Arbitrability, or the scope of issues that can be resolved through arbitration rather than traditional court litigation, is regulated in Nepal by the Arbitration Act 1999 (2055) (“Arbitration Act”) the National Civil Code 2017 (2074) (“Civil Code”) National Criminal Code 2017 (2074) (“Criminal Code”) and relevant international conventions. This article delves into the intricacies of Nepalese law on arbitrability, highlights judicial interpretations, and provides drafting considerations for ensuring foreign and domestic awards are enforceable in Nepalese courts.

Arbitrability Under Nepalese Law

The Arbitration Act lays the foundation for arbitration in Nepal, though it does not explicitly outline which disputes are non-arbitrable. Instead, it permits arbitration for disputes as specified by agreement. This broad scope permits arbitration for both civil and commercial disputes, provided the parties agree in writing.
However, judicial interpretations have introduced constraints that limit the Arbitration Act’s openness. For instance, in Rakesh Kumar on behalf of The Oriental Insurance Company Ltd. v. Ramkrishna Rawal (“Oriental Insurance”), the Supreme Court of Nepal opined that arbitrable disputes generally include commercial matters such as investment, construction, sales of goods, insurance, and banking disputes. This interpretation, while not explicitly supported by the reading of any provisions of the Arbitration Act, effectively narrows arbitrability to commercial matters, introducing a judicial limitation that can impact the enforcement of non-commercial awards.

Civil Code Restrictions: Capacity and the Identification of Minors

Civil Code reserves certain matters exclusively for court resolution, specifically issues concerning a party’s legal capacity. Questions of capacity, quasi-capacity and non-capacity determine whether a party has the legal ability to enter into and be bound by any obligations. In cases where a minor’s status or capacity is in question, arbitration cannot proceed as these matters require judicial intervention to verify age, confirm legal guardianship, or establish protections for the minor’s rights.

Criminal Code Restrictions

Similarly, the Nepalese Criminal Code mandates that criminal matters be resolved solely by the courts. Criminal cases, which involve public order and state interests, are categorically non-arbitrable due to their impact on society and their requirement for judicial authority.

Enforcement Risks in Nepal

Foreign parties should be aware of Nepal’s specific limitations on arbitrability, as these restrictions are likely to be enforced by Nepalese courts. For example, a dispute considered arbitrable in the European Union, such as certain civil matters, may face enforcement challenges in Nepal if it does not clearly fall within the scope of commercial disputes as interpreted by Oriental Insurance Case. Nepal’s ratification of the New York Arbitration Convention includes a reservation restricting enforceability to commercial awards only, mirroring the Arbitration Act’s approach. Consequently, non-commercial awards or awards involving non-commercial matters, may not be enforceable in Nepal.

Drafting Arbitration Clauses: Ensuring Arbitrability

Given these complexities, drafting arbitration clauses requires special attention to ensure enforceability. Foreign parties who are preempting enforcing their awards in the Nepalese courts, in particular, should be aware of Nepal’s limitations on arbitrability, as these restrictions are expected to be enforced by Nepalese courts. Consulting legal counsel familiar with both Nepalese and international arbitration standards can help mitigate risks, ensuring that the arbitration agreement aligns with enforceability criteria and providing greater security in dispute resolution. Our team at Niti Partners and Associates have relevant credentials to guide you on this issue.

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