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CS Executive · Jurisprudence, Interpretation and General Laws · Contract Law

Kiran borrows Rs. 1,000 from Anil and agrees to repay it in five equal monthly instalments, with a stipulation that if any instalment is not paid, the whole amount becomes due. Kiran defaults on the third instalment. According to the illustrations to Section 74, what is the nature of the stipulation?

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

  1. AIt is a penalty, so Anil gets only reasonable compensation
  2. BIt is not by way of penalty, and the contract may be enforced according to its termsCorrect
  3. CIt is void because it accelerates the debt
  4. DIt makes the contract voidable at Kiran's option

Explanation

Illustration (f) states that such an acceleration clause on a loan repayable in equal instalments is not by way of penalty and the contract may be enforced according to its terms. Option A confuses it with illustration (g), where the bond amount (Rs. 200 for a Rs. 100 loan) exceeds the loan, making it a penalty.

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