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Immovable Property Sale Contract Law in Nepal: Effects, Rights and Remedies
1. Introduction

July 2012

This article is a response and a follow up to the article published by His Honourable Justice Tekanarayan Kuwar in the last volume of this journal. 1 I agree with his reasoning that contracts to sell immovable property are valid and enforceable contracts according to the Contract Act 2056. To add to this discussion, I will address what I perceive to be another important question about the effects, rights and remedies that flow such a contract. In this essay, it will be argued that contracts to sell immovable property should be possible and enforceable, denying such an effect would be to undermine the basic theoretical conception and social utility of contracts. Secondly, it will be argued that the current problem about whether contracts to sell immovable property are enforceable originates from a misconception of not being able to distinguish contract from the performance of that obligation. Thirdly, contractual remedies shall be explained and applied to solve the problem of what remedies should be available for not conveying (transferring ownership) an immovable property contracted to one party or conveying it to another, by breaching the first contract.

2. Contracts of various types

Contract is a legally enforceable agreement between two or more parties. If you go to a shop to buy some rice you will be making a contract with the shopkeeper that he would be transferring you the ownership of the rice and that you would be paying him the agreed price (commonly called the contract of sale of movable property). If your car breaks down and you go to a mechanic and agree that he will fix the car in two days for a fixed price, a contract is formed (commonly called contract of service). It does not matter if there is no formal written agreement that is signed, if an oral agreement can be proven in court, it will be enforceable. 2 If those dealings are contracts, it would be absurd to argue that an agreement to buy a certain plot of land for a fixed price is not a contract. For the reasons also given by Justice Kuwar, it indeed is, however, the rights, remedies and effects of these three contracts are different. The only supreme characteristic of a contract, and common to all contract is that it creates an obligation to do something or not to do something. 3 For example, a contract of service creates an obligation to perform some act in return of money, and a contract of sale creates an obligation to transfer ownership of the thing to the buyer and the buyer an obligation to pay money.

3. ObligationandPerformance
A binding contract creates obligations that the parties to the contract can legally force each other to perform. However, it is important to distinguish between obligation and the performance of the obligation. Having an obligation does not automatically fulfil that obligation. For example, in a contract of repair, the mechanic will make a promise that he will repair the car and the customer will make a promise to pay the price. After that act the contract has been formed and respective obligation now exists with both parties. However, agreement of the mechanic will not repair the car automatically. The mechanic will actually have to repair the car to fulfil his obligation. Similarly in a contract of sale, where the obligation created is to transfer ownership, making the contract does not itself do that. Another
1 2

Teknarayan Kuwar, Alchal sampati ko karar ra bartaman anyol 86 Kanoon 8 (15 Ashad 2068) Contracts Act 2056 ss. 2, 5, 7 and 11(c), contract requires offer and acceptance and only be written in special cases when the law requires, for example Contracts Act 2056 s. 15 (3) (Jamanat sambhandi karar) Contracts Act 2056 s.s 2(a) 90 Devi Galli, New Plaza, Putalisadak, Kathmandu 32, Nepal Tel: +977 1 4417056 Fax: +977 1 4429290 Email: info@neupanelegal.com

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legal act has to take place. That legal act of how the ownership of things is transferred is dictated by the law of property, and not the law of contracts (subject to important exception for movable property).

4. Transferring ownership of movables and immovables

There exists to different methods of transferring ownership of movables and immovables. This has created confusion. The ownership of movable property can be transferred according to the intention of the parties as written in the contract or demonstrated, 4 while the ownership of land can only be transferred through registration at the land registry office (Malpot Karayalay).5 There reason for this divergence is that our society, and consequently the law, gives special significance to immovable things compared to movable things. First, movable things (eg vehicles, white goods, furniture, jewellery, food, minerals etc.) have lower value compared to immovable things (land, houses). Second, movable assets depreciates (decreases in value every year), whereas immovable assets increase in value. Third, movable asset can be easily controlled by possession, whereas there are difficulties to fully acquire control over immovable property. In the long run, immovable assets have more significant from a wealth point of view. Consequently, to regulate and protect the ownership of immovable property, the law maintains a registration system. Special legal acts are needed to transfer immovable property to another party. If such formal restrictions are placed on the ownership transfer of movable property like food and furniture, regulatory restrictions would make the administrative costs unbearable. The law would not be in line with the reality. Therefore, movable property in most countries, including Nepal, can be transferred through intention as demonstrated in the contract.6

5. Contract and conveyancing

The essence of the confusion about contracts of movable and immovable property lies in not being able to distinguish contract from conveyance (in contract of sale), and contract from performance (in other contracts). The law prescribes a special way for land to be transferred. It has to be done by registration. Therefore, if a contract prescribes the plot of land owned by X shall belong to Y from today or X is selling the land to Y per this contract, these clauses will not transfer the ownership of the land. Such clauses will only create an obligation for X to transfer the land to Y. We must remember that contracts are merely agreements, and agreements are different from action. Just like a mechanic contracts to fix a car, car is not fixed automatically, X agreeing to transfer the ownership of the land (sell) to Y does not transfer the ownership of the land automatically. The mechanic has to repair the car and X will have to register Y as the owner in the land register. However, this does not mean that no contract of sale of immovable property is possible. That is a misconception. It is failure to realise that contracts create an obligation to do or not to do. Contracts do not perform themselves. The person who has agreed to the contract must perform what has been agreed. However, in a contract of sale of movable property because the law prescribes that the ownership of such objects are to be transferred by intention, performance can be fulfilled through a contract alone. If you pay the price to the shopkeeper and the shopkeeper gives you the amount of rice you asked for, from now, the money belongs to the shopkeeper and the rice belongs to you. Ownership has been transferred and contractual obligation fulfilled. This requires no registration. Contract and conveyancing can take place at the same time.

Contracts Act 2058 s. 48, the main rule is that ownership of movables transfers according to the contract or intention demonstrated in the contract, this section also contains sub-rules to help determine intention of the parties in cases where intention is not clear. Muluki Ain Mahal 21 (1) requires registration, and Malpot Act s. 8 states that Malpot Karayala shall register and change the ownership of land Contracts Act 2058 s. 48; this rule applies to all movables except shares, currency and exchangeable claims (s. 40) 90 Devi Galli, New Plaza, Putalisadak, Kathmandu 32, Nepal Tel: +977 1 4417056 Fax: +977 1 4429290 Email: info@neupanelegal.com

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6. Remedies in breach of contracts to sell immovable property

Having determined that contracts create obligations and do not fulfil themselves, it is essential to examine what remedies will be available if one party does not perform. For example, the seller contracts to sell land with a buyer but later changes his mind. Even worse, sells it to a third party for a better price when the market is in an upward trend. Can the law compel the seller or the third party to transfer the land to the party that contracted first? After discussing the provisions in the Contracts Act, we will then respectively discuss each in turn. The Contract Act states that, not fulfilling ones obligation arising out of the contract is a breach of contract.7 A material breach of contract entitles the innocent party two alternative remedies, to continue with his performance and force the party in breach to perform, or to stop performance and claim for damages.8 Even a non-material breach entitles the innocent party to damages. 9 Damages are provided as primary remedy. If damages are not enough to cover the actual damage of the party then the innocent party may claim specific performance of the contract. 10 Specific performance of obligations cannot be granted if, damages will be an adequate compensation for the breach, the court cannot monitor whether the party performed the contract (e.g. contracts that may be performed abroad), contracts for where special skills by a person is to be used (e.g. contracts of service), the contract cannot be performed as stated because of change in circumstances, or the guilty party claims specific performance.11 If one party is going to act in such a way that would make the performance of the contract impossible, the court may order the other party to stop that action. 12 These provisions will help us solve the two questions mentioned above. First, if the seller refuses to sell the land to the first contracted party, but has not still conveyed it to a third party. The land still is under the ownership of the party. The innocent party has two options, either to claim damages or specific performance. Specific performance can only be claimed if the conditions in s. 86 are fulfilled. The most important question to be asked is whether in contracts relating to sale of land damages are adequate to compensate the innocent party? I would argue that it is not because every piece of land and houses, like a work of art, is unique. You can hardly find two plots of identical land and houses, in terms of features as well as location. If a developer contracts to buy a land to develop a shopping complex in New Road, he may not get that plot of land elsewhere. Damages will primarily be assessed on the price of him buying alternative land, not what he would have made if the project completed. In such circumstances, damages will be an inadequate remedy. Therefore, specific performance should be available in contracts selling land and houses. This is also consistent to the principles of law in England, where specific performance orders are granted in such circumstances. 13 It also should be noted that, the party in breach cannot claim specific performance. 14 For example, if the buyer does not pay the seller, the seller is not obliged to transfer the land to the buyer. In certain circumstances, it may be difficult to prove that the innocent party wanted to pay when the seller (guilty party) did not want to receive the payment. The guilty seller may always plead that the buyer did not pay him the contracted price. Therefore, the law may require that deposit of purchase price be deposited in the court or evidence in form of a receipt which shows that that the price has been paid, before the court orders specific performance.15 Second, the seller refuses to sell the contracted land to the innocent party but, because someone else has offered a better price, is instead about to sell the land to a third party or has already sold it to a third party (with knowledge or without knowledge that a prior contract already exists). In such circumstances, if the land has not been sold yet, the innocent party may apply to the court under s. 87 of the Contracts Act 2056 for an injunction. The court will grant such injunction against selling the contracted land to the third party if the facts can be proven and if the party applying to the court is not
7 8 9 10 11 12 13 14 15

Contracts Act 2056 s. 82(1) Contracts Act 2056 s. 82(2) Contracts Act 2056 s. 82(3) Contracts Act 2056 s. 86(1) Contracts Act 2056 s.86(2) Contracts Act 2056 s. 87 Jones and Goodhart, Specific Performance (2nd eds, Butterworths, 1996), at pages 32,33,293 Contracts Act 2056 s. 86(2)(e) Chadrabahadur Mabo v Lekhbahadur Mabo NKP 2065 page 46 (Supreme Court Decision Number 7915) 90 Devi Galli, New Plaza, Putalisadak, Kathmandu 32, Nepal Tel: +977 1 4417056 Fax: +977 1 4429290 Email: info@neupanelegal.com

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in breach of contract himself (e.g. by not paying the price).16 The situation gets more complex if the selling party transfers the ownership of the land to a third party in breach of the first contract. Now the land is validly transferred to the third party and the person that contracted first is without the land. This situation can also be solved by applying the principles in the Contract Act 2056. First, a contract can only bind the parties to the contract; it cannot bind a third party.17 Therefore, contract between the selling party and the buying party cannot be enforced against a third party purchaser. Second, s. 86 states that, specific performance of contract cannot be a remedy if the contract cannot be performed as stated. 18 After the seller sells the land to the third party, he will not be in a position to transfer its ownership to the first contracting party, even if the court order specific performance, the seller will not be in a position to fulfil his obligations. Therefore, in such circumstances damages will only be the appropriate remedy. The party in breach who transferred the land to the third party will have to pay damage to the innocent party. The innocent party cannot get the land from the third party. The solution to the second problem may seem inequitable to many. The seller can easily get away by breaking his promise if he opens a company and transfers the contracted land to it, or sells it to a third party who knows that the land had been contracted with another person, or transfers it to his relative. The economic gain he derives from breaching the contract may be more than paying damages. Another problem is to ascertain the damage. The limitation of the Contract Act 2058 is that it does not distinguish between good faith and bad faith transfers. It is equitable that a good faith purchaser should not been bound to transfer the land to the first contracting party, but a bad faith purchaser should. It is submitted that the courts themselves have to find a solution to this problem applying general principles of contract based on the case at hand.

7.Conclusion
Having determined that contracts create obligations and do not fulfil themselves, it is essential to examine what remedies will be available if one party does not perform. For example, the seller contracts to sell land with a buyer but later changes his mind. Even worse, sells it to a third party for a better price when the market is in an upward trend. Can the law compel the seller or the third party to transfer the land to the party that contracted first? After discussing the provisions in the Contracts Act, we will then respectively discuss each in turn. The Contract Act states that, not fulfilling ones obligation arising out of the contract is a breach of contract.19 A material breach of contract entitles the innocent party two alternative remedies, to continue with his performance and force the party in breach to perform, or to stop performance and claim for damages.20 Even a non-material breach entitles the innocent party to damages. 21 Damages are provided as primary remedy. If damages are not enough to cover the actual damage of the party then the innocent party may claim specific performance of the contract. 22 Specific performance of obligations cannot be granted if, damages will be an adequate compensation for the breach, the court cannot monitor whether the party performed the contract (e.g. contracts that may be performed abroad), contracts for where special skills by a person is to be used (e.g. contracts of service), the contract cannot be performed as stated because of change in circumstances, or the guilty party claims specific performance.23 If one party is going to act in such a way that would make the performance of the contract impossible, the court may order the other party to stop that action. 24 These provisions will help us solve the two questions mentioned above. First, if the seller refuses to sell the land to the first contracted party, but has not still conveyed it to a third party. The land still is under the ownership of the party. The innocent party has two options, either to claim damages or specific performance. Specific performance can only be claimed if the conditions
16 17 18 19 20 21 22 23 24

Contracts Act 2056 ss. 86 and 87 Doctrine of Privity of Contract Contract Act 2056 s. 88(2)(d) Contracts Act 2056 s. 82(1) Contracts Act 2056 s. 82(2) Contracts Act 2056 s. 82(3) Contracts Act 2056 s. 86(1) Contracts Act 2056 s.86(2) Contracts Act 2056 s. 87 90 Devi Galli, New Plaza, Putalisadak, Kathmandu 32, Nepal Tel: +977 1 4417056 Fax: +977 1 4429290 Email: info@neupanelegal.com

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in s. 86 are fulfilled. The most important question to be asked is whether in contracts relating to sale of land damages are adequate to compensate the innocent party? I would argue that it is not because every piece of land and houses, like a work of art, is unique. You can hardly find two plots of identical land and houses, in terms of features as well as location. If a developer contracts to buy a land to develop a shopping complex in New Road, he may not get that plot of land elsewhere. Damages will primarily be assessed on the price of him buying alternative land, not what he would have made if the project completed. In such circumstances, damages will be an inadequate remedy. Therefore, specific performance should be available in contracts selling land and houses. This is also consistent to the principles of law in England, where specific performance orders are granted in such circumstances. 25 It also should be noted that, the party in breach cannot claim specific performance. 26 For example, if the buyer does not pay the seller, the seller is not obliged to transfer the land to the buyer. In certain circumstances, it may be difficult to prove that the innocent party wanted to pay when the seller (guilty party) did not want to receive the payment. The guilty seller may always plead that the buyer did not pay him the contracted price. Therefore, the law may require that deposit of purchase price be deposited in the court or evidence in form of a receipt which shows that that the price has been paid, before the court orders specific performance.27 Second, the seller refuses to sell the contracted land to the innocent party but, because someone else has offered a better price, is instead about to sell the land to a third party or has already sold it to a third party (with knowledge or without knowledge that a prior contract already exists). In such circumstances, if the land has not been sold yet, the innocent party may apply to the court under s. 87 of the Contracts Act 2056 for an injunction. The court will grant such injunction against selling the contracted land to the third party if the facts can be proven and if the party applying to the court is not in breach of contract himself (e.g. by not paying the price).28 The situation gets more complex if the selling party transfers the ownership of the land to a third party in breach of the first contract. Now the land is validly transferred to the third party and the person that contracted first is without the land. This situation can also be solved by applying the principles in the Contract Act 2056. First, a contract can only bind the parties to the contract; it cannot bind a third party.29 Therefore, contract between the selling party and the buying party cannot be enforced against a third party purchaser. Second, s. 86 states that, specific performance of contract cannot be a remedy if the contract cannot be performed as stated. 30 After the seller sells the land to the third party, he will not be in a position to transfer its ownership to the first contracting party, even if the court order specific performance, the seller will not be in a position to fulfil his obligations. Therefore, in such circumstances damages will only be the appropriate remedy. The party in breach who transferred the land to the third party will have to pay damage to the innocent party. The innocent party cannot get the land from the third party. This article outlined solutions to common conceptual problems that have challenged contracts selling immovable property in Nepal. A contract to sell immovable property is possible and enforceable under Contract Act 2056. Such contracts have social and business utility. The current problem about whether contracts over immovable property are enforceable originates from a misconception of not being able to distinguish contract from the performance of the obligation it creates. A contract of sale of immovable property does not automatically transfer ownership, to transfer ownership registration with the land registry office is required. This should be distinguished with contracts selling movable property, in which ownership can be transferred by intention itself. Such difference can be attributed to the special significance attached to immovable property in our society. With regards to the remedies on breach of contracts selling immovable property, the Contract Act 2056, provides us with solutions. Because every piece of land and house is special which makes damages an inadequate remedy, the remedy of specific performance should be available if conditions of s. 86 are met. If a party is going to breach a contract, then injunction under s.87 should be available. Damages will only be an alternative remedy in such circumstances, which may occur, if the land is
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Jones and Goodhart, Specific Performance (2nd eds, Butterworths, 1996), at pages 32,33,293 Contracts Act 2056 s. 86(2)(e) Chadrabahadur Mabo v Lekhbahadur Mabo NKP 2065 page 46 (Supreme Court Decision Number 7915) Contracts Act 2056 ss. 86 and 87 Doctrine of Privity of Contract Contract Act 2056 s. 88(2)(d) 90 Devi Galli, New Plaza, Putalisadak, Kathmandu 32, Nepal Tel: +977 1 4417056 Fax: +977 1 4429290 Email: info@neupanelegal.com

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already sold or transferred to a third party. However, in many circumstances, if the third party purchaser is in bad faith, this may not be an equitable solution to the problem.

Originally published by Anjan Neupane in Kanoon Journal published by Laywers' Club Nepal. This document has been prepared by lawyers at Neupane Law Associates for public information and should not be used a substitute for legal advice. If you want detailed advice regarding the issues raised in this documents please contact us at info@neupanelegal.com

90 Devi Galli, New Plaza, Putalisadak, Kathmandu 32, Nepal Tel: +977 1 4417056 Fax: +977 1 4429290 Email: info@neupanelegal.com