Essential ingredients of a valid agreement
The essential conditions of a valid contract are informed consent, consideration and lawful object. Such agreements are enforceable under the Indian Contract Act, 1872. Even oral agreements are valid in India, as per the contract act.
The Contract Act does not make stamping of agreements compulsory. It does not make an unstamped agreement/contract thereby invalid or unenforceable. Therefore, an agreement does not require mandatory stamping to make it a legal and valid instrument.
Even though an agreement is not stamped, it will remain enforceable against the parties, who have signed it, if the party cures the defect of not using stamp paper for the instrument later, as provided in the Indian Stamp Act or the state specific Stamp Act.
Agreements on plain paper are not invalid
The agreements made on plain paper are not truly invalid in the eye of law. But it is always better to prepare them on stamp paper so as to avoid ensuing procedural difficulties and payment of huge penalty later.
However, no legal instrument can be registered without paying the proper stamp duty. All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of its execution, as per the Section 17 of the Indian Stamp Act.
The Indian Stamp Act or the State specific act provides for the provisions and procedures for making an unstamped or insufficiently stamped instrument legally valid.
Stamp act prescribes the need for stamp paper
The law that deals with stamping of agreements / documents in India is the Indian Stamp Act, 1899. Subsequently each state has enacted its own stamp act applicable to that state by following the Indian Stamp Act.
Stamping of agreements and documents is desirable as it ensures their legality, validity, enforceability, and admissibility in court. The registration of such agreements, whenever it is compulsory under the Indian Registration Act, 1908, will also have to be done to ensure their legal validity.
Agreements that need compulsory registration
Some kinds of agreements, specified under Section 17 of the Indian Registration Act,1908, need to be compulsorily registered. They cannot be registered, unless they are prepared by using stamp paper of sufficient value specified in law.
Some of such instruments which requires compulsory registration are: –
- Instruments of gift of immoveable property
- Testamentary instruments, such as sale deed, family settlement etc, pertaining to immovable property for the value Rupees 100/ or above which purports to or creates, declare, assign, limit or extinguish any right, title, or interest, in the present or future.
- Lease deed of an immovable property, where the lease period exceeds a year.
- Instruments that transfer or assign a decree or order of a court for a value exceeding Rs 100 in immovable property.
- Contract for the sale of immoveable property
- Document to adopt a son executed other than through a Will
- And such other documents enlisted under Section 17 of the act.
The Section 18 of the Indian Registration Act enlists the documents of which the registration is optional, which means the party can decide whether to register it or not. Such documents are valid even if the party decides not to register them. Oral agreements also need no registration.
Documents requiring stamp paper but no registration
There are certain agreements mentioned under Section 3 of the Indian Stamp Act which should be made on stamp paper but need no compulsory registration. They are: –
- Power of attorney, except on transfer of property
- Lease agreement
- Lease deed of an immoveable property for a period of less than one year
Plain paper agreement cannot be produced as evidence in court
The only problem with an agreement made not on prescribed stamp paper is that it cannot be produced in court as evidence or acted upon by a public officer unless it is cured by paying stamp duty and hefty penalty.
The Section 35 of the Stamp Act makes a document which does not bear a requisite stamp duty as inadmissible in a court of law.
Making an unstamped agreement lawful in court
If an agreement or document is found to be not duly stamped, the Section 35 of the Indian Stamp Act bars the said document from being acted upon by any public officer or a court of law. The document will have to be impounded and thereafter dealt with as per Section 33 or 38 of the Indian Stamp Act.
An agreement not executed on requisite stamp paper can be made admissible in evidence on payment of duty and penalty equal to ten times of the stamp duty, under section 35 of the Indian Stamp Act, 1899 (Thiruvengada Pillai v Navaneethammal & Anr).
Upon payment of deficit and penalty the agreement will be deemed to be fully stamped.
Collector determines the proper stamp duty
The determination of proper stamp duty is done by the District Collector.
When any instrument is brought to the District Collector and the person bringing it applies to have the opinion of him as to the proper duty, he shall determine the proper duty, under Section 31 of the Indian Stamp Act.
Plain paper agreement not per se invalid
In short, agreements can be made either in a stamp paper, or in a plain paper which can be made legally valid later on by curing the deficiency in stamp duty.
But, it is always advisable and better to make agreements on stamp paper by paying the requisite duty wherein stamp paper is prescribed under the law for such a document.
SC adds insufficient or unstamped agreement is valid
In M/S N.N. Global Mercantile Pvt Ltd v M/S Indo Unique Flame Ltd [2023 INSC 423], a Constitutional Bench of the Supreme Court (SC), in para 82 of its judgement, states:
“Non-stamping/insufficient stamping of the substantive contract/instrument would not render the arbitration agreement non- existent in law and unenforceable/void, for the purpose of referring a matter for arbitration”, and “An arbitration agreement should not be rendered void if it is suffering stamp deficiency which is a curable defect”.
Conclusion
An inadmissible instrument, because of being unstamped or insufficiently stamped, may be made admissible if the relevant stamp duty or a penalty is paid later, as per the Section 35 of the Indian Stamp Act, 1899.
Therefore, an unstamped or insufficiently stamped instrument is per se not invalid and it can be made valid and admissible in evidence after fulfilling the conditions prescribed in the proviso to Section 35 of the Indian Stamp Act, 1899.
Additional reference
