Contract Law in Nepal – Everything You Need to Know

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Contract law notes - iPleaders

Until the recent enactment of the Civil Code, 2017, the Contract Act, 2000, governed all aspects of contracts in Nepal. The new code has made significant changes to contract law, from contract formulation to contract execution.

Section 504 of the Civil Code states that if an agreement enforceable by law is reached between two or more people to do or not do something, it is considered a contract.

Eligibility for contract

Section 506 of the 2017 Civil Code stipulates that anyone other than the individuals named below is eligible to undertake a contract:

a. One who is a minor: According to Section 2(e) of the Civil Code of 2017, a minor is a youngster who has not reached the age of 18.
b. Someone who is mentally ill

Creation of obligation

According to Section 493 of the 2017 Civil Code, if there is a legal obligation for anybody to do or not do any act, an obligation is created, and non-performance of such an obligation results in remedies. Furthermore, section 494 (1)(b) of the Civil Code lists contract as one of the means to create legal duties between contracting parties.

Breach of contract and its remedies

According to Section 535 of the Civil Code of 2017, if a party to a contract fails to fulfill the obligation under the contract or provides notice to the other party that he or she does not perform the act as mentioned in the contract and demonstrates that he or she is incapable of performing the act under the contract, the party is deemed to have breached the contract.

In the event of a breach of contract under Section 535, the party aggrieved claim damages from the party in violation of the contract for the actual loss or damage caused by the breach or such loss or damage, as specified in Section 537(1) of the Civil Code.

Contract of personal guarantee

Sections 563 (1), (2), and (3) of the Civil Code, 2017, state that a contract of guarantee is formed when a third party to repay a debt received by a person or discharges the liability promised by that person in the event of that person’s default. If a third party provides such a guarantee and the person obligated to repay the loan fails to repay or discharge such loan or debt, the person the guarantee (the surety) shall reimburse or discharge the debt in accordance with the terms and conditions of the contract.

The guarantee’s terms and conditions shall be as specified in the contract.

Contract of lease

According to Section 610 of the Civil Code of 2017, a contract of lease is considered to be concluded if a person gives any goods in which he or she has right and possession to another person for use and possession and enjoyment of the benefits accrued therefrom in consideration for rent payable regularly for a certain period.

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