Nepal has no general Limitation Act. Instead, each statute sets its own periods, and for arbitration the operative rule is Section 6(1) of the Arbitration Act, 2055 (1999): the process of appointing arbitrators must begin within three months of the date the reason to settle a dispute through arbitration arises.
This brief examines what that means in practice, whether the three-month limit really applies to arbitrations, and, hardest of all, when the clock actually starts.
The Questions
- What is the statutory time limit to bring a claim in an arbitration under Nepalese law?
- Does the three-month time limit in Arbitration Act, Section 6(1) apply to arbitrations?
- When does a reason to settle a dispute through arbitration arise?
Time Limits Under Nepalese Law
Nepal does not have a general Limitation Act in the way that England and many other jurisdictions do. Statutes dealing with different topics each provide their own specific limitation periods.
Under the Contract Act, 2056 (2000)
Section 89 provided that, where prevailing law prescribes no specific limitation, a complaint would not be heard unless filed within the following periods:
| Matter | Limitation |
|---|---|
| A void contract, to have it declared void | At any time |
| A voidable contract | Within one year from the date the party learns of the reason for having the contract declared void |
| Contracts mentioned in Chapter 7 | Within two years after the date the reason to file a lawsuit arises |
| Any other claim under the Act | Within two years after the date the reason to file a lawsuit arises |
This was in similar terms to Section 18 of the previous Contract Act, 2023 (1966).
Under the National Civil Code, 2074 (2017)
The Contract Act, 2056 (2000) has been repealed and replaced by the National Civil Code Act. Chapter 2 sets out provisions relating to the performance of contracts. Section 534, which appears at the end of Chapter 4, provides:
534. Statute of limitation: A person who is aggrieved from any act done or action taken under this Chapter may make a lawsuit within two years after the date of the reason to file a lawsuit arises.
Chapter 5 deals with breach of contract and remedies. Section 544, at the end of that chapter, is in the same terms:
Statute of limitation: A person who is aggrieved from an act done or action taken under this Chapter may make a lawsuit within two years after the date of the reason to file a lawsuit arises.
Under the Arbitration Act, 2055 (1999)
Appointment of Arbitrator: (1) Unless otherwise stated in the agreement, the process of appointing arbitrators must be started within three months from the date when the reason to settle a dispute through arbitration arises.
Does the Three-Month Limit Apply to Arbitrations?
There is some debate as to whether the Contract Act, 2056 (2000) and the National Civil Code apply to arbitrations at all. The contention is that the word “lawsuit” in Section 89(2)(d) of the Contract Act and in Sections 534 and 544 of the National Civil Code refers to litigation in court.
Lawyers often contend the opposite: that the National Civil Code and its predecessor statutes applied to all contractual claims, whether brought in court or by arbitration, and that Section 6(1) merely added a further time limit for arbitration unless the agreement provided otherwise.
However, the courts have almost every time held that the National Civil Code and its predecessor statutes apply only to claims brought in court proceedings. For claims brought by arbitration, the only limitation period is that in Arbitration Act Section 6(1).
CCECC-Sharma-Lama JV v Melamchi Water Supply Development Board
In this ICC case (Tribunal: Professor Jayavadh Bunnag, President; Mr Gordon L. Jaynes; Mr Narayan Datt Sharma), a preliminary issue arose as to whether the claim was barred because the Notice of Arbitration was issued too late.
| Fact | Date |
|---|---|
| Construction contract, providing for ICC arbitration | 25 January 2005 |
| Date the respondent said the reason to arbitrate arose | 10 April 2011 |
| Notice of Arbitration issued | 27 July 2014 |
The tribunal held that the ICC Rules and the conditions of contract were silent about the time for commencing an arbitration, so the three-month limit in Section 6(1) applied:
5.35. Therefore, since neither the Contract nor the ICC Rules provides that the process of appointing arbitrators must be started within a certain period from the date when the reason for the settlement of a dispute through arbitration arises then it is the Tribunal’s determination that Section 6(1) of the Arbitration Act applies.
Having regard to both Section 6 of the Arbitration Act and Section 89(2)(d) of the Contract Act, 2056 (2000), the tribunal held the claimant had commenced the appointment process too late, and that it therefore had no jurisdiction to enter into the merits of the claim.
The 2012 version of the ICC Rules applied, and there is no relevant difference between Article 12 of the 2012 Rules and Article 12 of the 2021 Rules.
The service of the Notice of Arbitration
Under Nepalese law and practice, a claimant commences an arbitration by serving a Notice of Arbitration nominating its own party-appointed arbitrator. In ICC case 20375/CYK/PTA the tribunal held, rightly in our view, that the 2012 ICC Rules did not specify a time limit for serving that initial notice within three months. That decision is not binding, but it is persuasive.
There are numerous Supreme Court authorities endorsing Section 6(1) as the period of limitation for arbitrations, though all of those arbitrations were seated in Nepal.
Considering the above, we can say with a degree of certainty that where the seat of arbitration is Nepal, or where limitation is a matter of procedure, the three-month time limit in Section 6(1) applies.
When Does the Reason to Arbitrate Arise?
The principle running through the authorities is that time does not start when an obligation falls due. It starts when the other party refuses to meet it.
| Authority | Court and date | What was held |
|---|---|---|
| Pradhan v Korean Development Corporation (case 111 of 1986) | Reported NKP 1987, Issue 2, p.153 | A claim for 2% commission as local representative. The mere fact that commission fell due did not create a reason to file a lawsuit; that arose only when the defendant refused to pay. |
| Bijaya Construction Pvt Ltd v Appellate Court Patan (decision 7823) | Supreme Court, 29 May 2007 | The reason to arbitrate arose on 19 June 1996, when a board meeting rejected the claims as unjustified. The plaintiff began appointing an arbitrator well over three months later and was barred. It was the rejection of the claims, not their coming into existence, that started time running. |
| Raghubar Shrestha v Syako Construction Pvt Ltd | Supreme Court, Division Bench, 1 September 2008 | Time ran from the date the construction contract was terminated. Where a party had stopped carrying out the works and the term was not extended, termination was the reason to file the lawsuit. |
| Gurung v Thapa | Supreme Court, Division Bench, 1 March 2009 | Time ran not when a party was required to fulfil an obligation, but when that party refused to fulfil it. |
| Shreeram Sugar Mills v Agrotech | Supreme Court, Division Bench, 2 July 2009 | Reviewed the earlier authorities and distilled the principles (see below). |
| Namaste Travels Pvt Ltd v A.C. Garment | Supreme Court, Full Bench, 8 December 2011 | On non-payment, the plaintiff’s lawyer wrote threatening a legal remedy. The reason to file the lawsuit arose on the date of that letter. |
| Damodar Ropeways v Hazama Corporation | Supreme Court, Joint Bench, 13 February 2012 | The reason to file arose not when payment was due, but when there was a refusal to pay. |
| Nepal Industrial Bank v Arbitral Tribunal | Supreme Court, Division Bench, 17 September 2012 | The bank agreed to underwrite shares, then wrote saying it would not perform. Later the petitioner demanded payment and the bank refused. Time ran from the earlier date, when the bank gave notice it would not underwrite. |
| Milan Gurung v Mohan Salani | Supreme Court, Division Bench, 16 March 2015 | On a contract for payment by instalments, the limitation period started when the last instalment was not paid. |
| Bal Bahadur Pun v Himalayan Helicopter Pvt Ltd | Supreme Court, Division Bench, 8 September 2016 | Reached a similar conclusion. |
The principles distilled in Shreeram Sugar Mills
5. Owing to the above reasons and bases, the principle that the limitation period begins from the date of the end of a contract or the date of receipt of notice of termination of contract cannot be considered as a universally accepted principle. In situations where the aggrieved party approaches the court with a petition requesting an order for the specific performance following a breach or termination; the limitation period may begin from the date of expiry of the term of a contract, the date of termination of the contract, or the date of the breach of contract.
6. However, in claims involving compensation or payments based on quantum meruit, the date of the refusal of its obligation by a party may be considered as the date of the reason to file a suit.
7. The cause of filing a suit arises only after the party who is required to fulfil the obligation refuses to fulfil the obligation after the time has elapsed, and the legal statute of limitation to enter the court also arises only after the party refuses to fulfil the obligation.
The court there relied on Jyan Bahadur Pradhan v Korean Development Corporation (NKP 1987, Issue 2, p.153), Parasmani Bharati v Homraj Bam (NKP 2008, Issue 11, p.1421) and Ganga Bahadur Gurung v Bhagwati Thapa (Civil Appeal No. 459 of 2007, Division Bench, 1 March 2009).
What the Authorities Show
Determining when time starts to run, under the National Civil Code and under Arbitration Act Section 6(1), is heavily dependent on the facts. The limitation clock starts when two conditions are met:
- The claimant has a good cause of action against the respondent.
- The time has come when it is appropriate for the claimant to initiate proceedings, in court or by arbitration as the case may be.
In some cases, as in Raghubar Shrestha and Nepal Industrial and Commercial Bank, both conditions are met on the date one party unilaterally terminates the contract. But that is not always so, as the Supreme Court made clear in Shreeram Sugar Mills at paragraph 5.
A further point emerges from Pradhan: the date on which it becomes appropriate to refer a dispute to arbitration can arise later, and sometimes very much later, than the date the claimant first has a legal entitlement to a remedy. Before a dispute can arise there must be a claim made by the contractor and rejected by the employer. What constitutes a rejection, and what degree of finality that rejection must have, will be specific to the facts.
To answer the question of when the reason to settle a dispute through arbitration arises in any given case, it is first necessary to characterise the dispute that has been referred to arbitration.
Speak to Our Team
If you are considering commencing an arbitration, or facing a limitation defence to one, get in touch with Prakrit Shrestha, Attorney at Law, Managing Partner, or Dechen Gurung, Attorney at Law. You can also contact the firm directly, or read more about our regulatory and transactional advisory and forensic accounting and expert witness services.
Our write-up of a training on alternative dispute resolution and arbitration covers the practical side, and our guide to court case codes helps in reading the cause lists in which these matters appear.
This publication is not intended to be used as a basis for undertaking any significant transactions, financial or otherwise, without consulting appropriate professional advisers.
Read the Original Briefing
The full brief, including the original paragraph numbering and citations, is reproduced below and available to download.