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

Arjun borrows Rs. 10,000 from Bhavna and signs a bond stipulating that on default he must pay interest at 75 per cent per annum from the date of default, as against 12 per cent before default. According to the illustration to Section 74, what is the position of this stipulation?

The stipulation of 75 per cent interest from the date of default is treated as a penalty under Section 74. Bhavna can recover only reasonable compensation as determined by the Court, not the full stipulated rate, and she need not prove actual loss.

  1. AIt is a valid liquidated damages clause enforceable in full
  2. BIt is void and Bhavna can recover nothing extra
  3. CIt is a stipulation by way of penalty, and Bhavna can recover only reasonable compensation as the Court considers fitCorrect
  4. DIt is enforceable only if Arjun proves actual loss

Explanation

The illustration to Section 74 states that increased interest from the date of default of this kind is a stipulation by way of penalty. The creditor is then entitled only to such compensation as the Court considers reasonable, not exceeding the stipulated amount. It is not void, and it is not enforceable in full.

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