Engineering Professional Practice

Chapter 4: Legal Aspects of Professional Engineering in Nepal

4.1 Introduction to Nepalese legal system

4.1.1 Components of a Legal System

Law may be defined as the rules of a state made by legislation and implemented by the executives of
the state. Through law, a nation regulates the behavior of the people. It helps to maintain law and
order in the country and cooeration and coordination among citizens. It also helps to maintain
discipline, dignity and morality of the society. In short, law makes people aware of their duties while
exercising their rights.
The legal system of a nation includes:
a) acts/laws, court decisions/precedents (ain, kanun, nirnaya/najir)
Law is an umbrella term for any set of rules or regulations that have the backing of authority
behind them and includes Act, Rules, and Regulations, circulars, etc. In fact, it also includes
customs and traditions. An Act is a specific term used for a collected set of rules and regulations
passed by the Parliament. Therefore, an Act is a subset of Law
Precedent – a decision made by high court of state which influences the future decisions of the
court and lower courts. Such precedents are source of law.
b) Rules, regulations, bylaws, directives (niyam, biniyam, nirdeshika)
Bylaws - law made by a local authority and which applies only in their area or a local ordinance
Directives - an authoritative order or instruction issued by a high-level body or official: a
presidential directive.
c) Treaties, conventions, policies, (sandhi, prachalan, niti)
Treaty - an agreement between sovereign States (countries) and in some cases international
organizations, which is binding at international law.
Convention - an agreement between states covering particular matters, especially one less formal
than a treaty.
(United Kingdom does not have a codified constitution. So, constitutional conventions play a key
role)
Policies - The basic principles by which a government is guided or the declared objectives that a
government or party seeks to achieve.
d) Formation orders, ordinance, promulgations, (adesh, adhyadesh, ghoshana,)
Order: an authoritative command or instruction to a subordinate or any person.
Ordinance - Local law enacted by the governing body of a city or municipality which applies only
within its boundaries. To have full force and effect of law, an ordinance must not be in conflict
with any higher law

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If, at any time, except when both Houses of the Federal Parliament are in session, circumstances
exist which renders it necessary to take immediate action, the President may, on recommendation
of the Council of Ministers, promulgate an Ordinance. An Ordinance so promulgated shall have
the same force and effect as an Act
Promulgations - announce something publicly, especially a new law or officially put a law into
effect
e) Access to justice, freedom to choose legal advisor
Access to justice is a basic principle of the rule of law. In the absence of access to justice, people
are unable to have their voice heard, exercise their rights, challenge discrimination or hold
decision-makers accountable
f) Concepts of “innocent until proven guilty”
Universal Declaration of Human Rights, article 11, states: Everyone charged with a penal offence
has the right to be presumed innocent until proved guilty.
(People that are innocent often have their entire lives ruined by the publicity. They spend money
for lawyers and lose income from their jobs and the worst part is even if they are found innocent,
a certain percentage of the people will still believe that they “got away” with something)
In Nepalese legal system, a person is practically “assumed guilty until proven innocent”. As soon
as a person, or an officer, is charged of a crime, he/she is losses his/her official privileges,
expected to resign from his/her post or automatically suspended till the case is “closed” by a court
of law. The Nepalese society normally presumes a person guilty as soon as s/he is charged of a
crime. People have very low level of faith on the impartiality of justice/legal system. Many persons
found guilty by a court, but with good connection, roam in government offices, while persons with
low access to resources waits for years, even decades, for court verdict on cases he/she files.
g) Implementation aspects of (a) to (f) above

4.1.2 Nepalese Legal System

Structure of Nepalese Legal System
Historically, the Nepalese legal system is based on Hindu philosophy and its growth and development
is largely influenced by Hindu religious texts.
First available written law of Nepal is Muluki Ain, which was promulgated by King Surendra Bir Bikram
Shah in 1854. It amended and codified all existing laws of Nepal – civil and criminal, including religious
and customary.
The Muluki Ain, 2020 was the main pillar of the Nepalese Legal system during the Rana regime for
more than a century. This is based on the supremacy of the prime minister’s powers and principles of
punishment were according to caste. It legalized the caste-based social hierarchy and thus
encouraged casteism. Individuals of different caste groups were subjected to different punishments
for the same crime. Sati pratha and practice of slavery was abolished during Rana regime.
King Mahendra gave a Constitution to his people as the fundamental law of the nation. Nepalese
Legal System expanded further and adopted more modern legal concepts to meet the needs of the
changing Nepalese society without losing its identity during Shah regime.
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After 1990, the multi-party democracy in Nepal was restored and some major changes were
introduced in the Nepalese legal system. The mode of legal system started to change through the
constitutional reforms. Nepalese laws began being amended and/or repealed in accordance with the
intent and spirit of the constitutional requirements and international law. Many discriminatory laws,
including the legal provisions related to women, dalit, third gender were amended as per the
decisions and directive order of the Supreme Court.
The latest Constitution of Nepal was promulgated on 20 September 2015 by an elected Constituent
Assembly. This Constitution declared Nepal as an independent, indivisible, sovereign, secular,
inclusive, democratic, socialism-oriented, federal democratic republican state. It has internalized the
values of equality and non-discrimination as well of principle of proportional inclusiveness.
The present Constitution provides three tiers of Courts, which include:
a) Supreme Court (Apex Court): all courts and judicial bodies are under the supreme court and it will
have final authority to interpret the constitution and laws; Maximum of 20 judges plus chief
justice of Nepal.
b) High Court (Court of Appeal): in each state; empowered to hear appeals against the judgments
delivered by the District Courts; has the power to try certain cases as specified by law and to try
cases transferred by the Supreme Court to provide speedier justice in prolonged disputes
c) District Courts: in each district; court of first instance; have the power to originally try and settle
all civil and criminal cases under its jurisdiction
• Special Court
Besides, the Constitution provides for establishing special types of courts or tribunals under the
judicial control of the Supreme Court to deal with special types of cases, which include four Revenue
Tribunals, one Administrative Court, one Labor Court and one special court.
• Arbitration
Arbitration is a normal process where dispute emerged between parties is resolved outside the
established court by the legally appointed person or an institution under the consensus of the parties.
When dispute arises during the progress of a contract it is not necessary that it should automatically
go before a court of law for resolution. The parties involved may agree to submit their differences to a
third party in whom they have confidence and whose decision they will accept and enforce.
Arbitration is considered to be more appropriate method for dispute resolution as it takes less time
and money than normal court procedure. Condition of contract should have clause for this as well.

4.1.3 Acts related to Engineering Professional Practice in Nepal

a) The Patent, Design and Trademark Act, 1965
update the legal arrangements in respect to patents, designs and trade-marks for the convenience
and economic benefit of the general Public. It includes registration modes, terms of applications,
punishment, renewal procedures for patent, design and trademarks.

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b) Labor Act, 1992

make provisions for the rights, interests, facilities and safety of workers and employees working in
enterprises of various sectors. It includes provisions for working hours, remunerations, health and
safety, welfare arrangements, conducts and penalties etc for workers.
c) Insurance Act, 1992
to establish an Insurance Board to systematize, regularize, develop and regulate the Insurance
Business. It consists of functions, duties and power of Board, Registration of Insurer, renewal,
Cancellation of Registration and Liability, payment methods, punishment
d) Environmental Protection Act 1997
It has legal provisions to maintain clean and healthy environment by minimizing adverse impacts and
to protect environment with proper use and management of natural resources, taking into
consideration that sustainable development could be achieved from the inseparable inter-
relationship between the economic development and environment protection
it includes provisions of IEE, EIA, environmental inspector, control of pollution, national heritage,
environment protection area, punishments.
e) Contract Act, 1999
Includes legal provisions concerning contract, its validity, types, conditions for void and voidable
contracts, for cancellation, contracting parties etc
f) Nepal Engineering Council Act, 1999
An act made for the establishment of Nepal Engineering Council in order to make the engineering
profession effective in Nepal and mobilize it in a systematic and scientific manner. Its includes
functions, duties and powers of the Council and its members, provisions relating to registration of
engineers, recognition of certificates of academic qualification or degree, funds of council and others.
g) Public Procurement Act, 2007 (amendment 2012)
It has legal provisions in order to make the procedures, processes and decisions relating to public
procurement (goods, services, construction works) much more open, transparent, objective and
reliable. It consists of provision relating to bid, procurement and its methods, consulting services etc.

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h) International laws/ conventions, Bilateral agreements (WTO (23 Arp 2004), ILO, BIPPA)
i) Immigration Act, 1992
j) Foreign Investment and Technology Transfer Act, 1992
k) Industrial Enterprises Development Institute Act, 1996
l) Value Added Tax (VAT) Act, 1997
m) Nepal Arbitration Act 1999
n) Local Self Governance Act, 1999
o) Construction Business Act, 1999
p) Copy Right Act, 2002
q) Income Tax Act, 2002 & Regulation
r) Company Act, 2006

4.2 Essentials of a valid contract

Contract
Contract Act, 2056 has defined contract as an agreement made between two or more than two
parties to do or not to do any business, which can be enforceable as per law. So, it is an agreement
which is binding to both parties and should have legal basis so that it can be enforced under the law.
In short, an agreement enforceable by law is a contract. It involves proposal from one party and an
acceptance of the same by the other.
For a contract to be legally binding, it should have following essential elements.
a) Offer and acceptance
An offer is a promise made by a party/person to another party/person with an intention of getting
approval over his/her promise. A tender submitted by a contractor is considered as offer. The client,
after due consideration and evaluation of the offer, provides acceptance of the offer.
Offer without acceptance or acceptance without offer does not make contract.
Example:
A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B accepts this offer, there is
an acceptance.
b) Competent parties
An agreement is enforceable only if it is entered into by parties who possess contractual capacity. It
means parties or person who make contract must be competent according to law. As per contract act
2056, following people are not competent to contract.
• A person who is below 16 years
• A person who is not under his/her control
Example:

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A person of unsound mind enters into an agreement with B to sell his house for Rs.2 lac. It is not a
valid contract because M is not competent to contract.
c) Legal relationship
Only agreements between the parties are not sufficient to be a contract, it requires the parties’
intention to establish a legal relationship. The parties’ intention of entering into contract should be
clearly reflected in the agreement. Agreements of a social or commercial nature that have no
intention to create legal relation cannot become a contract.
Example:
1. A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses to pay. The
son cannot recover as it is a social agreement and does not create legal relations.
2. A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there is a contract
as it creates legal-relationship between them
d) Free consent
Acceptance or offer, both should be of free consent from both the parties. It means offer and
acceptance should be without any coercion, undue influence, fraud or misrepresentation etc. in such
event, the party suffering damage can make contract void.
Example:
A compels B to enter into a contract on the point of pistol. It is not a valid contract as the consent of B
is not free.
e) Consideration
Consideration is “something in return”. An agreement is enforceable only when the concerned parties
of the contract should get something of value for fulfilling the terms and conditions of the contract. In
short, both the parties involved must be benefitted from the contract.
Example:
A agrees to sell his house to B for Rs.10 Lac is the consideration for A’s promise to sell the house, and
A’s promise to sell the house is the consideration for B’s promise to pay Rs.10 Lac. These are lawful
considerations.
f) Lawful purposes
The purpose of the contract should be lawful. If it is contrary to the law, that will become illegal and
can’t be enforceable by law. Illegal, immoral and against the public welfare subjects/objects can’t be a
contractual matter and will become void.
Example:
A promises to pay B Rs.5 thousand if B beats C. The agreement is illegal as its object is unlawful.
g) Certainty
There must be certainty. Contractual conditions must not be vague, unclear and unlimited. Both
parties under the contract must have understood the terms and conditions.
Example:
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A promised to sell 20 books to B. It is not clear which books A has promised to sell. The agreement is
void because the terms are not clear.
If the above mentioned points are not addressed rightly, the agreement may not be legally binding
and hence won’t be considered as a contract. The fulfillment of above criteria only gives an
agreement the status of a contract. Therefore it is said that all contracts are agreements but all
agreements are not contracts.

4.3 Void and voidable contract

Based on the legal relationship and the method of contract, contracts may be classified as:
a) Valid contract
Contract which fulfill legal requirements and have legal status are called valid contract.
b) Void contract
A contract which is not enforceable by law is called void contract. There are many contracts which are
valid, but sometimes due to certain circumstances, they cease to be enforceable which makes them a
void contract because it is impossible that the contract is to be further executed. Further, one party
cannot sue the other party for the non-performance of the contract.
Example:-
A promises B to sell his horse after one month for Rs. 50,000. Before the completion of one month,
the horse died. Now, the contract becomes void as the contract cannot be performed, i.e. the object
on which the parties agreed is no more, so there is an impossibility of performance of the
contract. This type of Contract is known as Void Contract.
The following contracts shall be considered as void:
i. A Contract preventing anyone from engaging him/herself in any occupation, profession or
trade which is not prohibited by prevailing law. (Exception – service agreement, partners
agreement)
ii. A contract restraining marriages other than those prohibited by the prevailing law.
iii. A contract preventing any one from enjoying the facilities already being enjoyed by the
general public.
iv. A contract seeking to prevent the legal rights of any person from being enforced by any
government office or court.
v. A contract which is against the existing law and public welfare
vi. The subject matter of a contract is unclear or vague
vii. the contract is found impossible to perform even from the time of entering into contract
viii. the contract was concluded by incompetent person
ix. A contract which has unlawful consideration or objective
x. A contract which has immoral purpose or against public morality
c) Voidable contract
A contract which lacks the free will of one of the parties to the contract is known as Voidable contract.
In such situation, the suffering party may have rights to make the contract void and this type of
contract is known as void-able contract.
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The contract becomes valid until the aggrieved party does not cancel it. Moreover, the aggrieved
party has the right to claim damages for any loss sustained from the other party. However, the
burden of proof rests on the claimant.
Example:-
X says to Y, that he should sell his new bungalow to him at a nominal price otherwise, he will damage
his property and Y enters into a contract due to fear. In this situation, the contract voidable as the
consent of Y is not free, so he has the right to avoid the performance of his part. As well as he
can claim for any damages caused to him
A contract is voidable when it is concluded through:
i. Coercion
A person shall be considered to have indulged in coercion if he/she, compels any person, to accept
any contract against his/her wills, withholds or threatens to withhold property belonging to him/her,
or threatens to defame him/her, or takes or threatens to take any other action in contravention of
prevailing law.
ii. Undue influence
Undue influence means influence exercised by a person upon another person who is under his/her
influence and is amenable to his/her personal benefit or interest.
The following persons shall be regarded to be under the influence of any person and amenable to
his/her wishes:
•A person living under his/her guardianship, protection or custody.
•a persons who cannot take care of their interest temporarily or permanently by reason of old
age, sickness or physical or mental weakness.
• A person who can be subjected to one's economic or ranking influences.
iii. Fraud
A party to the contract or his/her agent shall be considered to have committed fraud if he/she, leads
the other party or his/her agent to believe the particular matter is true, although he/she knows that it
is false, or suppresses any information in his/her possession, or indulges in any other fraudulent act
punishable under prevailing law, with the intention of deceiving the opposite party or his/her agent.
iv. Deceit/misrepresentation
Any of the following acts shall be taken as deceit:
• Submission of false particulars on any matter without reasonable basis for doing so
• Misleading any party so as to aggrieve him/her
• Causing any wrong deliberately on the matter of contract

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4.4 Significance of a contract

A contract:
i. Makes an agreement legally enforceable
ii. Records the terms of agreement (terms of reference, scope of works)
iii. Specifies the roles and responsibilities of each party of the contract
iv. Specifies corrective measures in case of breach of contract
v. Specifies quantity & quality of work, work schedule and payment schedule & mode
vi. Identifies parties of the agreement, and the official agents/representatives of the parties, if
any.
vii. Sets out, in advance, the course of action to be taken in different foreseeable situations
viii. Defines words and establishes common language
ix. Defines limitations of the contract
x. Defines contract termination procedure
xi. Defines responsibilities of the contracting parties to the third parties like government,
community, workers, sub-contractor, material supplier, unions etc.

4.5 Factors to be considered in preparing a contract document

i. Terms used in the contract document must be defined clearly so that misunderstanding and
misinterpretation cannot be made.
ii. The contract must be fair to all the parties entering into the contract.
iii. The language used in the contract must be clear (unambiguous).
iv. The contract language must be consistent. Same word, phrase or abbreviation should not have
different meaning in different location.
v. There should be no repetitions, as it tends to create confusion.
vi. Contract information must be retrievable by all the parties entering into contract, whenever
they need it. So multiple original copies of the contract should be prepared.
vii. The terms of the contract should not conflict with existing laws.
viii. All legal provisions to make the contract valid and enforceable should be complied, like
witness, immediate stakeholder (in case of land/property ownership transfer).
ix. Construction contract having longer duration should have price escalation clause.
x. Duties and responsibilities of engineer, contract duration, clause for addition and alteration,
arbitration should be clearly mentioned in the contract.

4.6 Interpretation of contractual clauses

i. If the language in the contract is clear, the words and terms are interpreted on the basis of the
intention of the parties, which is reflected in the contract.
ii. If the words and terms are not used to give special (or technical) meaning, the words and
terms are explained or understood in their ordinary meaning.
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iii. If the words or terms are ambiguous or vague or used to give special (or technical) meaning,
then, outside help is taken in the interpretation of the words.
iv. If any section, clause, paragraph, term or provision of contract is found to be void and
unenforceable by law, such finding shall have no effect upon any other section, clause,
paragraph, term or provision of contract and the same shall be given full force and effect.
v. If the contract is ambiguous, with double meaning, or contains conflicting provisions, such
words, terms or contractual clauses are interpreted in favor of the party who has not drafted
the contract. This rule of interpretation is called contra proferentem (against the offerer) rule.

4.7 Liability under contract, criminal law and tort

Liability is a troublesome responsibility having legal binding or an obligation. A society can legally
impose liability for actions based on a variety of criteria. The following discussion will address three
resulting categories of liability: contract liability, criminal liability, and tort liability.
i. Liability under contract
Contract law imposes liability on a party for promises that the first has made to another party. An
engineer is liable to fulfill all terms of contract. S/he is liable for loss/damage due to breach of
contract clauses. But if there is no contract, legally, there is no liability under this category.
ii. Liability under Criminal law
An engineer is liable to follow all prevailing laws of nation. The breach of law related to design,
construction and implementation of design can result in criminal case, whether there is damage or
not. The state takes legal actions for criminal acts, such as theft or murder, although an individual
member of society may be harmed. Thus, the defendant has a liability to the government/state.
iii. Liability under tort
The kind of negligence that harms unrelated person or property and seeks compensation is a tort
liability. In engineering, engineers while performing their duties may create liabilities because of their
doings. An engineer can be held liable for loss or damage to the customer due to use of
services/products, designed, constructed, or implemented by engineer. S/he is liable even if there is
no specific contract and no laws have been breached.
Tort law is “directed toward the compensation of individuals, rather than the public, for losses which
they have suffered within the scope of their legally recognized interests generally rather than one
interest only, where the law considers that compensation is required”.
The objectives of tort provisions are,
• Compensation to the victims of the action or inaction of someone else.
• Transferring the cost of injury from the victim to the person responsible for the injury.
• Prevention of repetition of harmful action.
• Defending the law and rights of victim.

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Vicarious and Partnership Liability

a) Vicarious liability
An employer is responsible for the acts of his/her employee as long as the employee’s acts are within
the person’s job description. Furthermore, employer has to take responsibility for the wrong doings of
his employees even though he has not committed that mistake. This is known as vicarious liability. It
is also called organizational liability.
For example, hospitals are responsible for the acts of their doctors if the acts are within the scope of
employment. But the hospital is not responsible for the doctor’s act when he/she is serving at a
private clinic.
However, employees are also responsible for their acts. Professional regulatory bodies may take away
the abilities to practice.
Three tests are used to ascertain the degree of vicarious liability.
• Control test: The more control a company has over a person (employee), the more liable the
company is.
• Business integration test: The more the work of a person is integrated into the work of a
company, the more liable the company is for the acts of the person, even if the person is not a
direct employee of the company.
• Multiple test: Control test, business integration test, and other related factors are taken into
consideration to determine the degree of liability.
b) Partnership liability
It refers to the liability of the partners in tort. The partners of a company are liable for the acts of one
(or more) of its other partners.

4.8 Duties and liabilities of designers and professionals

Engineers and Architects as professional have following duties and responsibilities:

a) Fitness for Purpose
It should be noted that the design of an engineer should reasonably fit the purpose for which the
design is intended for. The suitability and fitness of materials including their quality need to be
confirmed by the designer and if required, should go for test and verification.
b) Negligent miss-statement
The designers and professionals are expected not to make any negligent or unsubstantiated
misstatements. They may be liable for the statements made by them if the person relying on their
statement suffers damage.
c) Complying with regulatory requirements
It is the duty of the designers and professionals to make themselves fully aware of the applicable
statutes, bylaws and regulations/codes related to their professional practice.

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d) Rightly Examining the Site Condition

The designer should clearly and adequately examine the site, above and below the ground before
designing a structure. Otherwise he/she may be liable for faulty design.
For example, if the site is found to have been used for illegal dumping of hazardous chemicals in the
past the designer should be aware of its impact on the users of the designed building.
e) Public and private rights
The design of a project should not contradict with the public and private rights of the client and
others who may be affected by the design implementation.
f) Plans, drawings and specifications
A designer should prepare complete set of plans, drawings and specifications of each components,
regardless of what is what is written in the contract. Incomplete sets of deliverables will make the
designer liable. All documents and drawings should bear the signature of the designer.
g) Materials (quantity, quality and availability)
A designer should select the best/optimum material for construction. Recommendation of a specific
material which turned out to be not suitable can put the designer in difficult position.
The details of the quantity and quality of materials to be used in a project should also be specifically
mentioned. The availability of the materials should be kept in mind while selecting the material types.
h) Novel, risky design and employers’ interference in design
A designer may choose to make novel or risky design and may decide to incorporate employer/client’s
idea in the design. However, the designer is ultimately responsible for the safety & fitness for purpose
of the design implementation.
A designer may not be spared from legal action on the excuse of employer’s interference in design.
i) Revision of design during construction
Revision of design during construction is allowed, and often practiced. However, the designer is
ultimately responsible for the safety, fitness for purpose and the appropriateness of the revised
design.
j) Miscellaneous
• Interpreting for the contractors the meaning of the drawing and specification.
• Keeping accurate books and records/documents.

4.9 Conditions for establishment of professional negligence (duty, breach,

proximity cause and damage)

Negligence
Negligence is a “conduct which falls below the standard established by law for the protection of
others against unreasonable risk or harm”. In other words, negligence is doing something which a
prudent and reasonable man would not do.

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'Professional negligence' represents a special case of negligence in which society holds members of a
profession responsible for not meeting a standard of care and competence.
In order to establish liability for damage, the courts analyze the following four elements, each of
which is defined below:
a) Duty
The most general duty under tort law is to exercise 'reasonable care' to avoid harm to others. A
person has obligation (duty) to all other persons at all times. The root of negligence (neglect) is the
absence of care or attention on the doing or omission of a given act. People have the responsibility to
exercise reasonable care toward others. The law of negligence seeks to assign liability for damages to
parties due to of the failure of others to be sufficiently careful of their interests.
b) Breach
The breach of duty is required for behavior to be considered as negligence in the legal sense. Breach
is a failure to fulfill the obligation of reasonable care under standards established by society
(generally).
c) Proximate cause
Proximate cause requires a sufficiently close relationship of the breach of a duty to the harm suffered
by a specific victim. This requires that the breach be more than simply a necessary condition for the
damages. A defendant will not be held responsible for all damages which are 'caused in fact' by
his/her conduct. Proximate cause addresses whether the defendant was under a duty to protect this
particular plaintiff (person who makes a formal complaint against somebody in court), against the
particular event that injured the victim.
d) Damages
The plaintiff must have actually suffered damages to recover compensation from the defendant. That
does not mean that the defendant was not negligent, but tort law generally is intended not to punish
negligent behavior itself, but to compensate 'innocent' parties for the harm suffered due to
negligence of others.
It is entirely possible that a professional exhibits negligent behavior, but will not be held liable (under
tort law) for his/her negligence, if there was no harm or loss to others. That does not make the
behavior less negligent, just less costly.
Thus, a defendant may be found liable when defendant breaches a duty of care to the plaintiff and
the breach of that duty is the immediate cause of loss or harm to the plaintiff (“damages”). In order to
be awarded compensation by the court, a plaintiff must prove all the above four elements, namely
that the defendant had a duty to the plaintiff, that it was breached, and that breach of duty was the
proximate cause of the loss/damage to the plaintiff.

4.10 Types of business enterprises: sole, partnership and limited company

Business may be defined as human activity directed toward producing or acquiring wealth through
buying or selling services or goods or works.
Types of Business enterprises
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a) Sole Proprietorship Firm

In this type of business concern, single person establishes, manages, organizes and controls the whole
business and is also singly liable towards the profit and loss of the business. This type of firm can be
established under Private Firm Registration Act 2014. As its name suggests, it is registered in the
name of a person.
Characteristics:
i. Sole ownership, management and control: A single person establishes, owns, manages and
controls all aspects of the business.
ii. No separate existence of business and owner: Owner and business do not have separate
identity. The owner represents the business and insolvency of owner dissolves the business.
iii. Unlimited liability: The sole owner is liable to pay debt not only from business property, but
also from personal property, if needed.
iv. Ownership and risk: The owner bears sole risk and owns total profit.
v. Individual capital investment: Capital is invested by owner only from personal property.
vi. Freedom of Occupation: The owner can choose occupation which is best suited to situation.
The business is easy to form and less capital needed.
vii. Limited area of operation: Due to limitation of financial and human resources, the area of
operation is limited.
viii. Less legal formalities: The requirements to establish and operate sole business concern are
much less compared to other forms of business.
ix. Voluntary origin and end: The owner can start and end business, by fulfilling certain legal
formalities.
Advantages:
i. Easy to form or establish
ii. Effective management and control
iii. less legal formalities
iv. Easy to dissolve
v. High flexibility
vi. Quick decision making
vii. Sole claim on profit
viii. Secrecy possible
ix. Benefit of inherited goodwill
x. Credit Standing
xi. Direct relationship with customer
xii. Social and National advantage
xiii. Stability and Continuity
Disadvantages:
i. Unlimited liability
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ii. Limited capital

iii. Limited management
iv. Limited area of operation
v. Absence of legal status
vi. Chances of wrong/impractical decisions
vii. Lack of specialization
viii. Loss in the absence of a key person
ix. Uncertain future
x. Low public trust
b) Partnership Firm
Partnership firm is the association of the people who agree to share benefits and liabilities as agreed.
This type of business organization is registered under the Partnership Act 2020.
Characteristics:
i. Plurality or association of more than one person
ii. Joint ownership
iii. Unlimited liability
iv. Sharing of profit and loss
v. Established on the basis of agreements and between the persons
vi. Partners do not have separate existence/individual identity
vii. Joint management and control
viii. Joint agentship
ix. Partnership right cannot be transferred/shares cannot be transferred
Advantages:
i. Easy to form: relatively easy to form and register than limited company
ii. Capital and credit: better than Sole Business Concern
iii. Advantages of Division of Labor: each partner can lead in his/her specialization
iv. Integration of Ability and Skill: Knowledge, ability and skill of multiple investors/partners can
be utilized
v. Incentive to work hard: Since profit is to be shared only among partners, there is incentive to
work hard
vi. Flexible: mode of business can be changed based on changes in market situation, without
much difficult
vii. Safeguard of the interests of minorities: Decisions are normally taken with consent of all.
Hence, smaller partners also have equal say in decision making.
viii. Reduced risk: Risk is reduced, compared to Sole Business Concern, as risk is distributed among
partners.

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ix. Possibility of Expansion: Partners can be added, which increases possibility of more fund for
expansion of works.
Disadvantages:
i. Unlimited liability: Partners are individually and jointly liable for the full amount of loss.
ii. Uncertain existence: Partnership business can suddenly collapse due to conflict among
partners or due to sudden demise of a partner or due to certain action of a partner.
iii. Limited resources (financial and human): Compared to a joint stock company, the resources
are limited in partnership business.
iv. Possibility of misunderstanding/disagreement and friction among the partners: Due to
different interests of each partner, there is possibility of misunderstanding/disagreement and
conflict/friction among partners, which can impact negatively
v. Difficulty in transferring ownership: Consent of other partners is required for transfer of
ownership, so one partner cannot sell his/her ownership to anyone whom he/she likes.
vi. Slow decision making compared to Sole Business Concern: Decisions are made by consent, so
the decision making can be slow.
vii. Less public faith: Financial status statements are not made public and hence there is less
public faith in partnership business firm.
c) Limited Company
Limited company is established under the act of the country and has limited liability. Finance is
collected through issuance of shares. Company is considered as an artificial legal person. Company
Act 2053 regulates the incorporation of a company in Nepal.
Characteristics:
i. Voluntary association of persons: Company is a voluntary association of persons for business.
ii. Legal artificial person: Company is an artificial legal entity (person). It can purchase and sale
properties in its own name. It can sue and can be sued.
iii. Perpetual existence: Action of one particular shareholder does not affect its continuity.
iv. Limited liability: Shareholders are owners of the company, but their liability is limited only up
to the amount of their share.
v. Common seal: Company uses a specific seal for all its official business/transactions.
vi. Capital collected by distributing shares: capital needed for expansion of business is raised by
issuing shares
vii. Transferability of shares: ownership shares can be sold to anyone interested to purchase.
viii. Management by representatives: management board is formed by election of shareholders’
representatives, and is managed as per stated rules rather than by whims of owners
ix. Publication of financial statements: Company needs to publish or circulate its financial
statements to the public or to its shareholders and has to conduct annual general meeting.
Advantages:

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i. Limited liability
ii. Perpetual existence
iii. Transfer of shares
iv. Effective management
v. Unlimited capital
vi. Public faith
vii. Unlimited business capability
Disadvantages:
i. Difficulty in formation, lengthy legal and formal process
ii. Lack of personal interest
iii. Lack of secrecy
iv. Possibility of fraud
v. Exploitation of share holders
vi. Groupism for power (Office politics)
vii. Conflict of interest
viii. Absence of prompt decision
Limited Company can be further divided as:
i. Private Limited Company
- Number of shareholders is limited to 50 and a minimum of 2 numbers.
- This type of company can’t issue public shares.
- These are usually owned by family members.
- They can’t trade their share and debt securities in organized stock exchange.
- Members of the firm are not liable for any financial obligation to its credit holders in case of
dissolution of company.
ii. Public Limited Company
- Public limited company shall have a minimum of 7 share holders and there is no upper limit
regarding the number of shareholders.
- These companies have minimum share capital and they must have minimum 2 directors.
- Company offers liquidity to the shareholders. So, it can easily raise the capital and must give
accurate and reliable information to the investors.
- They can sell their shares to the general public.
- Company is listed on the stock exchange and its shares are traded on the stock exchange.
- Company can raise the funds from the public by issuing authorized shares.

4.11 Intellectual property right (Copy right, patent, design and trademark)

Intellectual Property are original creative works that have economic value and are protected by law. It
covers patents, designs, trademarks and copy rights. Intellectual property also includes certain
related fields, such as trade secrets and the right of publicity. Trade secret law protects confidential
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information that belongs to a business and gives that business a competitive advantage. For example,
the formula for making the soft drink Coca-Cola is a trade secret protected by intellectual property
laws. Right of publicity law protects the right to use one’s own name or likeness for commercial
purposes. For example, a famous athlete may profit by using his or her name to endorse a given
product.
The legal rights given to the creators of such properties are called intellectual property rights.
Intellectual property laws reward the creators of original works by preventing others from copying,
performing, or distributing those works without permission. Without intellectual property laws, it
would be easy to duplicate original works and sell them for very low prices, leaving the original
creators without any chance to secure economic rewards for their efforts. The Intellectual property
laws must be strong enough to encourage authors and inventors to invest the necessary effort in
innovation. On the other hand, the law must also allow people some freedom to use the intellectual
property of others.
In Nepal, the laws relating to intellectual property rights are
i. Patent, Design and Trademark Act 2022 (1965), amended in 1987 and
ii. Copyright Act 2059 (2002).
Intellectual property is also much easier to copy than it is to create. It may take many months of work
to write a novel or computer program, but with a photocopy machine or a computer others could
copy the work in a matter of seconds.
a) Patent
PDT Act 2022 has defined patent as “any useful invention based on new principle or formula, or any
new way or method of construction, operation or transmission related to substance or a body of
substance”. The invention must be novel and useful. An idea alone is not patent able; the idea or
principle must be reduced to something physical.
To protect the right over the patent, a person should make registration of the patent under the Act.
Once registered, the right over the patent is protected for 7 years (plus two extensions, each of 7
years). The registered patent should not be used or copied without obtaining the written permission
of patent holder, until the period as protected by law. The law breaker can be fined up to Rs. 500000
and confiscation of the related items, and up to Rs. 250000 for committing an attempt of an offence.
The patent right is transferrable. Patent rights may also be licensed, on an exclusive or a non exclusive
basis. Usually royalty fee is charged based on a percentage of sales of the patented product,
A patent right cannot be granted if:
i. The patent is already registered in another person’s name
ii. The patent was not invented by the applicant and the right to patent has also not been received
from the inventor
iii. The patent is likely to produce adverse effects on health, conduct and morality of the citizen or
on national interest
iv. The patent is against the existing law
For registration of the patent, a person shall submit application mentioning the following:
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i) Name, address and occupation of the inventor.

ii) The process and types of transfer of ownership from the inventor.
iii) The process and method of making and using the patent.
iv) The principle or formula, in which the patent based on.
v) Full description of the patent along with map, drawing and application fee.
b) Design
The PDT Act 2022 has defined design as a feature, pattern or shape of a substance made by following
any means.
To protect the right over the design, it should be registered under the act. A registered design can be
used by someone else only with specific written permission of the design right holder, until the design
right duration expires. The right over the design is protected for 15 years (5 years plus two extensions,
each of 5 years).
The breach of the design right constitutes a fine of up to Rs. 50000 and confiscation of the related
items.
The design right cannot be issued if,
i. the design was already registered by someone else, and
ii. the design is likely to have adverse impact on the conduct or morality of a person or institution
or on national interest.
c) Copyright
Copyright is the sole right to produce or reproduce the work. As per the Copy Right Act 2059, the copy
right can be provided to the author of the works that are related to the following.
i. Book, pamphlet, article, and research paper
ii. Drama, opera, poetry, plays
iii. Musical compositions with or without words
iv. Audiovisual works , motion pictures
v. Architectural design
vi. Painting, sculpture, wood carving, lithography and architecture related other works
vii. Photographic works
viii. Works related to applied art
ix. Excerpt, maps, plan, three dimensional works related to geography, topography, and scientific
writing and articles
x. Computer software programs
All the works mentioned above are protected under the copyright act 2059 (2002) but the
descriptions or explanation of ideas, religion, news, concept, formula, court decision, administrative
decision, folk songs, folk stories, general statistics, even if they are included in any work, cannot be
copyrighted.

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The registration is not mandatory for exercising copyrights but they can be registered if desired.
Copyright subsists for a term equals to the life of the author and a period of fifty years after the
author’s death.
The author or the owner of the copyright shall have the following rights:
i. Reproduction of the work
ii. Translation of the work
iii. Modification or revision of the work
iv. Mixing of the works including changes
v. Selling or renting the original or copies of the work
vi. Importing the copies of the work
vii. Presentation and broadcasting of the work
viii. Public transmission of the work
Depending on the degree of infringement of the copy righted material, the penalty can range from Rs.
10,000 to Rs. 100000 or imprisonment up to six months or both for the first offense. Besides, the
offender shall be liable for compensation of the damages caused by his/her act.
However, the copy righted materials can be used without permission in the certain circumstances
as under:
i. A portion of the work for personal use, as long as it does not hamper the economic right of the
copy right holder.
ii. For public cause or academic purpose, portion of a published materials may be used with
proper citation of the source, provided that the use does not directly benefit (economically)
the user of the copy righted materials.
iii. Libraries and archives can reproduce the works for general purpose.
d) Trademark
Trademark means the use of any word, sign or picture or combination of them by a firm, company or
person to identify their goods, products or services and distinguish from those of the others. An
essential feature of a valid trademark is its distinctness.

Trademarks help consumers to identify goods they have used and enjoyed in the past as it
distinguishes goods of one manufacturer from the others. It also allows consumers to avoid goods
and services that they dislike. Examples of well-known trademarks include Coca-Cola for soft drinks,
Kodak for film, Nike for footwear, and Microsoft for software.

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Anyone can protect their right over the trademark by registration of the same. The registered
trademark should not be used or should not imitate to give false impression. Trademark rights never
expire, so long as a merchant continues to use the trademark to identify a given product. However, it
is subjected to renewal (7 years in each renewal).
The trademark will not be registered if,
i. the trademark has already been registered by someone else and
ii. the registration will have adverse impact on the conduct or morality of a person or institution or
on national interest.
The breach of the trademark right constitutes a fine of up to Rs. 100000 and confiscation of the
related items.

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