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

Ravi undertakes to repay Sunil a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that if any instalment is not paid, the whole amount becomes due. Ravi defaults on the second instalment. What is the position under Section 74 illustrations?

The acceleration clause is not a penalty, so the contract is enforced according to its terms and the whole loan falls due on default. The illustration to Section 74 distinguishes this from a bond inflated beyond the money lent, which would be a penalty.

  1. AThe acceleration stipulation is a penalty and Sunil gets only reasonable compensation
  2. BThe stipulation is not by way of penalty and the contract may be enforced according to its termsCorrect
  3. CThe stipulation is void because the sum is not named
  4. DSunil may claim only the missed instalment

Explanation

The illustration says that a stipulation that on default of any instalment the whole becomes due is not by way of penalty, and the contract can be enforced as agreed. Hence Sunil can claim the whole outstanding amount. Treating it as a penalty confuses it with the Rs. 100 bond for Rs. 200 case.

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