The Muluki Civil (Code) Act, 2017 (2074) and the Muluki Civil Procedure (Code) Act 2017 (2074) (collectively called the “Code”) will come into effect from 17 August 2018. The Code makes material changes to the laws of contract and execution formalities of contracts, deeds and other documents. The Code also repeals the current Contract Act 2000 and will contact all legal provisions relating to contracts.
This article intends to inform readers of new formalities required under the Code to sign contracts and ensure enforceability of contracts by Nepalese courts. This article only covers commercial transactions and excludes family law, joints property, trusts, and other matters.
Under the previous Muluki Ain, strict execution formalities interpreted not applicable to contracts undertaken under Contract Act and only applicable to deeds. However, the new Code expressly provides that execution formalities will also be applicable to contracts, deeds, power of attorneys and other documents. Generally, the following execution formalities are applicable.
- No Formal Requirements: Some transactions are not required to be in writing. They include transactions such as:
- Sale of movable goods with consideration below NPR 50,000;
- Donation of movable goods with consideration below NPR 100,000;
- Employment agreements under NPR 50,000;
- Service agreement with consideration below NPR 50,000; and
- Rental agreement with rental below NPR 20,000.
A verbal contract or conduct of parties is sufficient to evidence and enforce such transactions.
- Writing Requirement: The new Civil Code specifies that some agreements need to be in writing to enable enforcement (other than those that require thumbprint execution). They include:
- House rental with monthly rental above NPR 20,000;
- Sale and transfer of movable property above NPR 50,000 (other than donation of movable goods with consideration below NPR 100,000);
- Lease of immovable property (other than house rental with montly rent above NPR 20,000);
- Hire purchase;
- Guarantee; and
- Other contracts requiring thumbprint execution and registration stated below.
Such contracts will not be enforcable by Nepalese courts if they are not in writing.
- Thumbprint Execution Requirement: Thumbprint execution is a traditional method of execution of deeds and documents in Nepal. It was used at a time when most people were illiterate and could not write. However, the practice has remained and will be continued by the new Civil Code. In this method of execution thumbprint of both thumbs must be placed at the main signing area, and other areas where signatures are required will have to be affixed with thumbprint of one thumb. Documents related to the following transactions need to be executed by thumbprint:
- Transfer and relinquishment of rights in all property, except donation of movable property or cash of value NPR 100,000;
- Creation of security interests in immovable property;
- Pledge, hypothecation and security arrangements relating to movable property;
- Power of attorney submitted to government authorities or entities;
- Loan repayment deed;
- Unsecured loan and transaction deeds (kapali); and
Thumbprint execution is a must for these documents.
- Land Revenue Office Registration Requirement: The previous Muluki Ain also had requirements relating to registration of immovable property transactions and other transactions at the Land Revenue Office that maintains the land registry. The following transactions needs to be registered:
- Transfer of immovable property (such as house, land etc.);
- Creation of security for immovable property;
- Other immovable property and family property related transactions;
- Formation of trusts;
- House rental with rental above NPR 100,000 per month; and
- Lease of immovable property above 10 years.
Parties need to personally appear at the Land Revenue Office for registeration of these documents. They will also need to pay registeration fees applicable.
- Ward Office Attestation Requirement: One major change in the law following the introduction of the new Civil Code is the requirement for all contracts, agreements and deeds with value above NPR 50,000 are not registered or recorded in government offices need to be attested by the Ward Office. It is specifically stated that the courts will not enforce documents not meeting this requirement. Contracts, agreements and deeds relating to all transactions above NPR 50,000 need to be attested by the Ward Office except:
- Documents that need to be vetted or approved, or is in record of or to be enforced by an authority;
- Financial instruments; and
- Contracts executed following publicly undertaken tenders.
This is a major departure from existing law. For example, from the date of effectiveness of the new Civil Codes the following common transactions above NPR 50,000 governed by Nepalese law will need to be attested at Ward Office, which may prove cumbersome.
- The agreements that need to be attested at the Ward Office are:
- Loan agreements and guarantees (including undertaken by banks and financial institutions);
- Local share purchase agreements;
- Distribution agreements;
- Franchise agreements;
- Sale of movable property;
- Security over movable property;
- House rental above NPR 50,000;
- Pledge and hypothecation;
- Asset purchase agreement;
- Hire purchase; and
- Other commercial agreements.
The drafting requirements have also been made stricter. The drafting formalities which were prescribed in relation to deeds from the previous Muluki Ain are now applicable to contracts as well. For enforcement, amounts should be included in both numbers and words.
The following details of executors of documents need to be specified:
- Personal signings: Name, father, mother, grandfather, grandmother, spouses, citizenship number, age, date of issuance of citizenship, district issuing citizenship, permanent address, temporary address, address, email, and phone.
- Corporate signings: Name, registration numbers, address and should be singed by person authorized by directors decision. Stamp should be included when signing on behalf of corporates.
It is mandatory for each document to be witnessed by at least two witnesses. Name, address, details of witnesses need to be included. Details of person that has drafted the documents should also be included.
The person signing should write full name, address, and sign in the main signing page. In addition to the main signing page, short signatures are required in the top and bottom of each page. Location of execution, and date of execution need to be specified. Further, thumbprints are a must for certain documents listed above.
Please note that this guide is published for information only and should not be considered as legal advice. You are requested to seek legal advice for specific factual situations. If you need further information on this matter please Contact Us