Public Administration
Reforming Limitation of Arbitration Law in Nepal
2025-08-19 02:25:18
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Reforming Limitation of Arbitration
Law in Nepal
Background
Arbitration is
increasingly used in Nepal to resolve commercial and infrastructure disputes.
However, the Arbitration Act, 2055 (1999) imposes a strict 3-month limitation
period (Section 6(1)) to initiate arbitration from “the date the reason to
settle a dispute arises.” Compared to the 2-year window under the National
Civil Code (2017) and global practice (1–3 years), this short and ambiguous
period creates uncertainty, discourages arbitration, and increases risks for
investors and contractors.
Key
words: Arbitration
Law of Nepal, Statute of Limitation, Arbitration Act, Contractual Disputes,
Legal Reform and Harmonization.
Key
Limitations in Current Law
- Absence
of a Unified Limitation Act
ü Nepal lacks a comprehensive
Limitation Act; different statutes prescribe different periods.
ü Arbitration’s 3-month window is
much shorter than litigation’s 2-year period.
- Overly
Short 3-Month Rule
ü Section 6(1) requires arbitrator
appointment within 3 months, far shorter than global norms.
ü Complex disputes (hydropower,
roads, construction) often need lengthy negotiation before arbitration.
- Uncertainty
in Trigger Events
ü “Reason to settle” is undefined and
left to judicial interpretation.
ü Courts have held it starts when a
claim is refused or an obligation denied, not when payment simply becomes due.
ü This fact-specific test causes
inconsistent rulings.
- Mismatch
Between Arbitration and Litigation
ü Civil Code: 2 years for contractual
claims.
ü Arbitration Act: 3 months →
discourages ADR despite government policy.
- Negative
Impact on Investment
ü Short deadlines risk claims being
time-barred before negotiation or mediation concludes.
ü Undermines Nepal’s attractiveness
as an arbitration-friendly jurisdiction.
Judicial
Interpretation of “Reason to Settle”
1.
Refusal to Pay – Pradhan v. Korean Development Corporation (1986)
ü Facts: The plaintiff (Pradhan)
worked as a local representative of the Korean Development Corporation and
claimed a 2% commission.
ü Issue: When does limitation start —
when commission became due, or when payment was refused?
ü Court’s Finding: The mere fact that
commission became due did not create a reason to file a lawsuit. The limitation
clock started only when the defendant refused to pay.
ü Principle Established: A “reason to
settle” arises only when there is a clear denial of obligation, not when a debt
simply matures.
2.
Rejection of Claims in Meetings – Bijaya Construction Pvt. Ltd. v. Appellate
Court Patan (2007)
ü Facts: Bijaya Construction made
contractual claims, which were formally discussed in a board meeting. The board
rejected the claims on 19 June 1996. Arbitration was initiated much later.
ü Court’s Finding: The rejection in
the board meeting was a forthright denial, marking the start of the 3-month
limitation. Since arbitration was not commenced within 3 months, the claim was
time-barred.
ü Principle Established: A formal
rejection of claims in an official setting (e.g., board minutes) is enough to
trigger Section 6(1).
3.
Contract Termination – Raghubar Shrestha v. Syako Construction Pvt. Ltd.
(2008)
ü Facts: A construction contract was
terminated after the contractor stopped performing, and no extension was
granted.
ü Court’s Finding: The termination
date marked the reason to settle the dispute. The 3-month clock began running
from the termination.
ü Principle Established: Termination
of contract itself can crystallize the dispute and trigger limitation for
arbitration.
4.
Written Denial of Obligation – Namaste Travels Pvt. Ltd. v. A.C. Garment
(2011, Full Bench)
ü Facts: Defendant failed to make
payment. Plaintiff’s lawyer issued a demand letter threatening legal action.
Defendant refused.
ü Court’s Finding: The date of
refusal in writing was treated as the trigger date for limitation.
ü Principle Established: A demand +
written refusal is a clear starting point for the arbitration limitation
period.
5.
Invalid Trigger: Mere Expiry of Due Dates – Shreeram Sugar Mills v. Agrotech
(2009)
ü Facts: Dispute arose over payments
under a contract. One party argued that limitation started as soon as payment
became due.
ü Court’s Finding: Limitation does not
start automatically when an obligation falls due. It begins only when the
debtor refuses to fulfill the obligation.
ü Principle Established: Mere expiry
of a due date is not enough — there must be an express refusal or denial.
6.
Key Precedent: CCECC-Sharma-Lama JV v. Melamchi Water Supply Development
Board (ICC Arbitration, 2014–2016)
ü Facts: Construction contract dated
25 January 2005, disputes referred to ICC arbitration. The Notice of
Arbitration was issued on 27 July 2014. Respondent argued it was out of time
because the “reason to arbitrate” arose on 10 April 2011.
ü Tribunal’s Finding:
o Neither the ICC Rules nor the
contract specified a limitation period.
o Therefore, Section 6(1) of the Arbitration
Act, 1999 applied.
o Since arbitrator appointment was
not initiated within 3 months of the trigger date, the tribunal had no
jurisdiction.
ü Principle Established: Where
arbitration rules and contracts are silent, Section 6(1) is binding and
mandatory, even in international arbitrations seated in Nepal.
Critical
Gaps
v No extension mechanism for the
3-month deadline.
v Silent on counterclaims and
pendency tolling.
v No clarity on applicability to
foreign-seated arbitrations.
v No time-bound award rendering
unlike UNCITRAL standards.
Recommendations
for Reform
- Enact
a Unified Limitation Act
: Provide clarity across litigation, arbitration, and ADR.
- Extend
Arbitration Limitation Period:
Revise Section 6(1) to 1 year minimum, harmonized with global standards.
- Clarify
Trigger Events:
Statutorily define triggers such as:
ü Written rejection of a claim,
ü Formal contract termination,
ü Non-payment after demand notice.
- Harmonize
Arbitration and Litigation Rules:
Align arbitration timelines with the Civil Code’s 2 years.
- Adopt
International Best Practices
ü Integrate UNCITRAL Model Law
provisions (e.g., 12-month award deadline).
ü Permit tribunals limited discretion
to extend deadlines in exceptional cases.
Conclusion
Nepal’s
arbitration law, while intended to promote speedy dispute resolution, suffers
from an overly strict, ambiguous, and inconsistent limitation framework. The
3-month rule under Section 6(1) acts as a double-edged sword: it ensures
efficiency but risks injustice by barring legitimate claims. Legislative reform
is urgently needed to extend timelines, clarify triggers, and harmonize with
civil litigation and international standards.
Key Takeaway
Reforming
the limitation rules of Nepal’s Arbitration Act will strengthen dispute
resolution, protect investor interests, and align Nepal with global best
practices—making it a more reliable destination for commercial and
infrastructure arbitration.
