Contract Law in Nepal – An Easy Guide 2082

The framework of contract law in Nepal has undergone significant transformation over the years. Previously governed by The Contract Act of 2056 B.S. (2000 A.D.), the law has now been updated and integrated into the Muluki Civil Code, 2074 B.S. (2017 A.D.), and the Muluki Civil Procedure Code 2074 B.S. (2017 A.D.).

These changes have brought new definitions, obligations, and processes to the way contracts are handled in Nepal. This article aims to provide a clear and concise overview of the current contract laws in Nepal, including their formation, validity, performance, breach, and remedies.

Obligations Under Nepali Contract Law

An obligation in Nepali law can arise from various circumstances:

1. Through Law: The law directly imposes some obligations.
2. Through Contracts: Obligations of a contract agreement agreed on by the parties.
3. Through Indirect Contracts or Quasi-Contracts: The law imposes a responsibility to prevent unjust enrichment where there is no formal contract.
4. Through Unjust Enrichment: The law imposes an obligation when one party is unfairly enriched at the cost of another to rectify this.
5. Through Unilateral Commitments: When a person unilaterally commits to assume an obligation.
6. Through Torts and Quasi-Torts: Rise of obligations because of wrongful acts or omissions.

One important aspect of these obligations is that they are transferable to the successors of the person who originally assumed them. This ensures that obligations are not easily evaded by transferring assets.

Formation of Contracts

Contracts in Nepal are formed based on valid offers and acceptances. The key steps in forming a contract include:

Offer: One party presents a proposal to another party.

Acceptance: The other party agrees to the proposal.

Consideration: Something of value is exchanged between the parties.

Both offers and acceptances can be revoked through notices, provided that these notices are submitted before the other party acknowledges the offer or acceptance. This prevents parties from being unfairly bound by an offer or acceptance that they no longer wish to uphold.

Validity of Contracts

For a contract to be valid in Nepal, it must meet several criteria:

1. Free Will: The contract must be made with the free will of the parties involved.
2. Legality: The contract must not be against public order or interest.
3. Possibility of Enforcement: The contract must be capable of being enforced by the courts or other dispute settlement bodies.

Contracts that do not meet these criteria can be declared void. This ensures that contracts are fair and just and that parties are not coerced into agreements that they do not fully understand or agree with.

Performance of Contracts

Once a contract is formed, the parties are obligated to fulfill their commitments as stated in the contract. Key points about the performance of contracts include:

1. Mutual Understanding: Any changes or amendments to the contract must be made through mutual understanding.
2. Reciprocity: The obligations of the parties are reciprocal, if one party fails to perform their obligations, the other party is not required to fulfill theirs.
3. Timely Performance: Obligations must be fulfilled within the time and manner stipulated in the contract, or within a reasonable time if no specific time frame is provided.

Non-performance of a contract is acceptable under certain circumstances, such as mutual release from obligations, declaration of a voidable contract as void, breach by the other party, or fundamental changes in circumstances that make performance impossible.

Breach of Contract and Remedies

If a party breaches a contract, the other party has several remedies available:

1. Revocation: The aggrieved party can revoke the contract through a notice.
2. Damages: The aggrieved party can claim damages for the actual loss or damage suffered due to the breach.
3. Liquidated Damages: Pre-determined damages specified in the contract.
4. Quantum Meruit: Compensation based on the value of work done.
5. Specific Performance: The aggrieved party can seek a court order to compel the breaching party to perform their obligations.
6. Injunction: A court order to prevent the breaching party from performing certain actions.

These remedies ensure that parties have multiple options to seek justice and compensation in case of a breach.

Formalities of Legal Drafts

When drafting contracts, certain formalities must be observed to ensure their legality:

1. Figures and Words: Amounts should be clearly stated in both figures and words.
2. Corporate Signing: For corporate entities, the name, registration number, and address must be clearly stated, and the person signing must be authorized by the Board of Directors or hold a Power of Attorney.
3. Witnesses: At least two witnesses are necessary for the execution of a contract.

Special Provisions in the Civil Code

The Muluki Civil Code, 2074, includes several specific provisions related to different types of contracts:

1. Contracts of Guarantee: If a third party guarantees the repayment of a loan or the performance of an obligation, they are liable if the original party defaults.
2. Contracts of Lease: Contracts where one party gives possession of goods to another for use in exchange for rent.
3. Statute of Limitations: The Civil Code specifies time limits for filing lawsuits related to different types of contracts. For example, void contracts have no statute of limitations, while voidable contracts have a one-year limit from the date of knowledge of the cause.

Conclusion – Contract Law in Nepal

In conclusion, the code provides comprehensive guidelines on the formation, validity, performance, breach, and remedies of contracts. By relying on these guidelines, parties can ensure that their agreements are legally sound and enforceable, promoting trust and stability in business and personal transactions.

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