Arbitration Law in Nepal: Complete Legal Guide

Arbitration has been gradually gaining popularity as a method of dispute resolution in Nepal, offering parties a faster and more flexible alternative to traditional court litigation. As an alternative dispute resolution mechanism, arbitration allows parties to resolve their disputes through neutral third-party arbitrators whose decisions are binding and enforceable. This guide covers the legal framework, arbitration agreements, arbitrator appointment, procedures, awards, and enforcement mechanisms under arbitration law in Nepal.

Legal Framework for Arbitration

The primary legislation governing arbitration in Nepal is the Arbitration Act 2055 (1999), which replaced the earlier Arbitration Act 2038 (1981). The Act is supplemented by the Arbitration Rules 2059, which provide detailed procedural guidelines for conducting arbitration proceedings.

The Nepalese Arbitration Law is reflective of the UNCITRAL Model Law but is not expressly based on it. The Public Procurement Monitoring Office also prescribes arbitration as the default dispute resolution method for government procurement agreements, further demonstrating the growing acceptance of arbitration in Nepal.

Arbitration Agreements

For an arbitration agreement to be enforceable under Nepali law, it must meet specific formal requirements that establish the parties' consent to arbitrate their disputes.

Requirements for Valid Arbitration Agreement

• The agreement must be made in writing
• Parties must have a defined legal relationship, whether contractual or not
• The subject matter must be capable of settlement by arbitration

The writing requirement can be satisfied through a separate contract to arbitrate, an arbitration clause in the underlying contract, or an exchange of letters, telex, or email in which parties agree to arbitrate. If a party submits to arbitration proceedings as a respondent without challenging the commencement of arbitration, the parties are deemed to have an arbitration agreement.

Number of Arbitrators

The Arbitration Act provides flexibility in determining the number of arbitrators while establishing default rules when parties have not specified.

If the number of appointed arbitrators under the agreement is even, the number must be converted to an odd number by appointing an additional arbitrator by the existing arbitrators.

Appointment of Arbitrators

The process of appointing arbitrators must commence within three months from the date when the cause for dispute arises. Each party appoints one arbitrator, and the two appointed arbitrators then appoint a third arbitrator who serves as the chief arbitrator.

Court Appointment of Arbitrators

If parties fail to appoint arbitrators as specified in the arbitration agreement, or if the agreement is silent regarding appointment, either party can apply to the relevant high court. The application must include a copy of the agreement and details of minimum three persons proposed as arbitrators, including their full names, nationalities, occupations, and areas of expertise.

The court will first seek unanimous agreement from the parties. If the parties cannot agree, the court will appoint a qualified arbitrator within 60 days of receiving the application. The court's decision on appointment is final and cannot be challenged.

Qualifications and Disqualifications of Arbitrators

The Arbitration Act establishes criteria for who may serve as an arbitrator and grounds for disqualification.

Removal of Arbitrators

Parties can remove an arbitrator according to provisions in their agreement. If the agreement is silent, arbitrators can be removed under the following conditions:

• Arbitrator is clearly seen as biased or discriminatory instead of working impartially
• Arbitrator engages in improper conduct or commits fraud during arbitration
• Arbitrator frequently commits mistakes or irregularities in proceedings
• Arbitrator does not attend meetings or refuses to participate more than three times without satisfactory reasons
• Arbitrator takes action opposed to principles of natural justice
• Arbitrator is found lacking necessary qualifications or has ceased to be qualified

A party can challenge arbitrator appointment before the high courts, and the relevant high court's decision is final.

Place and Language of Arbitration

The place of arbitration should be as specified in the agreement. If not specified, parties determine the place by mutual consent. If parties cannot agree within 15 days of arbitrator appointment, the arbitrator determines the location.

Similarly, the language of arbitration should be as specified in the agreement. If not specified, parties determine the language by consent. If parties cannot reach agreement, the language used in the underlying agreement governs the arbitration proceedings.

Arbitration Proceedings

The Arbitration Act establishes a structured process for conducting arbitration from claim submission to final decision.

If any party fails to submit counter-claims or rejoinders within the time limit due to circumstances beyond their control, they can apply to the arbitrator for extension within 15 days of the deadline expiry. The arbitrator may extend the time limit if the reasons appear satisfactory.

Procedural Requirements

The following procedures must be followed in arbitrations governed by the Arbitration Act:

• Once all pleadings are filed, arbitration must proceed without delay
• The arbitrator must establish a timeline and inform parties in advance
• If either party is absent per the timeline, proceedings can continue and orders rendered
• After hearings end, the arbitrator must issue an end-of-hearing order
• Each party must be afforded equal and sufficient right to present their case
• Each party must be allowed representation by legal counsel
• Ex aequo et bono and amiable compositeur apply only if expressly agreed by parties

Powers of Arbitrator

The arbitrator can exercise the following powers during proceedings:

• Direct parties to appear, submit documents, and record statements
• Record statements of witnesses
• Appoint experts and seek opinions on specific issues
• Obtain bank guarantee or appropriate guarantee from foreign nationals
• Inspect places, objects, products, structures, or production processes
• Sell materials likely to be destroyed or damaged after consulting parties
• Exercise specific powers conferred by parties
• Issue preliminary orders, interim orders, or interlocutory orders
• Issue certified copies of documents

Court Intervention

The Arbitration Act limits court intervention to specific circumstances to preserve arbitration's independence.

These procedures can be overridden by parties agreeing to a governing law other than Nepalese law or by expressly specifying arbitration procedures or rules in the agreement.

Interim Relief

Arbitrators have powers to grant interim relief to protect party interests during proceedings. The aggrieved party can file an appeal before the relevant high court within 15 days of issuance to quash the interim relief. The high court's decision is final.

Arbitration Award

The arbitrator must pronounce the decision within 120 days from the date of submission of claim documents, unless otherwise provided in the agreement. Where three or more arbitrators are involved, the decision of the majority prevails.

Required Contents of Award

The award must be in writing and include details prescribed in the arbitration agreement. If the agreement is silent, the award must contain:

• Brief description of the dispute referred for arbitration
• Establishment of jurisdiction over the arbitration
• Arbitrators' decision with reasons and grounds
• Claims to be realized and compensation amounts
• Interest payable for delayed payment
• Place and date of the decision

Challenging Arbitration Awards

A party dissatisfied with the arbitration decision can file a petition before the high court within 35 days from the date of decision or notice received.

Grounds for Challenge

The high court will invalidate the award if the dispute cannot be settled through arbitration under Nepali law or if the award is against public interests or policy. In cases where the award violates constitutional rights, a party can file a writ petition to the Supreme Court against the high court's decision.

Enforcement of Domestic Awards

Parties to domestic arbitration are given 45 days from receiving the award to voluntarily comply. If parties do not comply voluntarily, the aggrieved party can file an application with the relevant district court within 30 days after the compliance period expires. The district court will enforce the award as its own judgment within 30 days.

Enforcement of Foreign Awards

A party seeking to enforce a foreign arbitration award in Nepal must submit an application to the High Court along with the original or certified copy of the award, the original or certified copy of the agreement, and if not in Nepali, an official translation in Nepali language.

Conditions for Foreign Award Enforcement

Foreign awards cannot be enforced if the dispute cannot be settled through arbitration under Nepali law or if implementation would be detrimental to public policy.

Nepal Council of Arbitration (NEPCA)

The Nepal Council of Arbitration is a non-profit organization providing institutional arbitration services in Nepal. Under NEPCA Rules, parties must appoint arbitrators within 30 days of commencement of proceedings. If parties fail to agree, either party can request NEPCA to make the appointment.