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

Ravi borrows Rs. 1,000 from Sunil and gives a bond promising repayment with interest at 12 per cent at the end of six months. The bond also says that, on default, interest will be payable at 75 per cent from the date of default. Ravi defaults. How does Section 74 treat the stipulation?

The higher interest rate on default is a stipulation by way of penalty under Section 74. Sunil cannot automatically claim 75 per cent. He is entitled only to such compensation as the Court considers reasonable, not exceeding the stipulated amount.

  1. AIt is a penalty stipulation, and Sunil can recover only such compensation as the Court considers reasonableCorrect
  2. BIt is valid liquidated damages, and Sunil can recover interest at 75 per cent in full
  3. CIt is void, and Sunil can recover nothing beyond the principal
  4. DIt is an acceleration clause that must be enforced according to its terms

Explanation

The Explanation and illustration (d) to Section 74 state that a stipulation for increased interest from the date of default may be a stipulation by way of penalty. The creditor is then entitled only to reasonable compensation fixed by the Court. Enforcing 75 per cent in full is therefore wrong.

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