Contract Law in Nepal

Under the Muluki Civil Code 2074, a valid contract requires: two or more competent parties (Section 505), a clear offer and unconditional acceptance (Section 508), free consent without coercion, fraud, or undue influence (Section 518), a lawful object that is not prohibited by law (Section 517), certain and definite subject matter, consideration (value exchanged between parties — upheld by Supreme Court precedent), intention to create legal relations, compliance with legal formalities, and the contract must not fall within the 12 grounds for void contracts listed in Section 517.

Section 517 of the Muluki Civil Code 2074 lists 12 grounds for void contracts. A contract is void if it restrains a profession, trade, or business; restrains marriage; is contrary to law; has an immoral or unlawful purpose; is against public order; cannot be performed because the subject matter is unknown; is impossible to perform; is too vague to give reasonable meaning; is entered by an incompetent person (minor or unsound mind); has an illegal purpose; or is based on mutual mistake of both parties on an essential fact.

A void contract is invalid from the start — it creates no legal rights or obligations. A voidable contract is initially valid but can be cancelled by the aggrieved party. Under Section 518, a contract is voidable if consent was obtained through coercion, undue influence, fraud, or deceit. Until the aggrieved party cancels it, a voidable contract remains enforceable. Once voided, it does not affect the rights of bona fide third parties.

Under Section 505(2) of the Muluki Civil Code 2074, a contract can be created through written agreement, verbal agreement, or by the conduct of the parties. However, contracts with a value exceeding NPR 50,000 that are not registered at a government office must be attested by the Ward Office to be enforceable in court. Additionally, all contract documents require at least two witnesses and must include specified personal details of the signatories.

The Muluki Civil Code 2074 requires that all contracts, agreements, and deeds with a value exceeding NPR 50,000 — which are not registered at a government office — must be attested by the Ward Office. This is a significant change from the previous law. Courts will not enforce documents that do not meet this requirement. The attestation serves as an official verification of the document’s execution and the identity of the parties.

Section 505 of the Muluki Civil Code 2074 provides that three categories of persons are not competent to conclude a contract: minors (persons under 18 years of age), persons of unsound mind, and persons disqualified by any prevailing law. A contract entered by an incompetent person is void from the start under Section 517(10). Natural persons can perform any act unless prohibited by law, while legal entities can only engage in activities permitted by their governing statutes.

Under Section 535 of the Muluki Civil Code 2074, the aggrieved party can seek: damages (compensation for actual loss caused by the breach, including foreseeable losses), specific performance (court order requiring the breaching party to fulfill their obligations), rescission (cancellation of the contract and restoration to original positions), and injunction (court order restraining the breaching party from acting contrary to the contract). Cases are filed at the District Court under the civil litigation process.

The Muluki Civil Code 2074 does not explicitly define or mandate “consideration” as the previous Contract Act 2056 did. However, Nepal’s Supreme Court has consistently upheld consideration as an essential element. In the landmark case Bhagwan Lal Shah v. Harka Lal Giri, the court ruled that a document lacking consideration does not constitute a valid contract. In practice, consideration (something of value exchanged between parties) remains a requirement for enforceability.

A quasi-contract (or indirect contract) is an obligation imposed by law without the parties’ express agreement, to prevent unjust enrichment. It is governed by Section 648 of the Muluki Civil Code 2074. Situations covered include returning goods received by mistake, repaying debts paid by a third person, returning amounts taken in bad faith, and paying back benefits unjustly acquired. Though no formal contract exists, the law creates obligations as if a contract were in place.

Part V of the Muluki Civil Code 2074 covers 16 chapters on contract types including: general contracts, sale of goods, agency, indemnity and guarantee, bailment and pledge, lease, hire-purchase, wages (employment), carriage (transport), and quasi-contracts. Each type has specific provisions governing formation, rights, obligations, and remedies for the parties involved.

Contract disputes in Nepal can be resolved through litigation (filing a civil case at the District Court), arbitration (under the Arbitration Act 2055), or mediation. For litigation, the aggrieved party files a plaint under the Muluki Civil Procedure Code 2074 at the District Court with jurisdiction. Court fees are calculated on the claim amount. Alternatively, parties can agree to resolve disputes through arbitration or mediation, which can be faster and less costly than court proceedings.

The limitation period varies by contract type. Voidable contracts have a 1-year limitation from the date of knowledge of the cause (e.g., discovery of fraud). Void contracts have no limitation period — they can be challenged at any time since they are invalid from the start. For breach of contract claims, the general limitation period is prescribed in the Schedule to the Civil Procedure Code 2074. Cases filed after the limitation period are dismissed as time-barred.