As legal professionals, we are often asked if agreements which are not made on stamp paper are invalid and unenforceable. The answer is a simple ‘NO’. Agreements may be made either in a stamp paper or a non-stamp paper. While making an agreement on a non-stamp paper, there are certain legal aspects that need to be complied with. This article reasons how unstamped agreements are valid and delves into the legal and technical repercussions of unstamped agreements.
The Contract Law on Unstamped Agreements
Like the contract law in most countries, the Indian Contract Act, 1872, maintains that all agreements that fulfil the essential conditions of free consent, lawful consideration and lawful object are valid and enforceable. It is important to note that even oral agreements, which constitute a major gamut of contracts in India are valid contracts under the Act provided that they fulfil the essentials of a contract. The Contract Act does not make stamping of agreements compulsory, nor does it deem an unstamped agreement/contract invalid and unenforceable. So, agreements do not require mandatory stamping for them to constitute as legal and valid. Even if they are not stamped they will still be enforceable as against the parties who have signed the same.
The Law on Stamping and Registration
The Indian Stamp Act, 1899 deals with stamping of agreements/documents in India. Stamping of agreements and documents is desirable as it ensures legality and validity, enforceability and admissibility in court since such agreements can be registered under the Indian Registration Act, 1908, which in turn ensures its enforceability.
The Indian Registration Act provides for registration of documents thereby recording the contents of the document. Registration is required to conserve evidence and title. There are certain agreements mentioned under section 17 of the Indian Registration Act, which are to be compulsorily registered and thus, cannot be made without stamp paper. Some of these are,
- Instruments pertaining to immovable property i.e. sale deed, agreement to sell, gift deed, lease, and others.
- Instruments pertaining to movable property valued at or above INR 100.
- Lease deed of an immovable property, where the lease exceeds a year.
- Instruments that transfer or assign a decree or order of Court for a value exceeding INR 100 and immovable property.
- Document to adopt a son executed other than through a will.
Documents that need to be made on stamp paper but need not be registered
There are certain agreements mentioned under the Indian Stamp Act which should be made on stamp paper but need not be compulsorily registered such as,
- Power of attorney that is given except power to sell property
- Development agreement, Agreement of sale given by a landowner to a developer
- Lease agreement
- Lease deed for less than one year
- Memorandum of oral partition
- Recording a past transaction
Agreements that are not made on Stamp Paper
The only discrepancy of an unstamped agreement is producing an unstamped agreement in court as evidence. Section 35 of the Stamp Act makes a document which does not bear a requisite stamp duty as inadmissible in a court of law. However, this provision has certain exceptions and does not completely negate the rights of the parties to enforce such an unstamped agreement. Under this section an unstamped agreement can be made admissible in court by paying the deficit stamp duty along with penalty i.e. deficit penalty amount, which may vary from state to state. Upon payment of deficit and penalty the agreement will be deemed to be fully stamped.
Obviously, these processes increase and delay processes in litigation and additional professional costs, hence, it is always advisable to make agreements on stamp paper by paying the required duty.
That being said, executing an agreement on a stamp paper everytime, especially when such agreements are needed to be executed often is understandably time consuming, tedious and consequently, impractical.