Plan the divorce before the wedding

What Nepali businesses must know before signing contracts with foreign companies

For a Nepali company, negotiating with a foreign company can be daunting. While business relationships begin with optimism, legal considerations are often overlooked. Yet, disputes are inevitable and contracts often predetermine where and how they will be resolved. It is therefore wiser to plan ahead than regret later. This article examines the advantages, disadvantages and key factors in choosing dispute resolution forums, including domestic courts, foreign courts and arbitration.

Foreign multinational companies typically treat dispute resolution clauses as a core risk management tool. One of their primary goals during negotiations is to ensure that any dispute will be heard in their home courts. Consider a contract between a Nepali company and an Australian company. The Australian party will usually insist that any dispute be submitted to the jurisdiction of Australian courts and governed by Australian law. For the Nepali business owner, accepting such a clause may feel like surrender. It can appear as though the stronger party has imposed its will simply to close the deal. However, in the context of Nepali law, this apparent defeat may actually conceal a strategic advantage. In many situations, a foreign judgement obtained abroad may have little practical value within Nepal.

The primary reason lies in Nepal’s legal framework governing the recognition of foreign court judgements. The Mutual Legal Assistance Act, 2014 acts as the principal gateway for enforcing foreign civil judgements in Nepal. Under this law, a foreign judgement can only be enforced if Nepal has entered into a formal bilateral treaty on mutual legal assistance with the country where the judgement was issued. As of today, Nepal has not concluded such bilateral treaties with any country. This creates a significant obstacle for foreign parties seeking to enforce their home court judgements within Nepal.

For Nepali businesses whose assets, bank accounts and operations are entirely located within Nepal, this legal structure can provide a powerful layer of protection. If a dispute arises and a foreign company spends substantial resources obtaining a judgement from a court in London or Delhi, that judgement cannot simply be presented before a Nepali district court to freeze bank accounts or seize property or to recover their claim. Without a treaty framework, the judgement often remains a ‘paper tiger’ rather than an enforceable order. This means that insisting on foreign jurisdiction may sometimes work against the foreign party’s own interests. By insisting on litigation in their home courts, they may end up securing a judgement that is extremely difficult to enforce where the opposing party’s assets actually exist.

Meanwhile, Nepali courts retain authority over parties and assets located within Nepal. In practice, Nepali courts have occasionally been willing to grant interim relief, be it temporarily, to domestic parties even where contracts contain foreign jurisdiction clauses. Such relief may include injunctions aimed at preserving the status quo, for example preventing termination of agreements while a dispute is unfolding. This can allow local business to continue operating and protect its commercial position while the foreign party attempts to pursue litigation in a distant jurisdiction.

When disputes escalate, the foreign party often faces two difficult options. The first is to initiate proceedings directly in Nepali courts. If the contract clearly states that disputes must be resolved exclusively in a foreign court, the Nepali court may decline jurisdiction at the preliminary stage. In such circumstances, the foreign party may find itself excluded from the very court that has the practical power to attach the Nepali company’s assets.

The second option is to pursue litigation in the foreign court named in the contract. This path can also be complicated. Service of process (delivery of court notice) to a Nepal-based company generally requires compliance with procedures under the Mutual Legal Assistance Act, a process which can be slow and cumbersome, sometimes creating delays that undermine the effectiveness of the lawsuit itself. Even after obtaining a judgement abroad, the foreign party may still need to initiate fresh proceedings in Nepal. In such a case, the foreign judgement may be submitted merely as evidence rather than as an automatically enforceable order.

At this stage, the foreign party may attempt to rely on Section 718 of the National Civil Code, 2017. Sub clause (f) of this provision allows Nepali courts to assume jurisdiction where at least one party to a contract is a Nepali entity. A foreign company might therefore argue that despite a clause favouring foreign courts, the Nepali court should exercise jurisdiction because the dispute involves a Nepali party. However, this approach remains uncertain as it is still unclear how Nepali courts will balance this provision against an explicit contractual clause that excludes Nepali jurisdiction. For a foreign business, relying on this argument may therefore become an expensive and unpredictable legal experiment.

If a foreign company recognises the limitations of court judgements, it may propose arbitration as an alternative. Arbitration is widely viewed as a neutral and professional dispute resolution mechanism. Nepal is also a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958. However, Nepal joined the convention with a reciprocity reservation, meaning; Nepal will only enforce arbitral awards from countries that would similarly enforce awards issued in Nepal. This issue was highlighted in the well-known Sanghi Brothers case, where the Supreme Court of Nepal upheld the refusal to enforce an arbitral award from India. One of the central issues was that India had not formally notified, in its Gazette, Nepal as a reciprocating territory. The case illustrates that even arbitration may not automatically guarantee enforceability.

Thus, for Nepali businesses, the practical lesson is not to fear foreign jurisdiction clauses as much as they might initially appear to warrant. If a Nepali company has no assets or operations abroad in such jurisdiction, such company is relatively safe. However, this does not mean that such clauses should be accepted without thought. Instead, they can become useful bargaining tools during contract negotiations. Nepali companies might agree to foreign jurisdiction while endeavouring to securing advantages in other areas of the contract such as pricing, delivery obligations or exclusivity.

A contract is largely also a strategic framework that shapes how future disputes will unfold. By understanding the unique characteristics of Nepal’s legal environment, Nepali businesses can negotiate with greater confidence and awareness. What appears to be a concession on paper may sometimes turn out to be a hidden source of leverage in practice.