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

Meera Traders borrows Rs. 1,000 from Kiran Finance and gives a bond for repayment with interest at 12 per cent at the end of six months. The bond stipulates that on default, interest will be payable at 75 per cent from the date of default. How does the Act treat this default-rate stipulation?

The 75 per cent default interest is a stipulation by way of penalty. The lender can recover only such compensation as the Court considers reasonable, not the stipulated rate automatically. The Act's explanation to Section 74 says increased interest from default may be a penalty.

  1. AIt is a stipulation by way of penalty, and the lender can recover only reasonable compensation as the Court considers fitCorrect
  2. BIt is enforceable exactly as written, as the parties agreed the rate
  3. CIt is a valid liquidated sum and the Court cannot reduce it
  4. DIt makes the entire loan contract void ab initio

Explanation

This matches the illustration to Section 74: increased interest from the date of default may be a stipulation by way of penalty. The lender is then entitled only to such compensation as the Court considers reasonable. It does not void the loan, and the Court is not bound by the agreed rate.

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