Arbitration in Nepal and Role of Courts

-Tika Bhushan Ghimire, District Attorney, Office of the District Attorney, Kavrepalanchok

- Rajib Dahal, Advocate & Managing Partner, Rajib Dahal & Associates, Kathmandu. The authors can be contacted via ghimiretka@yahoo.com or rajibdahal1@gmail.com

 

1. Background

The Arbitration Act, 2055 (1999) is the primary foundational law which has embraced the principles of Alternative Dispute Resolution (ADR) and has established Arbitration as one of the means of disputes settlement and resolution in Nepal. Although the mechanism of arbitration for dispute settlement was introduced in Nepal by Development Board Act, 2013 (1956), it was formally institutionalized by the Arbitration Act, 2038. The existing Nepalese Law (Arbitration Act, 2055) has fortified the concept and usage of arbitration in Nepal by incorporating the international norms and practices, and has played a significant role in making arbitration as one of the viable means of dispute resolution in the commercial sector. Since the concept of arbitration involves the resolution of disputes outside the formal court process, the courts and court procedures have a bare minimum role in it. Our laws and international practices have also emphasized this point. However, in any civilized society, the role of the court cannot be completely minimized. Though the arbitration mechanism expects a reduced role of the courts, nevertheless, the intervention by formal judicial bodies is desirable, and is essential in many instances. The role of the court in the arbitration mechanism and its importance have been discussed in this article.

 

1. The essence and use of Arbitration

Among the alternative methods of dispute resolution (ADR mechanisms), negotiation, mediation and arbitration are considered to be the primary tools. Generally, in order to reach a conclusion on a dispute through the arbitration method, the previous two stages - the stages of discussion/negotiation and mediation – are exhausted, but they may not be necessarily followed in every case. In this regard, the provisions of the contract agreement between the parties to the dispute are the governing instrument. If the parties have agreed to go through the stages of negotiation, mediation/conciliation and arbitration, then, the process would pass through this sequence: negotiation, mediation/conciliation and arbitration. First, the parties would try to settle the disputes by negotiation and discussion which can be termed as amicable settlement. If parties fail to settle the matter by negotiation, they would have to resort to mediation where the decision makers are the parties themselves but, they may take a help of a third party to facilitate the discussion and settlement. Under most of the standard forms of Contract, the mechanism of dispute resolution boards is provided and constituted to settle the disputes under the contract. When such mediation process also fails to yield any results, then, parties would have to subject the disputes to arbitration, and arbitral process would commence.

 

If the agreement between the parties states that the dispute can be resolved directly through the arbitration or if it is to be resolved through arbitration (without explicitly mentioning the need to go through any other ADR processes), the parties can resolve the problem or dispute directly through arbitration without being subjected to any formal process of negotiation and mediation, though such mechanism (subjecting the dispute to arbitration without any negotiation and mediation) is highly unlikely and uncommon especially in commercial world.

 

Although the procedure of arbitration is more formal and somewhat more expensive than negotiation and conciliation, the solution obtained by resolving the dispute through the arbitration is considered final and binding to both parties. In this sense, arbitration is also referred as a mechanism of “Court outside of the Court” or “Private Court”. The decision made through arbitration is called “Order/Award of the Arbitration Tribunal” and can be implemented like a court decision. Since the process of filing a case in a formal court and getting a decision takes a long time, is expensive and passes through formal procedures of the Court, the arbitration process is less time consuming, and cost effective. Therefore, the acceptance of Alternative Dispute Resolution (especially the arbitration) has gained momentum in recent years. The Act to Amend Certain Nepal Acts Relating to Improving the Economic and Business Environment and Promoting Investment, 2081, has further enhanced the need and importance of arbitration in commercial disputes by introducing the concept of “expedited/fast track arbitration”. The Second Amendment to the Development Board Act, 2013 BS (issued in 2014 BS) is the first codified modern legislation to adopt the process of resolving disputes through Arbitration in Nepal.[1] The Arbitration Act, 2038 BS, issued by integrating the provisions related to the arbitration, opened the formal door to the field of arbitration in Nepal. Moving one step forward and addressing the challenges and developments in the field, the Arbitration Act, 2055 has been the law of the land on Arbitration that can also accommodate the needs of the modern world after Nepal became a party to various international conventions. Our law, which is primarily based on the UNCITRAL Model Law on International Commercial Arbitration (ICA), 1985, has also segregated the jurisdiction of courts from the jurisdiction of arbitration tribunal. Notwithstanding that, the judicial intervention will be necessary in certain situations to ensure fair and just process and outcome to the parties of the conflict.

 

1. Key provisions relating to the role of Courts under the Arbitration Act, 2055

Resolution of disputes through arbitration is generally applicable and effective in disputes of a civil nature (civil cases) and, more practically, in civil cases of a contractual and commercial nature. Therefore, Section 3(2) of the Arbitration Act, 2055 (hereinafter referred to as the Act) contains a legal provision to state that if the parties request that the dispute of civil and commercial nature be resolved through an arbitration, the court shall resolve such a case or dispute through arbitration.

In such a situation, the role of the court will be to refer the dispute for arbitration. However, Section 4 of the Act also provides that in certain circumstances, the court may not refer certain types of disputes to arbitration:

 

• If it appears that a decision is required on a matter that can be decided by arbitration as well as that cannot be subject to arbitration process, and
• If there are any reasonable causes to demonstrate that the disputes cannot be resolved by arbitration,

 

Some questions may arise regarding the role of the court in the application of Sections 3 and 4 of the Act. Generally, in civil cases and in contractual disputes, both parties may jointly request before a court that their dispute to be settled through arbitration. In that case, the court refers to such cases and disputes for resolution through arbitration. Under this section, the court may mean a district court, high court or supreme court. In practical world, parties can jointly request to court at any stage that their matter may be referred to arbitration. Similar principle can be applied even when a dispute is being adjudicated by a tribunal constituted for specific matter, or specific purpose. If such matters under consideration are of civil nature, parties may jointly request the tribunal for initiating an arbitration process, and in that scenario, tribunals and quasi-judicial bodies can plausibly take reference of Sections 3 and 4 of the Act and refer the matter to arbitration.

 

Another important provision where the role of the court is very decisive is in Section 7 of the Act. Section 7 of the Act empowers the court to appoint an arbitrator. Any dispute that may arise between the parties is referred for arbitration only if there is an agreement to resolve it through arbitration process. The contract agreement itself should make it clear whether the dispute will be resolved through arbitration. Such contractual clause may be provided at the initial stage of drafting the contract. However, in some cases, even after a dispute arises, the parties can agree to use the arbitration process to resolve the dispute. If there is an agreement between the parties to resolve the dispute through arbitration, the contractual agreement generally would also provide the other related aspects of the arbitration in the contract such as governing law (under which law/ law of the country applicable), number of arbitrators and their selection procedure, the language of the arbitration, venue of arbitration etc. It is important to understand that the standard commercial contract may contain a clause on dispute resolution/arbitration, or parties may enter into a separate agreement for dispute resolution incorporating the usage of arbitration. From a legal point of view, both will have a similar effect.

 

If the parties to a contract have considered every possible scenario and the potential use of arbitration in dispute settlement while preparing the contract agreement, the role of the court would be minimal in such situations. But in cases where a contract agreement is not drafted with sufficient care, or where ambiguous provisions creep into the contract or where one party's understanding of the provisions of the agreement is different from that of the other party, the arbitral process may not get started on its own due to differences among the parties. During that situation, the role and functions of the court will be inevitable and quite important. In this context, Section 7 of the Act should be studied carefully.

 

[2]Section 7. Appointment of Arbitrators by Court:

1. Any party may submit an application to the High Court for the appointment of arbitrators in the following circumstances:

 

1. In case no arbitrator can be appointed upon following the procedure contained in the agreement.
2. In case the agreement does not mention anything about the appointment of arbitrators.

 

1. The application to be filed pursuant to Sub-section (1) must explicitly mention the full name, address, occupation and the field of specialization of at least three persons who can be appointed as arbitrator, and also be accompanied by a copy of the agreement.

 

1. Upon receiving of an application pursuant to Sub-section (1), the High Court shall notify all the parties and shall appoint arbitrators from the persons proposed by them in the case of consensus in that connection, and in the case of fail to consensus, the persons deemed appropriate by the High Court, within 60 days from the date of receipt of the application. The decision taken by the court in that manner shall be final.

 

According to Section 7 of the Act, the High Court has been given the power to appoint an arbitrator and for the exercise of that power, one of the parties to the contract needs to file an application in the court. If the parties to the dispute cannot appoint an arbitrator according to the procedure mentioned in the agreement, or if the agreement states that the dispute will be resolved by an arbitrator, but there is no further procedure prescribed for appointing the arbitrator, the responsibility of appointing the arbitrator is on the High Court if any of the parties invokes the jurisdiction of the High Court.

 

Since Section 2(d) of the Act broadly defines the jurisdiction of the High Court, it appears that parties can approach to  the High Courts claiming it to have the jurisdiction over the matter. In this regard, the principles and procedures related to jurisdiction that are generally applicable to other civil disputes can be said to be applied in these cases too. Therefore, it is advisable to approach the High Court having the ordinary jurisdiction over the matter – be it based on the nature of the contract, place of its execution, residence and domicile of the parties etc.

 

By exercising the authority conferred under Section 43 of the Act, the Supreme Court has framed the Arbitration (Court Procedure) Rules, 2002 (2059 BS) (hereinafter referred to as the “Rules”), which further clarify the role of the court and the procedures to be followed while discharging its functions and duties in arbitration proceedings. Rule 5 specifies the matters that must be disclosed in an application submitted to the High Court seeking the appointment of an arbitrator. Further, Rule 5(3) provides that, prior to appointing an arbitrator, the notice of the party’s claim must be given to the other party, along with a prescribed time limit (10 days’ time except for time for travel) for the other party to submit its response. After providing an opportunity to the other party for its submission on the matter, the High Court will appoint an arbitrator in accordance with Rule 5(6). Such appointment shall be made after receipt of the written response from the other party or upon expiry of the time limit prescribed for submission of such response. So far as it is possible, such appointment shall be of that person who has been proposed by both the parties by a consensus between them; and where such consensus cannot be reached between the parties, the High Court shall appoint a person deemed to be appropriate to be an arbitrator. In strict sense, such must be done within the time limit prescribed by the Act, namely within sixty days from the date of receipt of the application seeking appointment of an arbitrator (under Section 7(3) of the Act). For the purpose of appointing arbitrators, the High Court maintains a roster of arbitration experts.

 

If an arbitrator’s position becomes vacant (because of death, resignation, refusal, etc.), the same procedure must be followed for a new appointment as mandated under Section 8 of the Act. The timeline prescribed is of 30 days if both parties can appoint it amicably, otherwise, after the completion of this time period, any party can approach jurisdictional High Court within 15 days with a request to appoint the arbitrators.

 

Oath of an Arbitrator before starting its work is a mandatory provision under Section 9 of the Act. The appointed arbitrator must show its resolve to be an independent and honest about its work and such oath documents must be prepared in two copies. In Nepal, there are many other Acts and Rules which contain the provisions to take oath to discharge its duties impartially but in the context of arbitration, a copy of such oath document should be sent to the High Court under Section 9(1) of the Act. Therefore, the High Court acts as a ‘court of records’ under the Act and in the context of arbitration.

 

Under Section 11 of the Act, a provision is made for the removal of an arbitrator. The application for the removal of an arbitrator can be made by a party before the arbitration tribunal on grounds such as lack of honesty in work, biasness towards a party, or fraudulent activities. These provisions are in line with the practice on arbitration in international forums, and as per the provisions contained in international treaties on arbitration. Under Section 11(4), the party aggrieved by the decision to remove an arbitrator can approach the Hon’ble High Court to nullify such orders.

 

Under Section 16 of the Act, an arbitral tribunal can decide on its own jurisdiction. The tribunal can determine whether it has the jurisdiction to decide the disputes by arbitration, whether the Agreement under which the disputes have arisen is enforceable, whether the nature of the disputes make it fit to be resolved by arbitration etc. So, in essence, arbitral tribunal is very competent entity as a whole to make a determination on the legality of the contract under which it has to decide the matter by an arbitration process. Such determination should be made at the initial stage itself, i.e., before the determination on the disputed subject matter. Any party aggrieved by the decision made in this regard can approach High Court to nullify such determination of arbitral tribunal. No arbitration proceedings can be halted on the ground that a party has approached the Hon’ble High Court challenging the competency of the arbitral tribunal.[3]

 

Under Section 21 of the Act, the Arbitral Tribunal can call for and evaluate the evidence received, and against this decision too, aggrieved party can approach the High Court. Under Section 23, the arbitral tribunal can take the help of District Court in evidence gathering process.

 

So, the arbitration process deals with the civil contractual and commercial disputes which are ordinarily within the jurisdiction of the District Court. By being able to refer those cases to the arbitration process, we can clearly see that the role of District courts are naturally compressed. In certain cases, when parties differ, as seen above, the High Courts may have to step in.

 

Despite that the District courts have their roles to assist the arbitration tribunal in evidence gathering if requested (under Section 23) and the award enforcement. Under the Act, the award issued by the tribunal must be enforced and executed by the parties voluntarily under Section 31, but if the parties do not cooperate, any party can approach the district court (under Section 32) with an application to enforce such awards and District court must enforce and execute such awards within 30 days as if the award is their own judgement decree.

 

When it comes to the role of High Courts, another important area is to set aside the arbitral award. There is no mechanism of appeal or review quality of decision (arbitral award) of the arbitration tribunal, and the Act under Section 30 provides limited grounds to set aside the arbitral award and application under this Section will have to be filed in the High Court.

 

Rather than reproducing the Section 30 of the Act in toto, it can be summarized as below:

• An aggrieved party may challenge an arbitral award by filing an application before the High Court within 35 days of hearing or receiving notice of the decision, and must serve the copies of the application to the arbitrator and the other party. (Section 30(1) of the Act)
• The High Court may set aside the award or order a fresh decision if the applicant proves that:
  • The party lacked the legal capacity to enter the arbitration agreement, or the agreement is invalid under the applicable law (or under Nepali law if the governing law is unclear), (Section 30(2) (a) of the Act)
  • Proper notice of the arbitrator’s appointment or arbitration proceedings was not given to the party, (Section 30(2) (b) of the Act)
  • The award addresses matter not referred to arbitration, or violates agreed conditions, or exceeds the arbitrator’s jurisdiction, (Section 30(2) (c) of the Act)
  • The arbitrator’s appointment or procedure did not follow the parties’ agreement or, in its absence, the Act (unless the agreement itself is contrary to Nepali law) (Section 30(2) (d) of the Act)

 

Additionally, under Section 30(3) of the Act, the High Court may set aside the award if:

• The dispute is not arbitrable under Nepali law,
• The award is against the public policy[4].

 

Another area where High Court’s role is very significant is on the execution of arbitral decision made in the foreign country. Under Section 34 of the Act, foreign arbitral awards can be enforced in Nepal. Unlike domestic arbitration, the foreign arbitral awards under International Commercial arbitration cannot be enforced directly by District Courts of Nepal, and they must first, be endorsed by a High Court. Therefore, foreign arbitration awards must be validated by the High Court (under Section 34) before being enforced by District Courts. In this process, the High Court needs to be satisfied that the procedure and process adopted by the arbitrator were appropriate, that the subject matter of the dispute is one which may generally be resolved through arbitration under Nepali law, and that the arbitral award is not against public policy. Upon its satisfaction of aforesaid requirements, the High Court can forward the decision to the District Court for its enforcement. Accordingly, arbitral awards made outside Nepal/in a foreign territory may be enforced by the District Court in the same manner as a judgment of the District Court (Section 32). The provision allowing enforcement in Nepal of arbitral awards rendered abroad is based on the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention) to which Nepal is a party by accession to this treaty[5].

 

It is observed that the role of the High Court has been invoked and exercised in the appointment of arbitrators pursuant to Section 7 of the Act and in setting aside arbitral awards under Section 30. As disputes between the parties have frequently arisen in relation to matters under Sections 7 and 30, judicial decisions have also primarily focused on these issues, which are discussed in the subsequent part of this article.

 

1. The Nepal Council of Arbitration (NEPCA) as a professional body

 

NEPCA is an independent, non-governmental and non-profit institution established in 1991 to promote arbitration and other ADR mechanisms in Nepal. It was founded by professionals from the legal, business, and academic communities to provide an efficient platform for resolving commercial and contractual disputes outside the formal court system. Although it is not created directly by any legislation, its activities operate within the legal framework provided by the Arbitration Act, 1999, which recognizes arbitration as a valid method of dispute settlement.

 

NEPCA mainly provides institutional support for arbitration and mediation. It administers arbitration proceedings when parties agree to settle disputes under its rules and may assist in the appointment of arbitrators if the disputing parties cannot agree on one. The council also maintains a panel of trained arbitrators and mediators and organizes training programs, workshops, and seminars to develop professional capacity in arbitration practice. Through these activities, NEPCA promotes the use of ADR as a faster, cost-effective, and flexible alternative to traditional court litigation.

 

1. Role of Chartered Accountants (CAs) in arbitration proceedings

In many jurisdictions, including in Nepal, Chartered Accountants (CAs) are generally not authorized to practice law or represent clients in courts of law, as court advocacy is reserved for licensed legal practitioners (lawyers) under the relevant statutes. However, arbitration proceedings operate within a comparatively flexible procedural framework. As CAs have been representing their clients before the tax tribunal, have been undertaking activities in relation to company registration and renewal, they may also appear before arbitral tribunals as authorized representatives, experts, or consultants, particularly in disputes involving complex financial, accounting, or commercial issues. Arbitration is one such domain where the knowledge and the training of CA can be highly valuable.  Their participation is often valuable in matters relating to calculation of damages, financial claims, contract pricing disputes, project cost escalation, and forensic financial analysis. In addition to it, they can prepare the claim, prepare a counter reply and represent their clients before the arbitration proceedings.

 

The involvement of Chartered Accountants in arbitration also reflects the interdisciplinary nature of modern dispute resolution. Commercial and infrastructure contracts can involve intricate financial structures that extend beyond purely legal arguments. In such contexts, the analytical and auditing expertise of CAs significantly assists arbitral tribunals in assessing financial evidence and determining the quantum of claims.

 

As a result, arbitration has been recognized as a professional area not limited solely to lawyers or engineers but open to specialists from diverse fields, including finance and accounting. With appropriate training in arbitration law and procedure and with the grasp of prevailing applicable laws, Chartered Accountants can build professional careers as arbitration practitioners, expert witnesses, claims consultants, or even arbitrators, thereby contributing to more informed and technically sound dispute resolution processes.

 

1. Major Precedent from the Supreme Court of Nepal on arbitration matter

The Arbitration Act, 2055 (1999) provides that an award made by an Arbitration Tribunal may be set aside only on limited grounds (as provided under Section 30), and there is no provision for appeal against an arbitral award. The jurisdiction of the High Court has been expressly limited by the Act itself. Nevertheless, in the name of setting aside the award, parties dissatisfied with the decision are seen to file petitions before the High Court on various grounds. As a result, the High Court has been compelled to decide a large number of applications filed under Section 30.

 

When the parties are not satisfied with the decision of the High Court, they are found to approach the Supreme Court through various means, including writ jurisdiction, and applications for review. Consequently, although arbitration is regarded as a form of speedy justice in terms of time and cost, in practice, as parties tend to pursue and exhaust the available judicial remedies, the final resolution is found only after the pronouncement of Supreme Court.

 

In this context, there is also a decision clarifying the scope of Section 30 of the Act in the case of Mahakali Irrigation Project, Mahendranagar, represented by the Director General of the Department of Irrigation, Umakanta Jha v. Appellate Court, Patan[6]. In this decision, one of the important aspects under consideration was whether the extra-ordinary jurisdiction of courts can be invoked if a party is not satisfied with the decision of the arbitral tribunal. In this regard, the Supreme Court held that in absence of any other alternative remedy available to the parties on the decisions made by the High Court, extra-ordinary jurisdiction of Supreme Court may be invoked to seek the protection of rights of properties of the parties. Hon’ble Supreme Court stated that this has been affirmatively decided also in the case of Krishi Samagri Sansthan v. Sumit Prakash Asia Pvt. Ltd & others[7].

 

While explaining the ambit and scope of Section 30 of the Act, the Supreme Court held that the High Court can set aside the order of the arbitration tribunal based on the following principles:

• In accordance with internationally accepted principles relating to arbitration and the principles enshrined under Arbitration Act, 2055 (1999), the arbitration tribunal alone is entitled to enter into and determine the merits of the facts,
• The Arbitration Act, 2055 (1999), under Section 30, provides that court intervention against an arbitral award is permissible only on certain specified grounds,
• Such power is not to be exercised as an appellate jurisdiction, but rather as a correctional jurisdiction.
• It is presumed that an arbitral award is rendered promptly, in a balanced, impartial, and lawful manner; and any conduct appearing contrary to this presumption must be regarded as an exception, and not as a rule. Consequently, unlike other disputes, arbitral awards are not subject to appellate jurisdiction. Hence, the powers of High Courts under Section 30 should be construed in a limited fashion,
• Finally, the scope of Section 30 is limited. Within this limited scope, the appellate court (currently the High Court) is empowered under Section 30(1) to set aside an arbitral award or, where necessary, to order a re-decision by the arbitration tribunal. Under Section 30(3) specifies the circumstances under which an arbitral award may be set aside under limited and given circumstances.

1. Conclusion

Arbitration in Nepal has evolved into a credible and effective mechanism for resolving civil, commercial, and contractual disputes, facilitated by the Arbitration Act, 2055 and is in line with internationally accepted standards, particularly the UNCITRAL Model Law, and the Convention on enforceability of foreign awards. From the review of the legislation, we can infer that the legislative intent is very clear in its formulation, and that is arbitration is meant to function with minimal judicial interference while ensuring fairness, legality, and enforceability of arbitral awards. With that goal, the Act has created certain exceptions for judicial scrutiny and High Courts and District Courts can play a supportive and supervisory role. The jurisdiction of Courts is correctional rather than the appellate. Their involvement is provided in very few specific stages such as referral to arbitration when parties do not cooperate with each other, in appointment and removal of arbitrators, in assistance in evidence-taking, setting aside awards on limited statutory grounds, and enforcement of both domestic and foreign arbitral awards. Judicial precedents from the Supreme Court have further reinforced the principle that courts must not re-examine the merits of arbitral decisions. When exercised within these defined limits, the court’s role has strengthened confidence in arbitration in Nepal.

 

1. References:

 

• Arbitration Act, 2055 (including the amendments made in 2082 BS)
• Study by Nepal Law Commission (2080 BS) on the amendment of Arbitration Act, 2055
• Law Relating to Arbitration and Conciliation, P C Markanda, Naresh Markanda & Rajesh Markanda, 11^th edition, LexisNexis, 2022
• Law of Arbitration & Conciliation, Avtar Singh, 11^th Edition, Eastern Book Company, 2020