Even in cases of disobedience by government authorities, there is hardly any strict and effective action that the aggrieved party can resort to. Complaints to constitutional bodies like the Commission for the Investigation of Abuse of Authority also do not give clear solution to the party seeking recovery of the entitlement. Those who favour development law concepts are of the opinion that nothing stops courts from initiating such suo moto contempt action if payment is not made and a property is not disclosed from which recovery may be made. Practically, it is for the development lawyers to convince the court to abandon the conventional procedure and adopt progressive action to ensure quick and effective execution. Unless courts take stricter action against defying parties who ignore court notices, it is unlikely that attitudes will change.
With growing interest of foreign investors in the field of infrastructure development, such as hydropower, airports and the aviation sector, and highways, it is essential to understand how arbitration works in Nepal and what protection can be taken by the parties. There is a growing need for the legislature to simplify legal provisions for the enforcement of arbitral awards designating specific timelines and for the government to show that it is committed to the execution of awards in all respects. Likewise, there is a dire need for capacity building of, and more exposure for, among others, judges, government and private development lawyers, contract drafters and court officials, so as to enhance public trust and faith in arbitration proceedings as a successful mode of dispute settlement.