Legal Environment for Business in Nepal

The sources of business law in Nepal are:

1. Constitution of Nepal: the supreme law; all other laws must conform to it, and it guarantees rights such as the right to property and to carry on business.
2. Legislation (Acts and Rules): laws made by the Federal Parliament and, within their powers, by Provincial and Local assemblies, for example the Contract Act 2056, Companies Act 2063, Sale of Goods provisions of the Muluki Civil Code 2074, Negotiable Instruments Act, and Arbitration Act 2055. Rules and regulations made under Acts also form part of it.
3. Judicial decisions (precedent): rulings of the Supreme Court are binding on lower courts and clarify the law.
4. Customs and usage: established trade customs are recognised where they are not against the law.
5. International treaties and conventions: treaties ratified by Nepal, such as WTO agreements, have the force of law and prevail over conflicting domestic law.
6. Administrative orders and directives: for example directives of Nepal Rastra Bank and the Securities Board.

A contingent contract is a contract to do or not to do something if some event, collateral to the contract, does or does not happen (for example, insurance and indemnity contracts).

Rules:

1. Contingent contracts depending on the happening of an uncertain event cannot be enforced until that event happens. If the event becomes impossible, the contract becomes void.
2. If the contract depends on an event not happening, it can be enforced when the happening of that event becomes impossible, and not before.
3. If the contract depends on how a person will act at an unspecified time, the event is considered impossible when that person does anything that makes it impossible that he will so act within any definite time.
4. If the contract depends on an event happening within a fixed time, it becomes void if the event does not happen within that time or becomes impossible before.
5. If the contract depends on an event not happening within a fixed time, it can be enforced if the event does not happen within that time, or if it becomes certain that the event will not happen.
6. Contingent agreements to do or not to do anything if an impossible event happens are void, whether the impossibility is known or not.

The legal environment of business in Nepal is changing because of the following factors:

1. Political change: the move to a federal democratic republic under the Constitution of 2072 (2015) has created new law-making powers at the federal, provincial and local levels, and has led to new and revised business laws.
2. Economic liberalisation and globalisation: the policies of liberalisation, privatisation and foreign investment, and Nepal's WTO membership, have led to laws such as the Foreign Investment and Technology Transfer Act, Special Economic Zone Act and Industrial Enterprises Act.
3. Technological development: growth of the internet, e-commerce and digital payments led to the Electronic Transactions Act and to cyber-crime and data-protection rules.
4. Social awareness and consumer movement: greater awareness of rights has led to the Consumer Protection Act and to stronger rules on product safety and quality.
5. Environmental concerns: environment protection laws and impact-assessment requirements affect industries.
6. International agreements and organisations: membership of WTO, SAARC, BIMSTEC, and bilateral treaties require changes to domestic law.
7. Judicial activism: Supreme Court decisions, public interest litigation and orders have shaped the law.
8. Labour and social welfare concerns: the Labour Act and the Social Security Act have been introduced to protect workers.
9. Financial sector reform and corporate governance: new rules on banking, securities, insurance and company administration have been introduced to improve transparency and stability.
10. Competition and market needs: laws on competition, intellectual property and public procurement have developed with the market.

A contingent contract is a contract to do or not to do something if some uncertain future event, collateral to the contract, does or does not happen. Example: A agrees to pay B Rs 1,00,000 if B's house is destroyed by fire (an insurance contract). The main rules are:

1. Enforceable only after the event happens: A contract contingent on an event happening cannot be enforced until that event has happened. If the event becomes impossible, the contract becomes void.
2. Contingent on an event not happening: Such a contract can be enforced when the happening of the event becomes impossible, and not before.
3. Contingent on a specified time: If the event does not happen within the fixed time, or becomes impossible before that time, the contract becomes void.
4. Contingent on the future conduct of a living person: The event is treated as impossible when the person does anything that makes it impossible for it to happen within the time. Example: A agrees to pay B if B marries C; if C marries D, the event is impossible.
5. Contingent on an impossible event: An agreement contingent on an impossible event is void, whether the impossibility was known to the parties or not.
6. Event must be uncertain and collateral: The event must be uncertain and not part of the promise itself, and it must not be at the mere will of the promisor.

The legal environment of business in Nepal has changed greatly since the 1990s and the dimensions of change include the following.

1. Constitutional change: The Constitution of Nepal (2015) made the country a federal democratic republic. It guarantees the right to property, to freedom of trade and to information, and divides economic powers among the federal, provincial and local governments.
2. Liberalisation and privatisation: Since the 1990s the state has moved from a controlled economy to a market-based one, encouraging private investment, reducing licensing and privatising public enterprises.
3. New and reformed company and commercial laws: The Companies Act 2063 and its later amendments, the Contract Act 2056, the Securities Act 2063, the Insolvency Act 2063, the Banks and Financial Institutions Act and the Partnership Act reflect modern business needs.
4. Foreign investment and technology: The Foreign Investment and Technology Transfer Act (2019) and the Industrial Enterprises Act encourage foreign capital through simpler approval and repatriation of profits, and special economic zones.
5. Consumer and competition protection: The Consumer Protection Act 2075 and the Competition Promotion and Market Protection Act 2063 safeguard consumers and prevent unfair trade practices.
6. Digital and cyber development: The Electronic Transactions Act 2063 recognises electronic records and signatures and punishes cyber crime, which supports e-commerce.
7. Labour and social responsibility: The Labour Act 2074 and the Contribution Based Social Security Act 2074 protect workers and add obligations for employers.
8. Intellectual property and international commitments: Membership of the WTO (2004) and other treaties required the updating of patent, trademark and copyright laws.
9. Transparency and good governance: The Right to Information Act and anti-corruption laws demand openness and accountability from business and government.

Business law is the body of rules that regulates commercial dealings. Its sources in Nepal are as follows.

1. The Constitution of Nepal. It is the supreme law and the source of all other laws. It guarantees the right to property, freedom of occupation and trade, the right to information and consumer rights, and it allocates legislative powers on trade, taxation and commerce among the federal, provincial and local levels. Any law inconsistent with it is void to the extent of the inconsistency.

2. Legislation (statutes). Acts passed by the Federal Parliament are the most important source. Examples are the Contract Act 2056, the Companies Act 2063, the Insolvency Act 2063, the Arbitration Act 2055, the Negotiable Instruments Act 2034, the Partnership Act 2020, the Securities Act 2063, the Consumer Protection Act 2075, the Electronic Transactions Act 2063, the Labour Act 2074 and the Industrial Enterprises Act. Provincial and local assemblies make laws within their own powers.

3. Delegated legislation. Rules, regulations, bylaws, directives and notices made by the government, ministries, Nepal Rastra Bank, the Securities Board and local bodies under powers given by an Act. Examples are the Companies Regulations and NRB directives to banks.

4. Judicial precedents (case law). Under Article 128 of the Constitution, decisions of the Supreme Court are binding on all courts and bodies, so the court's interpretation of the law and its principles become part of the law. Directive orders in public interest litigation have also shaped business and consumer law.

5. Customs and usages. Long-standing, reasonable and certain practices of trade, such as business customs of a market or particular trade, are recognised where the statute is silent. For example, the Contract Act accepts custom in interpreting terms.

6. International treaties and conventions. Under the Nepal Treaty Act 2047, treaties ratified by Nepal prevail over national laws if there is a conflict. Examples are WTO agreements, bilateral investment promotion and protection agreements, double taxation avoidance agreements, and the New York Convention on enforcement of foreign arbitral awards.

7. Other sources. Legal opinions of eminent jurists, principles of equity, justice and good conscience, and English and Indian law as persuasive authority, are used to fill gaps.

In practice, the statutes are the principal source, and the others support, interpret and supplement them.

Two features of law:

• Rules of conduct: Law is a set of rules that regulate the behaviour of people in society.
• Enforceable by the State: Law is backed by the authority of the State, and a person who breaks it can be punished or made to compensate.

The legal environment of business is important because it:

• Sets the rules of the game, so that firms know what they may and may not do (registration, contracts, tax, labour, competition).
• Protects the rights of businesses, consumers, employees and investors, and gives remedies through courts and arbitration.
• Promotes fair competition and discourages unethical or illegal practices.
• Creates certainty and confidence for investment and long-term planning.

Coercion means committing, or threatening to commit, any act forbidden by law, or unlawfully detaining or threatening to detain any property, with the intention of forcing a person to enter into an agreement. Consent obtained by coercion is not free, so the contract can be avoided by the party whose consent was so obtained.

Three duties of an agent:

1. To act according to the principal's directions, or, where there are none, according to the custom of the business.
2. To exercise reasonable skill, care and diligence in carrying out the work.
3. To render proper accounts to the principal, to act in good faith, and not to make secret profit or deal on his own account without the principal's consent.

Breach of contract is of two types:

• Actual breach: a party fails to perform on the due date, or fails during performance.
• Anticipatory breach: a party repudiates the contract before the due date of performance, or disables himself from performing it.

A court is a body established by the State with authority to hear disputes, interpret and apply the law, and give binding judgments or orders. It is the place where justice is administered, and it can punish offenders, award compensation and enforce rights. In Nepal there are the Supreme Court, High Courts and District Courts.

The performance of a contract means that the parties carry out their promises as agreed. Its nature is:

• The parties must perform their promises, or offer to perform them (tender), unless performance is excused or dispensed with under the law.
• Performance must be made at the agreed time and place, and in the agreed manner.
• A promisor may perform personally, or through an agent or legal representative, unless the contract needs personal skill.
• Reciprocal promises are generally performed in the order the contract provides or the nature of the transaction requires.

Cyber law is the body of law that governs the use of computers, the internet and electronic communication. It deals with electronic transactions, digital signatures, data protection, privacy, and computer-related crimes such as hacking and online fraud. In Nepal the main law is the Electronic Transactions Act, 2063 (2008).

Caveat emptor is a Latin phrase meaning "let the buyer beware". The buyer must satisfy himself about the quality and suitability of the goods before buying, and the seller is not generally responsible for defects the buyer could have noticed. It is subject to exceptions, such as where the goods are sold by description or sample, where the buyer relies on the seller's skill and judgement, or where there is fraud or misrepresentation.

Features of a company:

• It is an artificial legal person created by law.
• It has a separate legal entity, distinct from its members.
• It has perpetual succession (continues despite the death or exit of members).
• It has limited liability of members (in a limited company).
• Shares are generally transferable.
• It has a common seal and can sue and be sued in its own name.
• It is managed by a board of directors.

Free consent: Consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. Where the parties agree to the same thing in the same sense, and their will is not distorted by any of these factors, their consent is free.

Importance of free consent:

• It is an essential element of a valid contract; without it the contract is not enforceable.
• It protects the weaker party from pressure and deceit.
• A contract made without free consent is voidable at the option of the party whose consent was not free (and void in cases of mutual mistake of fact).
• It ensures fairness and builds trust in business dealings.
• It gives the injured party the right to rescind the contract and claim damages.

INCOTERMS 2020 are international rules published by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers in international sale contracts. There are 11 terms (EXW, FCA, CPT, CIP, DAP, DPU, DDP for any mode; FAS, FOB, CFR, CIF for sea and inland waterway).

Importance:

• They give a common international language and reduce misunderstanding between buyers and sellers of different countries.
• They state who arranges and pays for transport, insurance, export and import clearance, and loading and unloading.
• They fix the point at which risk passes from seller to buyer.
• They help in correct pricing and cost calculation of the goods.
• They reduce disputes and litigation, and give a clear basis for settling any that arise.
• They facilitate international trade and are widely accepted by banks, insurers and carriers.

The essential elements of a valid contract are:

1. Offer and acceptance: a lawful offer by one party and its absolute and unconditional acceptance by the other.
2. Intention to create legal relations: the parties must intend the agreement to be legally binding; social and domestic agreements are normally not.
3. Lawful consideration: something in return for the promise, which must be lawful.
4. Capacity of parties: parties must be of the age of majority, of sound mind and not disqualified by law.
5. Free consent: consent must not be obtained by coercion, undue influence, fraud, misrepresentation or mistake.
6. Lawful object: the object must not be illegal, immoral or opposed to public policy.
7. Certainty and possibility of performance: the terms must be definite and performance must be possible.
8. Legal formalities: writing, registration or stamp duty where the law requires them.

A contract may be terminated (discharged) in the following ways:

1. By performance: both parties perform their obligations (actual performance) or the promisor offers to perform and the promisee refuses (tender).
2. By mutual agreement: the parties agree to cancel, replace (novation), alter (rescission or alteration) or remit their obligations.
3. By impossibility (frustration): performance becomes impossible or unlawful after the contract was made, through destruction of the subject matter, change in law, or death or incapacity in a personal contract.
4. By lapse of time: a claim is barred if not enforced within the period of limitation.
5. By operation of law: for example insolvency of a party, death in contracts of personal skill, or merger of rights.
6. By breach: where one party breaks the contract, the other is released from his obligation and may sue for damages. Breach may be actual or anticipatory.

Contract of affreightment: It is a contract under which a shipowner agrees to carry goods by sea from one port to another for a reward called freight. It takes two main forms: a charter party (the whole or part of the ship is hired) and a bill of lading (goods are carried as part of the general cargo of a ship).

Matters dealt with by the terms of a charter party:

• Names and addresses of the shipowner and the charterer, and the description of the ship (name, tonnage, flag, class).
• The voyage or period of hire, ports of loading and discharge.
• Kind and quantity of cargo to be carried.
• Freight or hire, and the time and place of payment.
• Laytime (time allowed for loading and unloading), demurrage for delay and despatch money for early completion.
• Seaworthiness of the ship and the date when she must be ready.
• Liabilities, exceptions and excluded perils, general average, lien of the owner, and arbitration clauses.
• Cancelling date, and the rights of the parties on cancellation.

Charter party and bill of lading differ:

Duties of an arbitrator:

1. To act fairly, impartially and independently, giving each party an equal opportunity to present its case.
2. To follow the agreement of the parties and the Arbitration Act, 2055, on procedure, and to decide within the period fixed.
3. To disclose in writing any circumstance likely to raise doubts about his independence or impartiality.
4. To hear the parties and examine documents and evidence honestly.
5. To keep proceedings confidential and not to take any personal benefit from the dispute.
6. To give a reasoned award in writing, signed and dated, and deliver a copy to the parties.
7. To act with due care and promptness, without causing unnecessary delay or expense.
8. To decide according to law and the contract, giving effect to its terms and to trade usage.

Revocation of the arbitrator's authority:

• The authority of an arbitrator is based on the agreement and cannot normally be revoked by one party alone without the consent of the other, unless the agreement allows it.
• It may be terminated by the mutual agreement of all the parties.
• It ends if the arbitrator dies, resigns, becomes incapable of acting, or fails to act without undue delay.
• A party can challenge an arbitrator for justifiable doubts about independence or impartiality, or lack of agreed qualification, and the arbitrator may then be removed or replaced.
• The court may remove an arbitrator who has misconducted himself or the proceedings, or who has acted with partiality.
• The arbitration agreement is also affected where the parties settle the dispute by themselves, or where the subject matter ceases to exist.
• On revocation, a substitute arbitrator is appointed by the method in the agreement, or by the court if there is none.

Liquidation (winding up) is the process of ending the life of a company: its assets are sold, its debts are paid from the proceeds, and any surplus is distributed among the members. After that the company is dissolved. It may be voluntary (by members or creditors) or compulsory (by order of the court).

Powers of the liquidator:

• To take control of the company's property and records.
• To carry on the business so far as is needed for beneficial winding up.
• To sell the property by public auction or private contract.
• To sue and defend legal proceedings in the name of the company.
• To draw, accept or endorse bills and to raise money on the security of the assets.
• To compromise claims, settle with debtors and creditors, and call meetings.
• To appoint a lawyer or other expert to help him.
• To inspect records and make calls on contributories where necessary.

Role and duties of the liquidator:

1. To prepare a list of assets and liabilities and a statement of affairs.
2. To realise the assets and collect debts due to the company.
3. To pay creditors in the order of priority (secured creditors, liquidation costs, employee dues, tax and government dues, unsecured creditors) and then distribute any surplus to the shareholders.
4. To investigate the conduct of the promoters and directors and report any fraud or misconduct.
5. To keep proper accounts, call meetings and report to the court and creditors.
6. To apply for dissolution of the company when the work is complete.
7. To act honestly, impartially and in the interest of creditors and members as a whole, as a person in a fiduciary position.

As the founder, I would protect the business through the following intellectual property rights:

1. Patent: The new machinery and any new and useful production process are inventions. Registering a patent under the Patent, Design and Trademark Act, 2022 gives exclusive right to make, use and sell the invention for the term of the patent, so rivals cannot copy it without my permission, and I can license it for royalty.
2. Trade secret: The recipe (the formula and blend) is best kept secret rather than patented, as a patent requires disclosure. By keeping it confidential through non-disclosure agreements with staff, I keep an advantage for as long as it remains secret.
3. Trademark: I would register the brand name, logo and slogan. This gives exclusive use of the mark, prevents rivals from selling similar-looking products and builds customer loyalty, goodwill and brand value.
4. Industrial design: The distinctive shape of the bottle, can and label can be registered as a design, which stops competitors copying the look of the product.
5. Copyright: Advertising jingles, packaging artwork, website content and promotional films are protected by copyright under the Copyright Act, 2059.

Benefits: exclusive market position; legal action and damages against infringers; the right to license or sell the rights for income; higher value of the company and easier funding; and protection against both old and newly emerging competitors.

Issue: whether Y can enforce the contract for specific performance.

Rule: An acceptance must be absolute and unconditional and must match the terms of the offer. If the offeree changes the terms, it is a counter-offer, which rejects the original offer and ends it. The original offeror is not bound by a counter-offer unless he accepts it.

Application: X offered to sell the car for Rs 200,000. Y did not accept this; he said he would buy it for Rs 1,800,000. This was a counter-offer and it terminated X's original offer. X was free to refuse it. Y's later offer of Rs 2,000,000 was a fresh offer, and X was again free to reject it. There was no acceptance of any offer by the other party at any stage, so no contract was formed. (Y cannot go back to accept the Rs 200,000 offer, since it had lapsed.)

Conclusion: Y will not succeed. Specific performance can be ordered only to enforce a valid contract, and here there is none.

Issue: whether C can recover Rs 2,000 from A.

Rule: A valid contract needs lawful consideration, and only a party to the contract can sue on it (privity of contract). A promise without consideration is void. A gratuitous act of one person does not give another person a right to sue on it.

Application: B treated A free of charge and did not ask for payment. A then promised to pay B's son C Rs 2,000. C gave nothing to A in return: he is a stranger to the consideration and to the promise, and B's treatment was a voluntary service for which B himself expected nothing. A's promise to C is therefore a bare promise made without consideration moving from C. Natural love and affection between A and B does not create a legal obligation either, and the promise is not in writing and registered in a way that would exempt it.

Conclusion: C cannot recover the money from A. The promise is unenforceable for want of consideration from C and because C is not a party to the contract.

Issue: whether Mrs A can claim the Rs 1,000,000 as a reward.

Rule: An advertisement can be a general offer to the whole world, which anyone can accept by performing the stated conditions (Carlill v. Carbolic Smoke Ball Co.). But for this the advertisement must contain a definite promise, clear terms and an intention to be bound; a vague statement of praise or a mere sales claim is only an "invitation to treat" or puffery, not an offer.

Application: Miracle Pharma only advertised that a person who consumes the medicine will not suffer from AIDS. Unless the advertisement itself stated that the company would pay Rs 1,000,000 to a user who still contracted the disease, it contains no promise of a reward, and Mrs A can claim nothing as a reward. Even if it did promise a reward, she would have to show that she met the conditions: she merely purchased the medicine, and has not claimed to have consumed it and then fallen ill. (In Carlill the company deposited money to show its sincerity; here nothing indicates this.) Further, a claim to cure or prevent AIDS is not backed by science and may be illegal and misleading under consumer protection and medicine laws.

Conclusion: Mrs A will not succeed in a claim for the reward on these facts. If the company really offered a fixed reward and she consumed the medicine as directed and still contracted AIDS, she would have a good claim as in Carlill. She may in any case complain under the consumer protection law for false and misleading advertising.

An unlawful agreement is an agreement whose object or consideration is forbidden by law, is of such a nature that it would defeat the provisions of law, is fraudulent, involves injury to the person or property of another, or is immoral or opposed to public policy. Such an agreement is void and cannot be enforced. An example is an agreement to commit a crime or to smuggle goods.

A person of unsound mind is one who, at the time of making a contract, is incapable of understanding it and of forming a rational judgement as to its effect on his interests. A person who is usually of unsound mind but sometimes of sound mind may contract when he is of sound mind; a person usually of sound mind may not contract when he is of unsound mind (for example, due to delirium, fever or intoxication). A contract by a person of unsound mind is void.

A quasi contract is not a true contract, but an obligation imposed by law on a person to restore a benefit to another, to prevent unjust enrichment, although there was no agreement between them. Examples are the supply of necessaries to a person incapable of contracting, payment of money by a person who is interested in paying it, the finder of lost goods, and money paid by mistake or coercion.

The nature of a company:

• It is an artificial person created by law, with a legal personality separate from its members.
• It has perpetual succession and exists until it is legally wound up.
• Its members have limited liability (in a limited company) limited to the unpaid amount of their shares.
• It has the power to own property, enter contracts and sue or be sued in its own name.
• Its shares are transferable (freely in a public company; with restrictions in a private company).
• It is managed by directors and controlled by its members through meetings.

The right to information is the right of every citizen to request and obtain information held by public bodies about their functions, decisions and use of public resources. In Nepal it is guaranteed as a fundamental right by the Constitution of Nepal (Article 27) and regulated by the Right to Information Act, 2064 (2007). It promotes transparency, accountability and good governance, and a public body must reply to a request within the time prescribed by the Act, except for protected information such as matters affecting national security or privacy.

Cyber law is the body of legal rules that governs activities in cyberspace, that is, the use of computers, the internet and electronic communication. It covers electronic transactions and digital signatures, cyber crime (hacking, online fraud, data theft), privacy and data protection, and intellectual property online. In Nepal the main statute is the Electronic Transactions Act, 2063 (2008).

In both cases the contract is voidable at the option of the party whose consent was not free.

Performance of a contract can be demanded by:

• the promisee, that is, the party to whom the promise was made;
• the legal representatives of the promisee, if the promisee has died, unless the contract is personal in nature;
• a person to whom the rights under the contract have been lawfully assigned, and in the case of a joint promise, any of the joint promisees as the contract provides.

A stranger to the contract generally cannot demand performance.

Consideration is the price, benefit or detriment given in return for a promise. It is something of value that the promisor receives, or something the promisee gives up or does, at the desire of the promisor. It can be an act, an abstention or a promise, and it may be past, present or future. A promise without consideration is generally not enforceable, apart from exceptions such as a written and registered promise out of natural love and affection. Example: A agrees to sell a book to B for Rs 500; the book is A's consideration and the Rs 500 is B's.

Insolvency of a company under the Insolvency Act, 2063 (2006) proceeds roughly in the following steps.

1. Application: The insolvent company, a creditor (owed the minimum amount prescribed by law) or another entitled party files an application for insolvency in the court.
2. Preliminary hearing and notice: The court examines the application, may issue an interim order to protect the assets, and gives notice to the concerned parties and creditors.
3. Declaration of insolvency: If the court is satisfied that the company cannot pay its debts as they fall due, it declares the company insolvent.
4. Appointment of a liquidator or receiver: An insolvency practitioner or committee is appointed to take control of the assets, books and records.
5. Filing of claims: Creditors are called by public notice to submit their claims, which are verified and admitted.
6. Realisation of assets: The assets are collected, valued and sold.
7. Distribution: The proceeds are paid in the legal order of priority: costs of insolvency, secured creditors, employees' dues and government dues, then unsecured creditors, and any surplus goes to shareholders.
8. Closing: After distribution the court closes the proceeding, and the company is wound up and its name removed from the register.

Alternatively, the court may approve a restructuring or reorganisation plan to revive the company instead of liquidating it.

A contract of sale of goods is one in which the seller transfers, or agrees to transfer, the property (ownership) in goods to the buyer for a price. Its main features are:

1. Two parties: There must be a seller and a buyer, who are separate persons and have capacity to contract.
2. Goods: The subject matter must be movable goods (not money or actionable claims), which may be existing or future goods.
3. Price: The consideration must be money, called the price. If goods are exchanged for goods it is barter, not a sale.
4. Transfer of property: Ownership in the goods passes from seller to buyer, which distinguishes a sale from a bailment or a pledge.
5. Essentials of a valid contract: Offer and acceptance, free consent, lawful object and consideration must be present.
6. Sale or agreement to sell: If ownership passes at once it is a sale; if the transfer is to take place at a future time or on a condition it is an agreement to sell.
7. Express or implied form: The contract may be oral, written or implied from the conduct of the parties.
8. Conditions and warranties: The contract carries terms (conditions and warranties), express or implied, that govern the parties' rights.

A condition is a stipulation essential to the main purpose of the contract, and its breach entitles the buyer to repudiate the contract. Where the contract does not state them, the law implies the following conditions in a sale of goods.

1. Condition as to title: The seller has a right to sell the goods (or will have it at the time ownership passes).
2. Sale by description: Goods must correspond with the description given.
3. Sale by sample: The bulk must correspond with the sample in quality, and the buyer must be able to compare the bulk with the sample.
4. Sale by sample as well as description: The goods must correspond with both.
5. Quality or fitness for purpose: Where the buyer makes known the particular purpose and relies on the seller's skill or judgement, the goods must be reasonably fit for that purpose.
6. Merchantable quality: Goods bought by description from a seller who deals in such goods must be of merchantable quality, although defects the buyer could have noticed on examination are excluded.
7. Condition implied by custom or usage of trade: A condition may be implied by the usage of the trade concerned.
8. Wholesomeness: Food and similar goods must be wholesome and fit for consumption.

Under the Arbitration Act, 2055 (1999) an arbitrator is a neutral person appointed by the parties or by the court to settle their dispute. The main duties of an arbitrator are:

1. Act impartially and independently: The arbitrator must disclose any circumstance that may raise doubt about independence, and must treat both parties equally.
2. Give a fair hearing: Each party must have a full opportunity to present its case and evidence, and notice of hearings must be given.
3. Follow the agreed procedure: The arbitrator must follow the procedure agreed by the parties or, failing that, the one laid down in the Act, and apply the law governing the dispute.
4. Decide within time: The arbitrator must complete the proceedings and give the award within the time fixed by the parties or the Act.
5. Maintain confidentiality: The proceedings and the information obtained in them must not be disclosed without authority.
6. Make a reasoned written award: The award must be in writing, signed, dated and state its reasons (unless the parties agree otherwise), and a copy given to each party.
7. Act in good faith and with due care: The arbitrator must not accept a gift or benefit from a party and must not do anything that prejudices the proceedings.
8. Record and preserve evidence: The evidence, statements and orders should be recorded properly.
9. Remain in office: The arbitrator should not withdraw without good reason, because he can be removed for failure to act.

When one party breaks a contract, the other (the injured party) may seek one or more of the following remedies.

1. Rescission (cancellation of the contract). The injured party may treat the contract as ended and refuse to perform his own obligations, and may claim compensation for any loss. Example: A agrees to supply B with 100 bags of cement on 1 Baisakh; A fails to deliver; B may cancel the contract and buy elsewhere.

2. Damages (compensation). Damages are money awarded for loss caused by the breach. Kinds:

• Ordinary (compensatory) damages: The loss that arises naturally in the usual course of things, or that both parties knew at the time of contracting was likely to result. Example: A contracts to sell goods to B at Rs 100 per unit; he fails, and B buys at Rs 120; B may recover Rs 20 per unit.
• Special damages: Loss that arises from special circumstances, recoverable only if the party in breach was informed of those circumstances when contracting.
• Liquidated damages / penalty: A sum named in the contract as payable on breach. The court awards reasonable compensation not exceeding the amount named.
• Nominal damages: A small sum awarded when a right is broken but no real loss is proved.
• Remote or indirect loss cannot be claimed, and the injured party must take reasonable steps to reduce (mitigate) the loss.

3. Specific performance. The court orders the defaulting party to carry out the contract as promised. It is granted where damages are not an adequate remedy, such as the sale of land, a rare or unique article, or shares of a closely held company. It is not granted for contracts of personal service or where constant supervision is needed. Example: A agrees to sell a particular plot of land to B and refuses; the court may compel A to transfer it.

4. Injunction. A court order restraining a party from doing something he promised not to do. Example: a singer who promised to perform only at one theatre for a period can be restrained from performing elsewhere.

5. Quantum meruit (as much as earned). Where a party has done part of the work under the contract before it is broken by the other, he may claim a reasonable payment for the work done. Example: A builder who has built half of a house before the owner stops the work can recover payment for the work done.

6. Restitution. The party who has received a benefit under a contract that is later avoided must restore it. Example: money advanced under a contract that is cancelled must be refunded.

7. Other remedies. The injured party may also sue for the price or for non-acceptance of goods in a sale, or ask for a declaration of rights. These remedies are not mutually exclusive: the injured party may usually combine rescission with damages.

Agency is a relationship in which one person (the agent) is authorised to act on behalf of another (the principal) and to create legal relations between the principal and third parties. An agency may be created in the following ways.

1. By express agreement. The principal appoints the agent by words, spoken or written. When the agent must execute a deed or sell land, the authority should be in writing, usually as a power of attorney. This is the clearest and most common mode, but it needs the parties to have capacity to contract.

2. By implied agreement. The agency is inferred from the conduct of the parties or the circumstances of the case. Examples: a manager of a shop is taken to have authority to buy and sell for the shop; a hotel waiter orders goods for the hotel. Its weakness is that the extent of the authority is uncertain and disputes arise.

3. By estoppel (holding out). If the principal, by words or conduct, leads a third party to believe that a person is his agent, he cannot later deny it as against that third party who has relied on it. Example: A allows B to represent himself as his agent in dealing with C; A is bound.

4. By necessity. In an emergency, a person may be treated as agent without the principal's authority, to protect the principal's interest where it is impossible to contact the principal and the act is for the principal's benefit. Examples: a carrier selling perishable goods to avoid rotting, or a wife purchasing necessaries for the household.

5. By ratification. A principal may adopt an act done on his behalf without authority, and it is then treated as authorised from the start. The conditions are: the agent must have said he acted for the principal; the principal must have been identifiable and capable of contracting at the time of the act and at ratification; the principal must know the material facts; ratification must be of the whole act within a reasonable time, and it cannot make a void act valid or prejudice third parties.

6. By operation of law / presumption. Some relationships create an agency by law, such as that of a partner for the firm, and the manager of a company by statute.

Critical comment. Express agency gives certainty but needs formality. Implied agency and estoppel protect honest third parties and the speed of business, but they can bind a principal against his wishes. Necessity and ratification apply only under strict conditions to prevent misuse. Hence courts examine the facts of each case before finding that an agency exists.

Compulsory (court-ordered) liquidation, or winding up by the court, is the ending of a company by a court order on a petition. Under the Companies Act, 2063 and the Insolvency Act, 2063 (Nepal), the court may order liquidation in the following circumstances.

1. Inability to pay debts (insolvency). The company cannot pay its debts as they fall due, or its liabilities exceed its assets. This is the commonest ground; a creditor to whom a due debt is owed may petition after demanding payment without result.
2. Special resolution. The company by a special resolution of its shareholders resolves that it be wound up by the court.
3. Failure to commence business or suspension of business. The company does not begin business within a year of incorporation, or suspends business for a long continuous period (generally a year) without reason.
4. Reduction of members below the legal minimum. The number of members falls below the minimum required by law (for a public company, seven; for a private company, one).
5. Just and equitable grounds. The court is of the opinion that it is just and equitable to wind up the company. Examples: a deadlock in management; loss of the substratum (the main object has failed); fraud or oppression of minority shareholders; the company is a bubble company set up for illegal or fraudulent purposes.
6. Failure to meet statutory requirements. The company has failed to hold the statutory meeting or to file the statutory report or annual returns and accounts for the prescribed period.
7. Illegal or fraudulent business. The company was formed for a fraudulent or unlawful purpose or carries on business against public interest.
8. Regulator's request. The Office of the Company Registrar, or other regulators such as Nepal Rastra Bank for banks and financial institutions, may ask the court to wind up the company on grounds set out in the law.

Procedure in brief. A petition is filed by the company, a creditor, a contributory (shareholder), the Registrar or another authorised person. The court hears the parties, may make an interim order, and if satisfied passes a winding-up order. A liquidator is appointed who realises the assets, pays the creditors in the order of priority, and distributes any balance among the shareholders. The court then dissolves the company.

This is not a valid offer, and no contract arises.

An offer must be definite and capable of performance. It must be possible to carry out the act that is requested. Making a circle from two parallel lines is impossible, because parallel lines never meet and cannot enclose a space. Under the Contract Act, 2056, an agreement to do an act that is impossible in itself is void, and a promise that no one can perform cannot be enforced.

Further, an offer must show an intention to create legal relations, and the offeree's acceptance must be of a real, performable proposal. Narayan's acceptance does not help, because Narayan is not even the person to whom the offer was made (it was made to Rambabu), and in any case acceptance cannot make an impossible offer valid.

Hence Man Bahadur is not bound to pay Rs 4,000, and neither Rambabu nor Narayan can enforce the promise.

Issue. Can a buyer who finds a defect in goods after taking them home reject them?

Rule. Under the law on sale of goods (Contract Act, 2056), the goods must be of merchantable quality and fit for their ordinary purpose, and a seller dealing in such goods must not supply defective goods. The implied condition as to quality applies, but the buyer cannot complain of defects he could have discovered by a reasonable examination before buying. A buyer who accepts the goods loses the right to reject them, but keeps the right to claim damages for breach of warranty, unless the defect was a hidden defect not discoverable by ordinary inspection.

Application. Madhav bought the mobile of his own choice, but the defect was found only after he reached home, which suggests that it was a latent defect that he could not discover when he looked at the phone in the shop. A mobile set with a defect is not of merchantable quality, so the implied condition has been broken.

Conclusion. Madhav may reject the mobile set and demand a refund or replacement, if he acts within a reasonable time (or within the warranty/return period), and informs the seller promptly and has not used the mobile in a way that shows acceptance. If he is held to have accepted the set, he can still claim repair, a price reduction or damages under the warranty. He may also complain under the Consumer Protection Act, 2075. If the defect was visible and he purchased the set after inspecting it, he cannot reject it (caveat emptor, "let the buyer beware").

Issue. Can the principal C ratify a contract made by A without authority, and can B, who repudiated the contract, avoid it?

Rule. A contract made by a person without authority on behalf of another may be ratified by the principal. Ratification relates back to the date of the act, and it makes the contract as binding as if the agent had had authority from the start. The conditions are: the agent must have professed to act for the principal; the principal must have been in existence and competent at the time of the act; the principal must have full knowledge of the facts; ratification must be made within a reasonable time and must not injure a third party. However, a third party who has already repudiated the contract before ratification is protected: ratification cannot be used to subject the third party to damages or to terminate an existing right or interest of his.

Application. A acted for C without authority. B repudiated the contract (withdrew) before C ratified it. C's later ratification cannot revive an offer that has already been withdrawn by B, because it would cause injury to B.

Advice to B. B is not bound by the contract. Since B repudiated the contract before ratification, C cannot enforce the contract or claim damages from B. B should also note that, if A represented that he had authority, A, and not B, may be liable to C or to B for breach of warranty of authority. If B had not repudiated and C had ratified within a reasonable time, B would have been bound.

Issue. To what extent can A recover loss caused by a carrier's delay in delivering goods?

Rule. A common carrier must deliver the goods within a reasonable time, or the time agreed, and it is liable for loss caused by its delay. Under the law of contract damages (Contract Act, 2056), the party who suffers a breach can recover the loss that arises naturally in the usual course of things from the breach, or the loss that the parties knew, when they made the contract, would probably result from the breach. Remote and indirect loss, or loss from special circumstances not made known to the carrier, cannot be recovered.

Application. B delayed the delivery unreasonably, which is a breach. The delay would naturally cause loss in the ordinary course, such as loss from the machine's lateness or idle factory time. But the loss of a profitable contract with the government is a special circumstance. A did not tell B at the time of the carriage that the machine was needed to fulfil that contract, so B had no reason to know of it.

Opinion. A may recover ordinary damages for the delay (for example, the loss of use of the machine, interest, or the cost of the delay in the normal course), but A cannot claim compensation for the loss of the government contract, because that loss was too remote and not within the contemplation of the carrier. The case follows the rule in Hadley v Baxendale (the case of the delayed mill-shaft).