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

Ravi borrows Rs. 1,000 from Meena and promises to repay it with interest at 12 per cent at the end of six months. The bond says that on default, interest will be payable at 75 per cent from the date of default. Under Section 74 and its illustrations, how is this stipulation treated?

The 75 per cent default interest is a stipulation by way of penalty, so Meena can recover only such compensation as the court considers reasonable. This follows from the Explanation to Section 74 and illustration (d), which deal with increased interest from default.

  1. AIt is a stipulation by way of penalty, and Meena can recover only reasonable compensationCorrect
  2. BIt is valid and enforceable exactly as written
  3. CIt is void and Meena recovers only the principal
  4. DIt is a liquidated sum recoverable in full as the Exception applies

Explanation

The Explanation to Section 74 says a stipulation for increased interest from the date of default may be a stipulation by way of penalty, and illustration (d) treats this very kind of 75 per cent stipulation as a penalty. Meena is therefore entitled only to such compensation as the court considers reasonable. Option B ignores this rule.

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