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

Meera borrows Rs. 1,000 from Sunil and agrees to repay it in five equal monthly instalments. The contract states that if any instalment is not paid, the whole amount becomes due. Meera misses the second instalment. According to the illustrations to Section 74, what is the position of this stipulation?

The acceleration stipulation is not a penalty. Illustration (f) to Section 74 provides that where the whole loan becomes due on default of any instalment, the contract may be enforced according to its terms, so Sunil can claim the whole outstanding amount.

  1. AIt is not a penalty, and the contract may be enforced according to its termsCorrect
  2. BIt is a penalty, and Sunil gets only reasonable compensation
  3. CIt is void because it is against public policy
  4. DIt is enforceable only for the missed instalment

Explanation

Illustration (f) to Section 74 states that a stipulation making the whole sum due on default of an instalment is not by way of penalty. The contract can be enforced according to its terms. Treating it as a penalty would confuse it with illustration (g), where the bond is Rs. 200 for a Rs. 100 loan.

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