Contract Law and Commercial Transactions in Nepal: Formation, Performance, and Remedies

Introduction: Contracts as Foundation of Commerce and Exchange

Contract law is among the most fundamental bodies of law in any legal system. Contracts are the mechanism through which parties exchange goods, services, money, and rights. They form the backbone of commerce, employment, real estate transactions, and virtually every economic interaction. A robust contract law system—one that protects parties' agreements, enforces obligations, and provides remedies for breach—is essential to economic development and prosperity.

For most of history, contract law in Nepal was governed by customary principles and the Muluki Ain (old legal code), which contained scattered contract provisions. These were supplemented by various specific statutes addressing particular types of transactions (sale of goods, negotiable instruments, etc.). The system was fragmented, inconsistent, and often inadequate for modern commerce.

The Civil Code 2074 (enacted on Magh 3, 2074 BS, equivalent to November 18, 2017 AD) modernized contract law comprehensively. The Code's contract provisions (Book 5) establish:

• Clear principles of contract formation (offer, acceptance, consideration);
• Requirements for essential elements (parties with capacity, legitimate purpose, no illegality);
• Rules governing performance and breach;
• Comprehensive remedies for breach (specific performance, damages, restitution);
• Special provisions for specific types of contracts (sale, lease, loan, service, etc.).

The Code also incorporates principles from international contract law and comparative law, making Nepali contract law aligned with global practice.

Yet, as with all law, understanding the legal framework is only the first step. Lawyers must be able to negotiate contracts effectively, draft agreements protecting clients' interests, interpret ambiguous language, analyze breaches, calculate damages, and enforce judgments. For businesses and individuals engaging in commerce in Nepal, understanding contract law and the risks of non-performance is essential.

This comprehensive guide explores contract law in Nepal, examining principles of formation and validity, performance and breach, remedies, and practical strategies for effective commercial contracting.

Part 1: Foundational Concepts and Contract Formation

1.1 What Is a Contract?

Definition: A contract is an agreement between two or more parties that is:

• Voluntary: All parties consent freely;
• Supported by consideration: Each party provides something of value or assumes obligation;
• Intended to Create Legal Relations: Parties intend to be bound by law;
• Enforceable: Law will enforce the agreement if one party breaches.

Key Characteristics:

• Agreement: Parties' minds meet on essential terms. Agreement is demonstrated by offer and acceptance.
• Consideration: Each party gives or promises something (payment, service, forbearance from action, or receipt of a benefit).
• Intent to be Bound: Parties intend to create legal obligations, not merely social arrangements.
• Legality: The contract's purpose is lawful; neither the formation nor performance violates law or public policy.

Contract vs. Non-Binding Agreements: Not all agreements are contracts. Social or domestic agreements (dinner invitation, friendly loan without written terms) may not be contracts if:

• Parties did not intend legal consequences;
• Consideration is absent;
• Terms are too vague to enforce.

Courts determine whether agreement was intended as contract based on context and parties' conduct.

1.2 Essential Elements of Contract Formation

Offer: An offer is a proposal by one party (offeror) to another (offeree) showing willingness to be bound if the other party accepts. An offer must:

• Demonstrate Intent: Make clear that a binding agreement will result if accepted;
• Identify Essential Terms: Price, goods/services, quantity, time, place;
• Be Communicated: Communicated to the offeree (cannot be accepted without knowledge);
• Be Definite: Terms must be clear and complete enough to enforce;
• Be Distinguished from Invitation to Treat: Mere invitation to do business is not an offer (e.g., price list, catalog); customer's selection of goods is the offer.

Termination of Offer: An offer can terminate by:

• Acceptance: Offeree accepts, creating a contract;
• Rejection: Offeree rejects;
• Counter-offer: Offeree makes a counter-offer (rejection of original offer);
• Lapse: Offer expires after reasonable time if no acceptance;
• Revocation: Offeror withdraws the offer before acceptance (unless offer explicitly cannot be revoked);
• Death or Incapacity: Offeror dies or becomes incapacitated;
• Illegality: If performance becomes illegal, offer terminates.

Acceptance: Acceptance is the offeree's agreement to the offeror's proposal. Acceptance must:

• Be Unequivocal: Clear acceptance of all terms (conditional acceptance is a counter-offer);
• Match the Offer: Accept the offer as made (any changes are counter-offer);
• Be Communicated: Communicated to the offeror (acceptance is not effective until communicated, except in exceptional cases);
• Occur Before Offer Terminates: Must be timely;
• Be by Proper Mode: If offer specifies how acceptance must be made, acceptance must be by that mode (e.g., "respond by email" requires email acceptance).

Time of Contract Formation: Contract is formed when:

• Acceptance is communicated to the offeror (or becomes effective under applicable rules);
• At that moment, parties are bound.

Postal Rule (acceptance by mail): If offer invites acceptance by post, acceptance is effective when posted (sent), not when received. This protects the offeree from revocation after mailing acceptance.

1.3 Consideration

Definition: Consideration is the value that each party provides or promises. It can be:

• Payment of money;
• Performance of service;
• Transfer of property;
• Forbearance from action (agreeing not to do something);
• Receipt of a benefit.

Adequacy of Consideration: Consideration must be of some value, but:

• Courts do not measure whether the bargain is fair;
• One party can make a bad bargain and still be bound;
• Gross inadequacy might suggest lack of genuine agreement or fraud, but alone is not sufficient to void contract.

Must Move from Both Parties: For a valid contract, both parties must provide (or promise to provide) consideration. If only one party gives consideration, it is typically a gift, not a contract.

Example of Consideration:

• Sale: Buyer provides money; Seller provides goods.
• Service Contract: Employee provides labor; Employer provides salary.
• Loan: Lender provides money; Borrower promises to repay with interest.

Lack of Consideration: If one party promises something without receiving any consideration, it is a unilateral gift (usually not enforceable as a contract). However:

• Partial performance may constitute consideration;
• Reliance on promise (if foreseeable and substantial) may enforce promise in equity;
• Some promises are enforceable despite lack of traditional consideration.

1.4 Capacity of Parties

Legal Capacity: Parties to a contract must have legal capacity—the legal power to bind themselves. Persons lacking capacity include:

Minors (under 18 years):

• Generally cannot make binding contracts;
• Exception: contracts for necessities (food, medicine, clothing) may be enforceable;
• Minors can disaffirm (reject) contracts upon reaching majority, with limited exceptions;
• Parent or guardian can make contracts on behalf of minors.

Persons with Mental Incapacity:

• Persons with severe mental illness or intellectual disability may lack capacity;
• If the person cannot understand the nature of the contract, it may be void or voidable;
• Guardian can make contracts on behalf of incapacitated person.

Persons Under Guardianship:

• Guardians can make certain contracts on behalf of the ward;
• Restrictions may apply to certain transactions (sale of major assets);
• Contracts by the guardian in excess of authority may be void.

Persons Under Intoxication:

• Person extremely intoxicated may lack capacity;
• If intoxication is involuntary (forced intoxication), contract may be voidable;
• If intoxication is voluntary (self-induced), person is usually bound unless unable to understand.

Married Women (historical limitation):

• Under old law, married women had limited capacity;
• Modern law (Civil Code 2074) gives full capacity to married women;
• Married women can enter contracts, own property, engage in business independently.

1.5 Legality and Public Policy

Lawful Purpose: A contract is valid only if:

• The purpose of the contract is lawful;
• Neither formation nor performance violates law;
• The contract does not contravene public policy.

Illegal Contracts: Contracts are illegal and void if they involve:

• Crime or tort (e.g., contract to commit murder, theft, fraud);
• Violation of statute (e.g., contract violating maximum working hours, minimum wage, safety standards);
• Immorality or public policy violation (e.g., contract for prostitution, gambling contracts in some jurisdictions);
• Corruption (e.g., contract requiring bribe or corruption to perform).

Consequences of Illegality:

• Contract is void (unenforceable);
• Neither party can enforce it;
• Parties cannot recover payment made under illegal contract (with exceptions for parties who were innocent/forced).
• However, if the illegal part can be severed, the remainder may be enforceable.

1.6 Writing and Form Requirements

Contracts Requiring Writing: Some contracts must be in writing to be enforceable:

• Sale of land or interest in land;
• Lease of land for more than one year;
• Contract not to be performed within one year;
• Guarantee (promise to pay another's debt);
• Contracts under seal (in some contexts).

Statute of Frauds: If a contract is required to be in writing but is not, it is unenforceable (though may still be valid). However:

• If performance has begun or is complete, writing may not be required;
• Part performance can make oral contract enforceable;
• Court may enforce oral contract if parties clearly intended to be bound.

Form and Formality: Most contracts do not require particular form:

• Can be written, oral, or even implied from conduct;
• However, written contracts are preferable (evidence of terms);
• Formal requirements (seal, witnesses, registration) are required for specific transactions (sale of land, mortgages, etc.).

Part 2: Validity, Invalidity, and Voidability

2.1 Voidable Contracts

Some contracts are voidable—valid unless repudiated by the party who has the right to repudiate. Contracts are voidable if:

Misrepresentation: If one party made a false statement inducing the other to contract. The party induced by misrepresentation can:

• Repudiate the contract;
• Claim damages for fraud or negligent misrepresentation.

Types:

• Fraudulent Misrepresentation: False statement made knowingly or recklessly;
• Negligent Misrepresentation: False statement made without reasonable care;
• Innocent Misrepresentation: False statement made without knowledge of falsity.

Undue Influence: If one party used improper pressure or influence to force the other to contract. Examples:

• Threat or blackmail;
• Abuse of a position of trust;
• Pressure on elderly or vulnerable person;
• Pressure by creditor on debtor.

Duress: If one party made threats (of violence, harm, or criminal prosecution) forcing the other to contract.

Mistake: If both parties misunderstood essential terms:

• Mutual Mistake: Both parties mistaken about a fundamental fact;
• Unilateral Mistake: One party mistaken (generally does not void contract unless the other party knew of the mistake).

Remedies for Voidable Contract:

• Rescission: Party cancels the contract and is restored to original position;
• Damages: Party claims compensation for harm;
• Reformation: Court modifies contract to reflect parties' true intent.

2.2 Void Contracts

Void contracts are invalid from inception and cannot be enforced by either party.

Contracts are void if:

• Illegal purpose: Purpose violates law or public policy;
• Impossible performance: Performance is impossible from inception;
• Lack of parties' agreement: No true meeting of minds;
• Certain essential terms missing: Terms so vague they cannot be enforced.

Effect of Void Contract:

• Neither party can enforce it;
• If performance has begun, parties cannot recover payment (generally);
• Exception: if one party is innocent victim of illegality, court may allow recovery.

2.3 Discharge of Contract (Completion)

Contracts can end by:

Performance: Both parties perform their obligations completely. Contract is discharged when performance is complete.

Agreement: Parties agree to end the contract without full performance (settlement, compromise, release).

Impossibility: Performance becomes impossible due to circumstances beyond parties' control:

• Destruction of essential subject matter;
• Death of party (if personal services);
• Change in law making performance illegal;
• Unforeseen circumstances (war, natural disaster, pandemic).

Frustration: Performance becomes so different from what was intended due to unforeseen circumstances that the contract is effectively defeated. Party can be excused from performance.

Breach by Other Party: If one party breaches, the other party can:

• Refuse to perform;
• Claim damages.

Part 3: Performance and Breach

3.1 Obligation to Perform

Time of Performance: Parties must perform by the time agreed:

• If specific date is set, performance must occur by that date;
• If no specific date, performance must occur within a reasonable time;
• Time is of the essence: if time is critical, delay is breach.

Place of Performance: Performance must occur at the place agreed:

• If no place specified, at place of contract formation or place where services are to be performed;
• Performance in wrong place is breach.

Manner of Performance: Performance must be substantially as agreed:

• Quality and specification of goods/services matter;
• Material deviations are breach;
• Minor deviations may not be breach (substantial compliance).

Conditions and Warranties:

Conditions: Terms that are essential to the contract. Breach of condition allows the other party to:

• Repudiate the contract;
• Refuse to perform;
• Claim damages.

Warranties: Terms that are important but not essential. Breach of warranty allows the other party to:

• Claim damages;
• Cannot repudiate (must continue with the contract).

3.2 What Constitutes Breach

Breach is failure to perform a contractual obligation. Forms include:

Non-Performance: Complete failure to perform:

• Payment not made;
• Goods not delivered;
• Service not performed.

Partial Performance: Partial or incomplete performance:

• Payment of less than full amount;
• Delivery of less quantity;
• Quality not meeting specification.

Defective Performance: Performance that does not meet contractual standard:

• Goods delivered are defective or substandard;
• Services performed negligently or incompletely;
• Work does not comply with specifications.

Late Performance: Performance after the due date:

• If time is of the essence, late performance may be material breach;
• If time is not critical, late performance with damages may be acceptable.

Anticipatory Breach: Before performance is due, party indicates it will not perform:

• Express statement: "I will not perform";
• Conduct showing inability: selling the only asset needed to perform;
• Other party can treat this as breach and claim damages immediately.

3.3 Defenses to Breach

Performance Excused: A party may be excused from performance if:

Impossibility: Performance became impossible through no fault of the party. Examples:

• Specific item for sale is destroyed;
• Death of party when personal service required;
• Law changes making performance illegal;
• Unforeseen circumstance makes performance impossible.

Frustration: Performance is possible but the purpose is so defeated by unforeseen circumstance that performance would be inequitable. Example:

• Contract to rent a room to view a coronation; coronation is cancelled.

Force Majeure (Acts of God): Contract is excused if performance becomes impossible due to unforeseen events:

• War, insurrection;
• Natural disaster (earthquake, flood, fire);
• Pandemic or epidemic;
• Government action;
• Strikes or labor unrest.

Many contracts include force majeure clauses specifying events that excuse performance.

Waiver: One party voluntarily waives the right to demand performance. Waiver can be:

• Express (written statement);
• Implied (conduct showing acceptance of non-performance);
• Effective only if supported by consideration or clear statement.

Estoppel: If one party's conduct leads the other to believe it will not enforce the contract, it may be estopped from enforcing after the other party has relied.

Mitigation: Party breached has duty to minimize damages by taking reasonable steps to mitigate (reduce) harm. Failure to mitigate reduces damages recoverable.

Part 4: Remedies for Breach of Contract

4.1 Damages (Monetary Compensation)

Compensatory Damages: The primary remedy. Intended to put the non-breaching party in the position they would have been in if the contract had been performed.

Calculation: Damages = (Value if performed) - (Value of what was received) + (Costs incurred)

Example:

• Contract: Seller to sell car for NPR 8,00,000; Car is not delivered.
• Non-breaching party must buy similar car in market for NPR 9,00,000.
• Damages = NPR 9,00,000 - NPR 8,00,000 = NPR 1,00,000.

Causation: Damages are recoverable only for losses caused by the breach. Remoteness doctrine limits damages to those reasonably foreseeable at time of contract.

Foreseeability: Damages are recoverable only for losses that:

• Parties could reasonably foresee would result from breach;
• Are not too remote or speculative;
• Are direct result of breach.

Example:

• Seller fails to deliver goods. Buyer loses profits on resale (foreseeable).
• Seller fails to deliver; this causes psychological distress (not foreseeable unless buyer disclosed dependence).

Types of Damages:

Direct Damages (General Damages): Loss directly resulting from breach (cost to purchase replacement, cost of repairs).

Consequential Damages (Special Damages): Losses indirectly resulting from breach but foreseeable (lost profits, business interruption, cost of alternative performance).

Incidental Damages: Costs incurred in response to breach (cost to notify others, costs of investigating the breach).

Liquidated Damages: Parties can agree in advance to fixed amount of damages if breach occurs. This is enforceable if:

• Amount is reasonable estimate of anticipated loss;
• Amount is not penalty (grossly excessive).

If liquidated damages clause is found to be a penalty, court may disregard it and award actual damages.

4.2 Specific Performance

Nature: Rather than paying damages, the court orders the breaching party to perform the contract as agreed.

When Available: Specific performance is available when:

• Damages are inadequate remedy (unique goods, irreplaceable property, specific service);
• Enforcement is feasible;
• No undue hardship to breaching party.

Examples:

• Sale of unique property (land, artwork, antique): Buyer can require seller to sell as agreed rather than accepting damages.
• Employment: Generally, employee cannot be forced to work (violates right to freedom), but sometimes non-compete covenants can be enforced.

Limitations:

• Not available for personal service (cannot force someone to work);
• Not available if requiring continuous supervision;
• Not available if would cause undue hardship to breaching party.

4.3 Restitution and Unjust Enrichment

Restitution: Return of money or property to restore the party to original position. Available when:

• One party has received benefit from the other;
• Benefit was provided based on the contract;
• Contract has been rescinded or is unenforceable;
• It would be unjust for the breaching party to keep the benefit.

Example:

• Buyer pays for goods but seller does not deliver and refuses refund.
• Buyer can claim restitution of the payment.

Unjust Enrichment: If one party is unjustly enriched at the other's expense, court can order compensation. Available even if no enforceable contract existed.

Example:

• Oral contract for services (not provable); services are performed; party refuses payment.
• Court can award restitution based on unjust enrichment.

4.4 Reformation

Nature: Court modifies the contract to reflect the parties' true intent when:

• Writing does not accurately reflect the agreement;
• Mutual mistake occurred;
• One party made misrepresentation.

Example:

• Contract states "widgets at NPR 10 per unit" but parties intended "NPR 100 per unit."
• Court can reform to correct the amount.

4.5 Rescission

Nature: Cancellation of the contract, restoring parties to original position.

Available When:

• Contract is voidable (misrepresentation, duress, undue influence, mutual mistake);
• Grounds for recession exist.

Effect:

• Contract is cancelled;
• Parties are restored to original position;
• Restitution is ordered if necessary.

Part 5: Special Types of Contracts

5.1 Sale of Goods

Applicability: Special rules apply to sale of goods (transfer of personal property for money).

Implied Terms: Even if not expressed, certain terms are implied:

Title: Seller must have title to goods and can transfer good title. Seller warrants:

• Ownership of goods;
• Right to sell;
• Goods are free from encumbrance.

Merchantability: If seller is a merchant (regularly sells goods of that type), goods are warranted to be merchantable:

• Fit for ordinary purposes;
• Free from defects;
• Safe.

Fitness for Particular Purpose: If buyer made known the particular purpose and relied on seller's judgment, goods are warranted to be fit for that purpose.

Risk of Loss: When does risk of loss transfer from seller to buyer?

• Generally, risk transfers when buyer takes possession;
• Parties can agree different allocation;
• If goods are damaged before transfer, loss falls on party bearing risk.

Seller's Remedies for Non-Payment:

• Withhold delivery;
• Stop goods in transit;
• Reclaim goods if buyer becomes insolvent;
• Sue for price;
• Sue for damages if goods are resold at lower price.

Buyer's Remedies for Defective Goods:

• Reject goods if defect is material;
• Accept goods but claim damages;
• Specific performance (if goods are unique);
• Rescission (cancel contract and recover payment).

5.2 Lease of Property

Rights and Duties:

Lessor's (Landlord's) Duties:

• Provide possession of property;
• Maintain property in safe condition;
• Provide quiet enjoyment (not interfere with tenant's use).

Lessee's (Tenant's) Duties:

• Pay rent on time;
• Maintain property in good condition (ordinary wear and tear excepted);
• Not use property for illegal purposes or harmful way;
• Allow lessor to inspect property.

Eviction: Lessor can evict (remove) tenant if:

• Rent is not paid (after notice and opportunity to pay);
• Tenant violates lease terms (after notice and opportunity to cure);
• Lease term expires (with proper notice);
• Grounds for eviction exist.

Security Deposit: Tenant typically provides deposit held by lessor. Deposit should be:

• Returned to tenant at end of lease (minus legitimate deductions for damage);
• Not used for normal wear and tear;
• Returned with interest (in some jurisdictions).

5.3 Employment Contracts

Implied Terms: Even without express agreement, certain obligations are implied:

Employer's Duties:

• Pay agreed wages;
• Provide safe working conditions;
• Not discriminate;
• Not require illegal conduct;
• Not retain earnings (minimum wage must be paid).

Employee's Duties:

• Perform work competently;
• Follow lawful instructions;
• Not compete with employer during employment;
• Maintain confidentiality;
• Work reasonable hours.

Termination:

• Either party can terminate (absent fixed term);
• Termination may require notice (period varies);
• Termination without cause may require severance;
• Termination for cause (breach, incompetence) may not require severance.

5.4 Loan and Credit Contracts

Obligations:

Lender's Duties:

• Provide the loan amount;
• Disburse in timely manner;
• Disclose terms clearly.

Borrower's Duties:

• Repay principal;
• Pay interest (if agreed);
• Pay by due date;
• Use funds for agreed purpose.

Security and Collateral: Lender may require security (pledge of property) to secure repayment:

• If borrower defaults, lender can seize and sell collateral;
• Proceeds are applied to debt;
• If proceeds exceed debt, excess goes to borrower.

Default: If borrower fails to pay:

• Lender can accelerate (demand full balance immediately);
• Lender can seize collateral;
• Lender can sue for recovery.

Part 6: Interpretation of Contracts

6.1 Principles of Contract Interpretation

Purpose: Courts interpret ambiguous contracts to determine parties' intent and the contract's meaning.

Plain Language: If contract language is clear and unambiguous, courts apply its plain meaning without looking beyond the words.

Ambiguity: If language is ambiguous (multiple reasonable interpretations), courts consider:

• Context and circumstances;
• Course of dealing (how parties have dealt previously);
• Course of performance (how parties have actually performed);
• Industry custom and practice;
• Factual matrix (surrounding facts and circumstances).

Parol Evidence Rule: Written contract is presumed to be the complete agreement. External evidence (oral statements, prior agreements) generally cannot be used to contradict written terms unless:

• Fraud, duress, or illegality is claimed;
• Terms are ambiguous (parol evidence clarifies);
• Course of performance shows different understanding;
• Contract is incomplete.

Contra Proferentem: If language is ambiguous and one party drafted it, ambiguity is construed against the drafter (the party who chose unclear language).

6.2 Express vs. Implied Terms

Express Terms: Terms explicitly stated in the contract (usually in writing).

Implied Terms: Terms not expressed but implied by:

• Law (statutory implied terms);
• Parties' conduct and understanding;
• Industry custom and practice;
• Necessity (terms required for contract to make sense).

Example:

• Contract for sale of land does not specify when buyer must take possession. Court implies that possession must be taken within reasonable time.

6.3 Entire Agreement Clause

Effect: If contract includes "entire agreement" or "complete agreement" clause:

• Written contract is the complete agreement;
• Prior agreements are superseded;
• Parol evidence is excluded (with exceptions for fraud, duress, illegality).

Limitation:

• Does not prevent evidence of conditions precedent (conditions that must occur before contract is binding);
• Does not prevent evidence of circumstances making contract voidable.

Part 7: Practical Guide for Commercial Contracting

7.1 Negotiation and Drafting

Pre-Drafting:

• Identify the parties and their roles;
• Define the subject matter clearly (goods, services, price);
• Determine key terms (price, payment terms, delivery, timeline);
• Identify risks and allocation of risk;
• Research industry standards and similar contracts;
• Understand applicable law and regulations.

Drafting:

• Use clear, simple language (avoid jargon);
• Define key terms explicitly;
• Specify performance obligations clearly;
• Include conditions and contingencies;
• Address remedies for breach;
• Include dispute resolution provisions;
• Include termination provisions;
• Address force majeure and unforeseen circumstances.

Key Provisions:

• Parties: Names and addresses;
• Subject Matter: Clear description of goods/services;
• Price and Payment: Amount, payment schedule, payment method;
• Delivery/Performance: What, where, when, how;
• Warranties: Quality, fitness for purpose, title;
• Conditions: Precedent, concurrent, subsequent;
• Remedies: Damages, specific performance, etc.;
• Indemnification: Party covers losses caused by the other;
• Limitation of Liability: Caps on damages;
• Dispute Resolution: Negotiation, mediation, arbitration, litigation;
• Termination: How and when contract can end;
• Severability: If one provision is void, rest remains valid;
• Entire Agreement: This is the complete agreement;
• Amendments: How contract can be modified.

7.2 Reviewing and Analyzing Contracts

Spotting Issues:

• Identify ambiguous or unclear language;
• Look for missing or incomplete terms;
• Identify risks and allocation of risk;
• Check for unconscionable terms or unfair allocation;
• Identify contradictions between sections;
• Identify missing standard provisions.

Negotiating Terms:

• Identify terms favorable to other party;
• Identify terms unfavorable to your client;
• Propose modifications;
• Understand trade-offs and compromises;
• Get client input on acceptable terms;
• Document agreements for amendment.

Documenting Amendments:

• In writing (signed by both parties);
• Clear and specific;
• Reference original contract;
• Clearly state what is being changed.

7.3 Enforcement of Contracts

Pursuing Breach Claim:

• Document the breach (when, what, how);
• Gather evidence (communications, photos, expert reports);
• Calculate damages (direct, consequential, incidental);
• Notify breaching party of breach;
• Attempt resolution (negotiation, demand letter);
• If resolution fails, file lawsuit or pursue arbitration.

Defenses to Breach Claim:

• Challenge the existence of contract;
• Challenge terms of contract;
• Claim performance was excused (impossibility, frustration, force majeure);
• Claim other party breached first (material breach);
• Challenge damages calculation;
• Claim statute of limitations has expired.

Collecting Judgment:

• Obtain court judgment;
• Identify breaching party's assets;
• File execution against assets;
• Garnish wages or bank accounts;
• Obtain charging order against property;
• Use court process to enforce judgment.

7.4 Standard Contracts and Forms

Advantages:

• Save time and cost;
• Incorporate standard, balanced terms;
• Industry recognized;
• Familiar to parties.

Cautions:

• May not fit specific transaction;
• May contain terms favorable to drafter;
• May need customization;
• Should be reviewed by lawyer before use.

Common Forms in Nepal:

• Sale agreements (goods, real property);
• Lease agreements (commercial, residential);
• Employment agreements;
• Loan agreements;
• Service contracts;
• Partnership agreements;
• Construction contracts.

Part 8: Commercial Instruments and Negotiable Instruments

8.1 Negotiable Instruments

Types:

• Promissory Note: Written promise to pay money;
• Bill of Exchange/Check: Written order to pay money;
• Cheque: Specific type of bill of exchange (written order on bank);
• Hundi: Traditional negotiable instrument in South Asia.

Characteristics:

• Written and signed;
• Unconditional promise or order to pay;
• Specified amount of money;
• Payable on demand or at fixed future date;
• Named payee or bearer.

Negotiation: Instruments can be transferred (negotiated) to new parties. Holder can:

• Demand payment;
• Sue for recovery;
• Transfer to third party.

Legal Immunity: Holder in due course (taking instrument in good faith for value) takes free of prior claims or defects.

8.2 Cheques and Banking

Cheque Law: Special provisions govern cheques:

• Drawer (person signing) orders bank to pay;
• Payee (person named) is entitled to payment;
• Bank must pay if funds are sufficient;
• Cheque is dishonored if bank refuses (insufficient funds, stop payment, account closed).

Liability for Dishonored Cheque: If cheque is dishonored:

• Drawer is liable for payment;
• Drawer may face criminal penalty (bounced cheque offense);
• Drawer owes interest and costs.

Stop Payment: Drawer can order bank to stop payment:

• Must be done before cheque is presented;
• Bank must honor stop payment order;
• If bank pays despite stop payment, bank is liable.

Part 9: International Contracts and Cross-Border Transactions

9.1 Choice of Law

Parties' Choice: Parties can specify which law governs their contract. If they do:

• That law applies to interpretation and enforcement;
• Must be reasonable connection to that jurisdiction;
• Cannot choose law to avoid mandatory public policy rules.

Default Rules: If parties do not choose law:

• Law of place where contract was made;
• Law of place where contract is to be performed;
• Law with closest connection to contract;
• Usually determined by conflict of laws principles.

9.2 Dispute Resolution

Forum Selection: Parties can specify where disputes will be resolved:

• Courts of a particular jurisdiction;
• Arbitration in a particular location;
• Combination of approaches.

Arbitration: Increasingly popular for international contracts:

• Private dispute resolution;
• Parties choose arbitrator(s);
• Hearing in neutral location;
• Award is enforceable internationally.

International Conventions:

• Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention);
• Allows enforcement of arbitral awards across countries.

9.3 Applicable International Standards

CISG (United Nations Convention on International Sale of Goods):

• Applies to international sales of goods between parties in different countries;
• Provides uniform rules for contract formation, performance, remedies;
• Many countries are signatories (but not always applied);
• Parties can opt out and choose different law.

INCOTERMS:

• International standards for allocation of responsibilities in international sales (who pays for shipping, insurance, etc.);
• Used worldwide to standardize terms.

Standard Contracts:

• International Chamber of Commerce provides standard forms;
• Used in trade financing, construction, etc.;
• Incorporated by reference in contracts.

Part 10: Common Contract Issues and Disputes

10.1 Breach and Remedies—Practical Issues

Proving Breach:

• Must show contract exists;
• Must show breach of specific term;
• Must show causation (breach caused harm);
• Must show damages.

Defenses:

• Breach did not occur;
• Breach was excused (impossibility, frustration);
• Damages were mitigated by other party;
• Statute of limitations has expired;
• Other party breached first (material breach).

Calculation of Damages:

• Direct losses (replacement cost, repair);
• Lost profits (if foreseeable);
• Other consequential losses (if foreseeable);
• Incidental costs;
• Deduction for mitigation.

10.2 Unconscionability and Unfair Terms

Unconscionable Contracts: Contract terms that are so unfair or oppressive that they shock conscience of court may be unenforceable.

Unfair Terms:

• Gross disparity in bargaining power;
• Term is grossly unfavorable;
• Party had no real choice;
• Other party hid or obscured term.

Examples:

• Seller adds hidden clause doubling price;
• Seller includes clause making buyer liable for consequential damages of unlimited amount;
• Seller imposes penalty term grossly disproportionate to breach.

10.3 Good Faith and Fair Dealing

Implied Covenant: Every contract includes implied covenant of good faith and fair dealing. Each party must:

• Act honestly;
• Act reasonably;
• Not intentionally interfere with other party's rights;
• Cooperate in performance.

Violations:

• Refusing to cooperate;
• Claiming unreasonable interpretation;
• Refusing to perform requirements of good faith;
• Interfering with other party's performance.

Conclusion: Contracts as Drivers of Economic Activity

Contract law is fundamental to commerce and economic development. A robust system that protects agreements, enforces obligations, and provides effective remedies enables parties to conduct transactions with confidence that their rights will be protected.

Nepal's Civil Code 2074 provides a modern, comprehensive contract law framework aligned with international standards. For lawyers in Nepal, effective practice in contract law requires:

• Deep Knowledge: Understanding contract formation, performance, breach, and remedies;
• Drafting Skill: Ability to draft clear, protective contracts;
• Negotiation Skill: Ability to negotiate favorable terms;
• Litigation Skill: Ability to prove breach and enforce judgments;
• Business Acumen: Understanding commercial realities and business practices;
• Ethical Practice: Advising clients honestly about risks and helping them reach fair agreements.

As Nepal's economy develops and commerce expands, contract law will continue to evolve. Lawyers who master contract law and practice ethically will serve clients effectively and contribute to a legal system that supports robust commerce and economic growth.