Arbitration Law in Nepal: A Complete Guide to Dispute Resolution

Arbitration has emerged as a crucial method of dispute resolution across the globe, providing a faster, more flexible, and confidential alternative to traditional litigation. In Nepal, arbitration has been steadily gaining recognition as an effective dispute resolution mechanism, particularly for commercial, investment, and contractual disputes. To modernize its arbitration framework and align with international best practices, Nepal enacted the Arbitration Act 2075 (2019), which came into force on April 17, 2020. This new legislation repeals and replaces the Arbitration Act 2055 (1999), addressing previous shortcomings and incorporating global arbitration standards, including provisions from the UNCITRAL Model Law on International Commercial Arbitration.

This article explores the key aspects of the new arbitration law in Nepal, highlighting its main features, legal framework, and implications for businesses, foreign investors, and dispute resolution practitioners.

What is Arbitration?

Arbitration is an alternative dispute resolution (ADR) method where disputes are submitted to one or more neutral arbitrators, who render a final and binding decision. Unlike traditional litigation, arbitration proceedings are often faster, private, and more adaptable to the needs of the parties involved. Arbitration is particularly advantageous in commercial disputes, where time efficiency, expertise, and enforceability of awards are of paramount importance.

Nepal’s arbitration law applies to both domestic and international arbitrations, ensuring a standardized approach to dispute resolution while adhering to international arbitration conventions.

Main Features of Nepal’s Arbitration Law (2019)

The Arbitration Act 2075 (2019) introduces several key changes aimed at improving arbitration efficiency, reducing court intervention, and ensuring consistency with global arbitration standards. Below are the major features of the law:

1. Scope and Application

The new law governs both domestic and international arbitrations that take place in Nepal or those governed by Nepalese law. It also applies to:

• Institutional arbitration (conducted under an arbitral institution's rules).
• Ad hoc arbitration (where parties conduct proceedings independently).
• Foreign arbitral awards, recognizing them under international conventions.

However, some disputes cannot be resolved through arbitration under Nepalese law. Non-arbitrable matters include:

• Criminal cases
• Family law disputes (such as marriage, divorce, and child custody)
• Constitutional matters
• Public policy disputes
• Labor disputes (unless specifically permitted)

This distinction ensures that arbitration remains a viable solution primarily for commercial and contractual disputes.

2. Arbitration Agreement

A valid arbitration agreement is fundamental to initiating arbitration proceedings. Under the new law:

• The agreement must be in writing and can be established through:
  • A signed contract between the parties.
  • Exchange of letters, emails, or other forms of written communication.
  • A reference to an arbitration clause in another legal document.
• Oral arbitration agreements are valid only if recorded by an arbitrator or an arbitral institution.

This provision strengthens the enforceability of arbitration agreements and ensures clarity in commercial contracts.

3. Composition and Appointment of Arbitrators

The law allows parties to freely determine the number and qualifications of arbitrators, but if no agreement is reached:

• The default number of arbitrators is three.
• If parties fail to appoint arbitrators:
  • Each party appoints one arbitrator.
  • The two appointed arbitrators select a third arbitrator as the chairperson.
  • If parties fail to agree, the court intervenes to appoint an arbitrator.

To ensure neutrality, arbitrators can be challenged or replaced based on:

• Conflict of interest
• Failure to act impartially
• Incompetence or incapacity

This process ensures that arbitration remains fair and transparent.

4. Arbitral Proceedings

The new law enhances procedural flexibility and party autonomy in arbitration.
Key aspects include:

• Freedom to decide arbitration rules, including:
  • Language
  • Venue
  • Procedural deadlines
• The tribunal has authority over:
  • Admissibility of evidence
  • Ordering interim measures
  • Requesting expert opinions
• Equal treatment of parties is a legal obligation, ensuring that each side has the opportunity to present its case.

These provisions reduce delays and give parties greater control over the arbitration process.

5. Arbitral Awards: Final and Binding Decisions

Arbitral awards under the new law carry the same legal effect as a court judgment. Key provisions include:

• The award must be in writing and signed by all arbitrators.
• It must include:
  • Reasons for the decision (unless parties agree otherwise).
  • The date and place of arbitration.
• Correction and interpretation of awards are allowed under certain conditions.

Once issued, an arbitral award is final and binding, with limited options for appeal.

6. Recognition and Enforcement of Arbitral Awards

Nepal has been a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1998. Under the new arbitration law:

• Arbitral awards, both domestic and international, are enforceable in Nepal.
• A party can apply for court recognition and enforcement within three years of receiving the award.
• Courts will enforce awards unless they violate public policy or meet specific grounds for refusal.

These measures strengthen investor confidence and align Nepal’s arbitration system with international commercial practices.

7. Setting Aside an Arbitral Award

Despite arbitration being final and binding, parties can apply to set aside an award within 35 days of receiving it. However, grounds for annulment are strictly limited, including:

• The arbitration agreement is invalid.
• A party was not given proper notice of the proceedings.
• The award exceeds the scope of the arbitration agreement.
• Procedural irregularities (such as arbitrator bias).
• Non-arbitrable subject matter.
• The award is contrary to Nepalese public policy or morality.

Crucially, courts cannot review the merits of the case, ensuring that arbitration remains an independent and efficient dispute resolution mechanism.

Key Benefits of Arbitration in Nepal

Nepal’s new arbitration law offers several advantages over traditional litigation, including:

• Speed & Efficiency – Arbitration avoids court delays and resolves disputes faster.
• Flexibility – Parties can customize the arbitration procedure, language, and location.
• Confidentiality – Unlike court cases, arbitration proceedings remain private.
• Expert Decision-Making – Arbitrators are often specialists in the dispute’s subject matter.
• Cross-Border Enforceability – Foreign arbitral awards are enforceable under international conventions.
• Limited Court Interference – Courts only intervene in specific circumstances, preserving arbitration’s independence.

Challenges and Future Outlook

Despite the improvements, Nepal faces challenges in arbitration implementation:

• Lack of experienced arbitrators and institutions.
• Judicial delays in enforcing awards.
• Limited awareness among businesses and investors.

To ensure the success of the new arbitration framework, stakeholders must:

• Train lawyers, judges, and arbitrators in best arbitration practices.
• Promote arbitration-friendly policies to attract investors.
• Strengthen the capacity of arbitral institutions.

With proper implementation, Nepal can position itself as a regional arbitration hub, offering a reliable, investor-friendly dispute resolution mechanism.

Conclusion

The Arbitration Act 2075 (2019) represents a significant step toward modernizing Nepal’s arbitration system. By aligning with international standards, the law fosters efficient, enforceable, and fair dispute resolution. Businesses, investors, and legal practitioners must familiarize themselves with these changes to leverage arbitration as a fast and effective alternative to litigation.

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