Since the National (Muluki) Civil Procedure Code, 2074 (2017) came into force, courts and regulators have grown increasingly strict about compliance with Section 36, which governs the validity of deeds and requires certain documents to be certified at the local level.
The provision that causes the difficulty is short: “The court shall not enforce a deed failing to meet the requirements referred to in this Section.” This memo, current to 1 January 2020, examines what Section 36 requires, what falls outside it, and whether a digitally signed document survives it.
Background
Section 36 broadly provides for the validity and enforceability of deeds and documents, including methods of valid execution, and procedures for certain deeds to be registered with the local municipal authorities.
As at the date of the memo, Section 36 had not been interpreted by the Supreme Court, the only court of record in Nepal. It therefore has to be understood and applied on the basis of accepted norms and rules of interpretation, and there are grey areas over its application to registration of corporate contracts worth more than NPR 50,000.
The drafting could lead to ambiguity in implementation. Nevertheless, the law as it stands has to be complied with until its defects are cured, whether through judicial interpretation or subsequent amendment.
Section 36 in Full
36. Deeds to be valid: (1) If signature or thumb impression is affixed on a deed pursuant to this Chapter, the deed shall, subject to law, be valid for any purpose whatsoever and enforced in accordance with law.
(2) Notwithstanding anything contained in sub-section (1), in the case of any deed which involves transaction of more than fifty thousand rupees and requires affixation of signature or thumb impression pursuant to this Chapter, or which involves transaction of an amount in excess of such an amount as may be so determined by the Government of Nepal, by a notification in the Nepal Gazette, that it is not less than fifty thousand rupees, and is prepared in household within Nepal, except any deed which is by law required to be authenticated or approved by any body, or recorded in, or enforced by, such a body, or is transacted through a negotiable instrument or any contract, agreement under a publicly notified tender, the concerned parties shall appear before the office of the Local Level or ward committee of the Local Level and have the deed certified on top of it by such an office; and in so certifying a deed, the certifying office shall cause the executors of such a deed to affix their respective signature or thumb impressions on the deed.
Provided that the parties to a deed prepared in household, involving transaction of less than fifty thousand rupees, may, if they so wish, have even such a deed certified pursuant to this Section.
(3) If a deed is tendered for certification pursuant to sub-section (2), the office of the concerned Local Level or ward committee of the Local Level shall certify such a deed on the same day, upon maintaining the records setting out, inter alia, the name, surname and address of each party to the deed, the date of execution of the deed, and the amount transacted or claimed amount specified in the deed.
(4) The office of the Local Level or ward committee of the Local Level may charge a fee not exceeding two hundred rupees for certification of a deed pursuant to sub-section (3).
(5) The court shall not enforce a deed failing to meet the requirements referred to in this Section.
Provided that the provision of this Section shall not prejudice the recognition or enforcement of a deed prepared in accordance with the law in force for the time being prior to the commencement of this Section.
The Good, the Bad and the Ugly
The Good
- Provides uniformity and added security to a transaction.
- Would aid and provide recourse in respect of documents that are lost or destroyed.
- Prevents transactional forgeries and frauds, ensuring that registered documents are less contentious.
The Bad
- Ambiguity in the text of the provision, especially the provisions relating to registration and the extent of applicability of the term “negotiable instrument”.
- Compliance with the provision is not practical and deviates from accepted norms.
- Lack of clarity on contracts concluded in Nepal with foreign dispute resolution and governing law clauses.
The Ugly
- Non-compliance could potentially render bona fide transaction documents unenforceable.
- The procedure of registration is unclear, leading to varying implementation of the provision.
- Local municipal authorities seem unclear on registration of deeds, and often intervene on the text of documents or reject them.
Exceptions: What Does Not Need Registration
Section 36(1) requires all transaction documents, including contracts, carrying a value of NPR 50,000 or above to be duly registered in the local municipal (ward) office of the local government.
Sub-section (2) exempts certain categories. The exceptions are essentially meant for deeds and contracts whose payments and transactions can be verified and are appropriately recorded for future reference. The following are exempt from registration:
| Exempt category | Detail |
|---|---|
| Payment by negotiable instrument | Documents where all payments under the deed or contract are made through cheques, bank drafts or other banking instruments that can be categorised as negotiable. |
| Foreign parties and foreign law | Deeds or contracts involving foreign parties, which are expressly governed by foreign law and foreign jurisdiction for all kinds of dispute settlement under the contract. |
| Public tender | Contracts awarded through public tender or sealed quotations. |
| Documents handled by a statutory body | Contracts or deeds that need to be registered, certified or enforced by any legally established body. |
Registration is therefore not specifically necessary so long as payment under the contract is agreed to be made or received through negotiable instruments such as cheques, drafts and other banking instruments that can be categorised as negotiable, or the document meets any of the other criteria above.
Other Compliance Requirements
To ensure that a contract or transaction document with a monetary value of NPR 50,000 or more falls outside the registration requirement, it must satisfy one of the following:
- The document should provide that all payment consideration under the contract is made through negotiable instruments such as cheque, draft or any other banking instrument that can be categorised as such; or
- The contract should be procured through public notification and public tender.
If neither applies, the deed must be registered with the local municipal authorities on payment of the prescribed registration fee, up to NPR 200.
How the document must be executed
In addition, the authorised signatory must execute the transaction document as follows:
- Affix the executor’s signature on the top and bottom of each page of the document.
- A short signature or initial is acceptable on all other pages, except the main execution page.
- Where the document is executed on behalf of an entity, the stamp of that entity must be affixed on each page.
- The document must include the full signature with name, designation and address of the executor or signatory.
These should be built into the contract management procedure of an enterprise.
Section 36 and Digital Signature
Is a digitally signed transaction document valid?
On a specific reading of Chapter 4 of the Code (Sections 28 to 32), though the position is unclear, the provisions appear to indicate that a document must be physically signed in wet ink. They do not explicitly recognise the use of a digital signature in transaction documents.
However, the Electronic Transaction Act, 2063 makes special provision for recognition of electronic signatures, at Section 5 read with Section 2(O). A digital signature is defined there as an authentication system based on an asymmetric crypto system. Section 5 provides:
Legal Recognition of Digital Signature: Where the prevailing law requires any information, document, record or any other matters to be certified by affixing signature or any document to be signed by any person; then, if such information, documents, records or matters are certified by the digital signature after fulfilling the procedures as stipulated in this Act or the Rules made hereunder, such digital signature shall also have legal validity.
Section 3 further provides that electronic records can be authenticated through a digital signature.
To resolve the contrasting positions, the Civil Procedure Code is a general law, and where there is a conflicting provision in a specific law, the specific law takes precedence. Since digital signatures are specifically governed by the Electronic Transaction Act, digitally signed transaction documents are valid in Nepal.
Speak to Our Team
If you need your contract templates or execution procedures reviewed against Section 36, get in touch with Prakrit Shrestha, Attorney at Law, Managing Partner, or Dechen Gurung, Attorney at Law. You can also contact the firm directly, or read more about our regulatory and transactional advisory and mergers, acquisitions and corporate restructuring services.
Our note on the Company Registrar notice on share lagat covers related documentary requirements for share transactions.
This publication is not intended to be used as the basis for undertaking any significant transactions, financial or otherwise, without consulting appropriate professional advisers. The memo is current to 1 January 2020.
Read the Original Memo
The full memo is reproduced below and available to download.