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

Rohan borrows Rs. 1,000 from Meena and gives a bond promising repayment with interest at 12 per cent at the end of six months. The bond states that on default, interest will be payable at 75 per cent from the date of default. Under Section 74, how is this stipulation treated?

The stipulation is a penalty. Section 74 and its illustration (d) treat increased interest from the date of default as a stipulation by way of penalty, so Meena can recover only such compensation as the court considers reasonable, not the 75 per cent rate as written.

  1. AA valid liquidated sum, enforceable exactly as written
  2. BA stipulation by way of penalty, so Meena gets only reasonable compensationCorrect
  3. CVoid, so Meena can recover nothing on default
  4. DA stipulation that makes the whole bond void ab initio

Explanation

The Explanation to Section 74 and illustration (d) say a stipulation for increased interest from the date of default may be a penalty. Meena is entitled only to reasonable compensation as the court considers fit. It is not enforced exactly, and it does not wipe out her claim.

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