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CMA Foundation · Fundamentals of Business Laws and Business Communication · Breach of Contract and Remedies for Breach of Contract

Anil borrows Rs. 1,000 from Bimal and gives a bond promising to repay it with interest at 12 per cent at the end of six months. The bond adds that on default, interest will be payable at 75 per cent from the date of default. Anil defaults. How does Section 74 treat the 75 per cent stipulation?

The 75 per cent default interest is treated as a stipulation by way of penalty. Section 74 and its illustration (d) say the creditor is entitled only to such compensation as the Court considers reasonable, not to the full stipulated rate.

  1. AIt is a stipulation by way of penalty, and Bimal can recover only reasonable compensation as the Court considers fitCorrect
  2. BIt is enforceable in full because the parties agreed to it in writing
  3. CIt is void, and Bimal can recover nothing beyond the principal
  4. DIt is valid only if Bimal proves actual loss equal to the increased interest

Explanation

The Explanation and illustration (d) to Section 74 say stipulated increased interest from the date of default may be a penalty. Bimal is entitled only to such compensation as the Court considers reasonable. It is not enforced in full, and it is not void so as to leave Bimal with only the principal.

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