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

Anil undertakes to repay a loan of Rs. 1,000 to Bhaskar by five equal monthly instalments. The agreement says that if any instalment is not paid, the whole amount becomes due. Anil defaults on the second instalment. Under the illustrations to Section 74, what is the nature of this stipulation?

The clause is not a penalty. Illustration (f) to Section 74 says that a stipulation making the whole loan due on default of any instalment is not by way of penalty, so Bhaskar can enforce the contract according to its terms.

  1. AIt is a penalty, so only reasonable compensation is payable
  2. BIt is not a penalty, and the contract may be enforced according to its termsCorrect
  3. CIt is void because it is against public policy
  4. DIt is a penalty only if Bhaskar proves actual loss

Explanation

Illustration (f) states that an acceleration clause making the whole sum due on default of an instalment is not by way of penalty. The contract is enforced according to its terms. The penalty view is wrong because the clause adds no extra sum beyond the loan.

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