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

Arun undertakes to repay Bhavna a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that if any instalment is not paid, the whole amount becomes due. Under the illustrations to Section 74, this stipulation is:

The stipulation is not by way of penalty, and the contract may be enforced according to its terms. Making the whole loan fall due on default of an instalment merely accelerates the amount already owed, so Bhavna can demand the full balance.

  1. AA penalty, so Bhavna can claim only reasonable compensation
  2. BNot by way of penalty, so the contract may be enforced according to its termsCorrect
  3. CVoid because it accelerates the debt
  4. DValid only if Bhavna proves actual loss from the default

Explanation

The illustration states that an acceleration clause in a loan repayable by instalments is not by way of penalty, and the contract can be enforced according to its terms. Calling it a penalty confuses it with the case where a bond is for more than the sum borrowed.

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