Nepal’s contract law: Here are basic provisions explained

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The Contract Act, 2000, used to govern all aspects related to contracts in Nepal until the recent enactment of the Civil Code, 2017. The new code has made a big change in the law relating to contract, ranging from the drafting of a contract to its execution.

As per section 504 of the Civil Code, if an agreement enforceable by law is concluded between two or more persons to do or not to do any act, such shall be regarded as a contract.

Eligibility for contract

Section 506 of Civil Code, 2017, states that every person other than the following listed are eligible of performing a contract:

  1. One who is minor: Section 2(e) of the Civil Code, 2017, define the minor as a child who has not attained the age of 18.
  2. One who is of unsound mind

Creation of obligation

Section 493 of the Civil Code, 2017, states that if there is a legal obligation for anyone to do or not to do any act, an obligation is created, and non-performance of such an obligation is followed by remedies. Further, section 494 (1)(b) of the Civil Code has listed contract as one of the ways to create obligations that are enforceable between contracting parties. 

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Breach of contract and its remedies

As per section 535 of the Civil Code, 2017, if any party to a contract fails to fulfill the obligation under the contract or gives a notice to the other party that he or she does not perform the act as mentioned under the contract and demonstrates that he or she is incapable of performing the act under the contract, the party shall be deemed to have breached the contract.

In case of the breach of a contract under section 535, the party aggrieved by it shall be entitled to recover from the party in the breach of the contract damages for the actual loss or damage caused by the breach or such loss or damage, as mentioned in section 537(1) of the Civil Code.

Contract of personal guarantee

Sections 563 (1), (2), and (3) of the Civil Code, 2017, provide that if a contract is concluded under which a third party undertakes to repay the loan borrowed by or discharges the liability promised by a person in case of that person’s default, a contract of guarantee shall be deemed to be concluded. If a third party gives such a guarantee and the person bound to repay the loan and fails to repay or discharge such loan or liability, the person giving the guarantee (the surety) to such loan or liability shall repay the loan or discharge the liability according to the terms and conditions of the contract. 

The terms and conditions of the guarantee shall be as determined in the contract.

Contract of lease

As per section 610 of the Civil Code, 2017, if a contract is concluded under which a person gives any goods in which he or she has right and possession to another person for use and possession and enjoy the benefits accrued therefrom in consideration for rent payable regularly for a certain period, a contract of lease shall be deemed to be concluded.

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Regmi is an advocate associated with Associates Hub Law Firm.

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