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

Karan agrees to repay a loan of Rs. 1,000 to Lata in five equal monthly instalments, with a stipulation that if any instalment is unpaid, the whole balance becomes due at once. Karan defaults on the second instalment. Under the illustrations to Section 74, what is the position?

The acceleration clause is not a penalty, so Lata may enforce the contract according to its terms and recover the whole balance on default. Section 74 illustrations distinguish this from clauses imposing an excess sum, which are penalties and attract only reasonable compensation.

  1. AThe acceleration stipulation is a penalty and Lata gets only reasonable compensation
  2. BThe acceleration stipulation is not by way of penalty and the contract may be enforced according to its termsCorrect
  3. CThe stipulation is void because no actual loss is shown
  4. DLata can recover only the unpaid second instalment

Explanation

The illustration states that a clause making the whole sum due on default of an instalment is not by way of penalty, so the contract can be enforced as written. This differs from a case where the bond is for Rs. 200 on a loan of Rs. 100, which is a penalty. Limiting recovery to one instalment ignores the clause.

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