The contract plays a vital role in both commercial and civil business affairs. One party might refuse to deliver a product or service, a client may decide not to pay, a contractor may leave a project unfinished or one party may state that it will no longer carry out an agreed-upon obligation.
A breach of contract in Nepal happens when one of the contractual parties fails to perform contractual obligations, refuses to perform or engages in conduct that indicates that it is unable to perform its obligations. Failure to perform or perform incorrectly may also trigger contractual remedies depending on the terms and conditions.
The affected party might wish to be compensated or have the contract terminated, or have an advance returned, or have the obligation under the contract performed, or that it be ordered not to engage in further harmful conduct. Nepalese law offers a number of remedies, but the remedy that is suitable will depend on the contract, the nature of the breach, evidence and applicable law, etc.
In short, a party to a contract who suffers from a breach of contract in Nepal can seek out remedies including compensation, specific performance, rescission, restitution or an appropriate court order for prevention. The options for relief rely on the agreement, the type of violation, proof of loss and the law that governs the agreement.
What is a Breach of Contract in Nepal?
In Nepal, the National Civil Code, 2074 is the key legislation related to the general duty to pay a contract. Under Section 504, a contract arises when two or more persons enter into an agreement which is legally enforceable to do or refrain from doing something. Consent, contractual capacity, an adequate object and a lawful obligation are required in section 505.
More importantly, Nepalese law does not recognize just formal printed agreements. Unless another law requires a particular writing, registration or formality, a contract may be made in writing, orally or by conduct of the parties. If these formalities are not done, a contract that specifies them may not be considered valid.
Section 535 provides that breach can happen when any contracting party:
- Fails to fulfil an obligation;
- Notifies the other party that the obligation will not be fulfilled;
- Shows by actions that the party is incapable of performing it.
Not all disagreements are necessarily a breach. The agreement must first be examined to determine what each party actually promised in the agreement and when or if the disputed conduct is in violation of that obligation.
It may also be important that the invoices, purchase orders, electronic records and messages or emails that are sent to and from the parties constitute evidence of the parties' agreement and subsequent conduct. Nepal also maintains a statutory framework for electronic transactions under the Electronic Transactions Act, 2063.
Common Types of Breach of Contract
- Failure to Perform
This happens when a party simply fails to fulfill a contractually agreed-on duty.
For example: A supplier is given an advance to provide machinery, and fails to provide it to the customer by contractual deadline.
- Delayed Performance
Section 525 specifically deals with delayed contractual performance. If a performance can still be made after the original time, the other party can extend the period for reasonable performance and may claim damages for lost cause due to the delay. Rescission may be possible if performance does not occur after such notice.
For example: A contractor agrees to renovate an office by June, but finishes the work several months late, resulting in the added cost of rental expenses.
- Defective or Incomplete Performance.
A party can only do a part of the duty or deliver an item which is substantially different from what was specified in the contract
For example: The construction contractor constructs a building but omits to fit the material that is specifically prescribed in the contractual specification.
- Non-Payment
One of the most common disputes that may arise is when the agreed amount is not paid.
- Refusal to Perform
Section 535 also applies where a party notifies the other party that it will not be performing its contractual obligations.
- Anticipatory Breach
There doesn't have to be a wait until the final performance date to have a breach. If the refusal is clear or behavior is exhibited indicating inability to perform, it could constitute a breach under Section 535.
For examples: Suppose that the seller tells the buyer prior to the delivery date that it has sold the goods to someone else and will not deliver them.
- Breach of Specific Contractual Obligations
Confidentiality, delivery, construction, service, payment or similar clauses are also potential sources of disputes.
For certain clauses like non-compete, their scope and enforceability must be examined separately. Just adding a term into an agreement does not automatically mean that all of the restrictions are enforceable under the Nepalese law.
What Must Be Established in a Breach-of-Contract Claim?
In most cases, a claimant will have to establish:
- There was a valid and enforceable contractual relationship in place.
- The contracting party had the capacity and authority to make the contract.
- The agreement created a sufficiently identifiable obligation.
- The other party did not perform that obligation or failed to do so.
- The conduct was in breach of contract and applicable law.
- Where compensation is sought, legally recoverable loss has occurred as a result of the breach.
- The claim was commenced within the applicable limitation period.
- All necessary notice, negotiation, mediation or arbitration procedures were adhered to.
These requirements will vary depending on the contract and dispute.
It's also important for parties to consider the dispute-resolution clause very carefully. Section 507 acknowledges contractual autonomy in determining contractual terms, remedies and method of dispute resolution, subject to law.
Legal Remedies for Breach of Contract in Nepal
Under Chapter 5 of the National Civil Code there are a number of remedies. Not necessarily interchangeable in all situations and no remedy should be deemed automatic.
Compensation and Damages
Section 537 permits an aggrieved party to get compensation for actual loss arising from breach, and for loss that the parties were aware, at the time of contracting, was likely to arise from the breach.
If the contract stipulates a sum payable on default; the law does not automatically grant such sum. Under section 537(2), a reasonable amount not exceeding the amount stipulated in the contract is permitted to be recovered.
If no agreed compensation amount is set, direct and actual loss may be recoverable. The idea of indirect or remote loss or damage is explicitly excluded from Section 537(3).
Compensation is supposed to address legally recoverable loss. It is not just a punishment for the one party that has done something bad.
Specific Performance
Sometimes money is not an adequate substitute for performance.
Section 540 allows an aggrieved party to seek specific performance, meaning an order to have the contractual obligation performed, when monetary damages are not reasonable and adequate.
But in particular the performance is restricted in the following cases:
- There is an adequate monetary compensation;
- The court cannot supervise the required performance,
- The agreement is based on individual skill, ability or knowledge;
- Specific performance is not possible; or
- The party in breach seeks the remedy.
Specific performance may therefore be pertinent when the subject matter or obligation which was promised cannot easily be replaced, but this would have to be assessed case by case.
Rescission or Termination
If it is a serious enough violation, the innocent party can terminate the contractual relationship.
If there is a material breach or material non-performance, the other party can rescind the contract pursuant to Section 535(2) by notifying the party in breach. The rescinding party then has no further obligation under Section 535(3).
Do not take the decision to terminate lightly. There may be provisions in the contract that set forth their own notice, cure and termination requirements and wrongful termination may create another dispute.
Restitution
Rescission is not always the answer to what happens to money and property that has been already transferred.
The general rule of Section 538 is to compel the return of money, goods or other advantages received when a contract is rescinded, voided, made invalid or no longer has to be performed. There may be a reasonable value that applies to situations where services or other benefits cannot be simply returned.
The doctrine of quantum meruit is also a form of proportional recovery discussed in Section 539.
Injunctions and Preventative Orders
Often a contractual disagreement can only be settled through prevention rather than only compensation afterward.
If the conduct is likely to make performance impossible, then the aggrieved party may come before the court under Section 541 to prevent the conduct. The court may order a party to stop the relevant action while the contractual dispute is resolved.
This can be applicable, for instance, if the behaviour in question is found to be in dispute and poses a potential risk to contractual property, confidential information or a potential completion of the agreement.
It does not imply that an injunction is always granted in contract disputes.
Compensation for Breach of Contract
The amount claimed should be related to the breach and substantiated with proof.
Under Section 543, the court, in determining the compensation, shall take into account whether the breach was intentional, or whether the non-performance was due to recklessness, and the amount of money or benefit the innocent party might have received if the contract had been performed.
|
Type of loss |
Possible supporting evidence |
|
Unpaid amount |
Contract, invoice, bank record, payment reminder |
|
Delayed delivery |
Purchase order, delivery schedule, correspondence |
|
Repair or replacement cost |
Receipts, quotations, technical reports |
|
Lost business income |
Financial records, sales data, accounting documents |
|
Construction defect |
Site records, photographs, expert or technical reports |
|
Advance payment |
Bank statements, receipts, agreement, payment records |
The above evidence does not ensure recovery. The cause of the loss and contractual provisions still have legal significance.
A claimant should also document reasonable steps they took to prevent further unnecessary loss. The impact on the final evaluation will be dependent on the facts and existing court practice.
How to Enforce a Contract After a Breach
The enforcement process is typically practical and starts before a case is filed in court:
- Read the entire contract to review the payment, performance, notice, default and termination and dispute-resolution clauses.
- Identify the exact breached obligation, don't just present the grievance as a general unfairness.
- Check procedural clauses as some agreements require notice, additional time to cure, negotiation, mediation or arbitration.
- Preserve the evidence and maintain original agreements, modifications, invoices, letters and proof of performance.
- Calculate the loss, determine the amount due for contractual obligations from any additional compensation claimed.
- If applicable, send a written demand or legal notice.
- Consider settlement because a business-friendly solution can save time and business relationships.
- Mediate or arbitrate as necessary or advisable. Nepal has two distinct statutory frameworks, namely Mediation Act, 2068 and Arbitration Act, 2055.
- Start proceedings as appropriate before a competent forum.
- Comply with eventual judgment, arbitral award or settlement, as appropriate.
The details of the forum and procedure can change depending on the parties, contract, place, subject matter, special legislation and dispute resolution clause. The general civil procedure in Nepal is regulated by the National Civil Procedure Code, 2074.
Legal Notice for Breach of Contract
A legal notice is typically a document that specifies:
- the parties;
- the relevant contract and date;
- breached obligation;
- conduct constituting breach;
- previous communication;
- requested performance or payment;
- reasonable time frame if applicable; and
- intended next legal step if the matter remains unresolved.
A notice is not a proof of liability or of the obligation for payment.
But notice can have a legal significance. In rescinding a contract for material breach, notice is expressly mentioned in Section 535(2). In delayed performance situations where performance is still feasible, Section 525 requires a notice to be given before rescission to allow a reasonable additional time to perform as set forth in the section.
There may be further notice requirements as set out in the agreement.
Evidence to Collect
Preserve:
- signed contract and amendments;
- emails, messages and letters;
- invoices and payment receipts;
- purchase Orders and delivery records;
- photographs and videos
- inspection or site reports;
- meeting records;
- relevant witness details;
- bank statements;
- expert or technical reports;
- evidence of monetary damage; and
- every demand, legal notice and response.
Never delete, date, edit or selectively save evidence. For electronic evidence, original records must be kept, along with any contextual information.
Court, Arbitration, Mediation or Settlement?
|
Option |
Potential advantage |
Possible limitation |
|
Negotiation |
Faster and comparatively inexpensive |
Requires cooperation |
|
Mediation |
Flexible and settlement-focused |
Generally, depends on the parties reaching agreement |
|
Arbitration |
Private adjudicative process and may follow specialist contractual arrangements |
Depends heavily on arbitration agreement and can involve significant cost |
|
Court proceedings |
Formal judicial remedies and enforcement |
May involve time and litigation expense |
|
Settlement |
Gives parties greater control over outcome |
Requires acceptable compromise |
The dispute-resolution clause should be considered prior to initiating litigation.
For plans that include an arbitration clause, consult Nepal Lawyer's guide to arbitration laws in Nepal. The Nepal Arbitration Act 2055 is still the existing principle law in Nepal relating to arbitration.
Limitation Period for Breach-of-Contract Claims
This point deserves particular attention.
According to Section 544 of the National Civil Code, if a person is harmed by an act or action under Chapter 5 on breach of contract and remedies, then there is a two-year time limit for filing a lawsuit from the date of the cause of action.
This is not a universal two-year answer for all disputes with an agreement. There are various rules in different chapters or special contracts, special statutes or procedural situations. Therefore, a party should establish the relevant limitation period early and not wait until the negotiations have broken down.
Prior to action, legal counsel should be secured, in accordance with the law and the current court practice.
Common Mistakes After a Contract Breach
Some frequent issues are relying solely on oral discussions, waiting too long, neglecting to follow the cure or notice provisions, losing evidence, compensating too much, and ending without documenting objections, as well as threatening the other party improperly, and not following an arbitration clause and continuing to perform without filing any objections.
A common error is thinking that the court will always award the full amount of a penalty or compensation clause even when it is specified on the contract. Section 537 instead refers to a reasonable amount not exceeding the stipulated amount.
When Should You Consult a Lawyer?
Legal review is particularly useful where:
- the amount of the contract or loss claimed is significant; and
- land or construction project, intellectual property, employment or financing agreement is involved;
- a clause in the agreement stipulating that a case goes to arbitration or jurisdiction of a particular court;
- the other party refuses to accept responsibility and the underlying agreement;
- It is hard to determine compensation;
- worries about loss of property or evidence;
- termination or rescission is being considered;
- a legal or arbitration notice has already been received; or
- a limitation period may be approaching.
How Nepal Lawyer Services Can Help
Whether the exact wording of a termination clause, the delivery date, whether extra time was approved, who signed for the company, the wording in an arbitration clause, or whether the loss is claimed can be substantiated, can be the details that can make or break contract disputes.
Nepal Lawyer Services enables people and businesses to reach lawyers who specialize in civil and commercial matters in Nepal. Originally, its Civil Law Services include contract and recovery matters expressly.
Depending on the dispute, legal assistance may include:
- reviewing the contract and amendments;
- identifying possible breach and available remedies;
- preparing or responding to a legal notice;
- assessing compensation and supporting evidence;
- negotiating a settlement;
- reviewing termination rights;
- preparing a civil claim;
- dealing with commercial contract disputes;
- advising on mediation or arbitration; and
- assisting with enforcement proceedings.
For businesses involved in broader commercial and corporate conflicts, please see NLS' guide to commercial and corporate litigation in Nepal as well.
In the event of civil assistance in connection with the contract, please refer to Civil Law Services in Nepal or contact Nepal Lawyer Services to discuss the documents and the next steps.
Frequently Asked Questions
- What is a breach of contract in Nepal?
A breach typically occurs when a party fails to perform an obligation, thereby declaring that it will not perform an obligation, or by conduct becoming evident to the other party that it cannot perform an obligation. The basic rule is provided for in Section 535 of the National Civil Code. The definition of breach will be based upon the agreement and facts.
- What are the common types of contract breach?
Common situations include: non-performance, delayed performance, defective or incomplete performance, refusal to perform even when paid and advance refusal to perform. Each infraction may be serious or of legal consequence depending upon the terms and purpose of the agreement.
- Can I claim compensation for breach of contract in Nepal?
Potentially. Section 537 provides compensation for actual loss caused by breach and certain loss known by the parties to be a likely result when they contracted. The section does not cover indirect or remote losses. This is yet to be adequately backed up by the law and substantiated.
- What evidence is needed?
Items such as the contract, amendments to the contract, invoices, bank statements, emails, messages, delivery records, photographs, technical reports and loss evidence can be useful evidence. The type of evidence depends on which contractual obligation and damage is being disputed.
- Can I cancel a contract after the other party breaches it?
Rescission may be allowed under Section 535(2) with the notice to the party in breach. The termination clauses of contracts and other other relevant conditions should also be reviewed before the unilateral termination.
- What is a specific performance in Nepal?
Specific performance involves not just payment of money, but actually the performance of the contractual obligation. The remedy is available in Section 540, but with some statutory limitations, when monetary compensation is not reasonable and proper.
- Can I recover an advance payment?
Potentially. If a contract is duly rescinded or is rendered void, the provisions of this Section apply to the return of money and goods and other benefits already received. The outcome is contract dependent, performance accomplished, and reasons for termination.
- Is a legal notice required before filing a contract case?
Not consistently as the same throughout all contract disputes. However, notice is important in some delayed performance and rescission contexts and in some instances the contract itself may require such notice, as well as statutory provisions like Sections 525 and 535. It should be determined if there is a requirement before proceeding.
- Can a contract dispute go to arbitration?
Yes, in the event of a valid arbitration arrangement. Arbitration is regulated by the Arbitration Act 2055 of Nepal and contractual dispute-resolution clauses should be checked before filing for court proceedings.
- How long do I have to bring a breach-of-contract claim?
There is a two-year limitation period from accrual of the cause of action for actions under Chapter 5 with regard to breach and remedies in Section 544. The contractual classifications and special legislation may need to be analyzed separately.
- Can I claim both compensation and specific performance?
Specific performance is described in section 540 as a remedy to be exercised instead of monetary compensation. There are other remedies and ancillary claims which will depend on the statutory provision, contract and circumstances, and so a combination of remedies cannot be assumed as a matter of course.
- Does sending a legal notice guarantee payment?
No. A claim is recorded in a legal notice for remedy for alleged breach, and the claimant can be rebutted. If settlement is not reached, it may be necessary to proceed with further negotiation, arbitration or litigation.
- What should I do if I receive a breach-of-contract notice?
Do not ignore it. Read through the contract, allegations, deadlines and supporting documents before you begin answering. Maintain pertinent records and refrain from admitting or promising anything without understanding the implications.
- How can a lawyer help with contract enforcement?
A lawyer will be able to conduct a review of the existence of an enforceable contract and a breach of it, the remedies available, preparing notices, reviewing limitation and dispute-resolution provisions, organize evidence, negotiate settlement and represent the party in the appropriate forum.
Conclusion
Breach does not automatically result in compensation or cancellation of the contract under the Nepalese contract law, which has provided various remedies when breach occurs.
It all begins with the contract. The parties will need to establish the obligation, establish whether the obligation has been fulfilled, keep evidence and discuss what to do about it. Depending on the circumstances, that remedy may involve compensation, rescission and restitution, specific performance, a preventive court order, negotiation, mediation, arbitration or litigation.
The two-year limitation period provided by Section 544 of the chapter of the National Civil Code on breach of contract and remedies is a particularly important factor to consider, since this section contains the limitation period for claims arising from breach of contract.
In case of a contract with substantial money or property involvement, commercial operations or complicated dispute resolution provisions, professional review may help determine which legal path to take before rights or evidence are lost.
Need Legal Assistance with a Contract Dispute?
Contract disputes can involve significant financial, commercial, and legal consequences. If your dispute involves a company, business agreement, shareholder matter, commercial transaction, or other corporate issue, professional legal advice can help you understand your rights and available remedies.
Looking for a corporate lawyer in Nepal? Explore Corporate Law Lawyer in Nepal and get professional assistance with contract disputes, corporate matters, legal notices, negotiations, and related legal proceedings.
For broader legal assistance, you can also Contact Nepal Lawyer Services to discuss your contract or business-related legal matter.
Sources:
https://lawcommission.gov.np/content/13397/
https://lawcommission.gov.np/content/13455/civil-code-2074/
Disclaimer: This article is only for general legal information on breach of contract in Nepal. It is not legal counsel; it is not intended as a substitute for advice from a qualified attorney. The remedy and process and the applicable law may all vary depending on the contract, facts, evidence, dispute resolution clause and the law in force.
