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

Sunil borrows Rs. 100 from Tara and gives her a bond for Rs. 200 payable by five yearly instalments of Rs. 40, with a stipulation that on default of any instalment the whole shall become due. How does Section 74 illustration treat this?

This is a stipulation by way of penalty, because the bond is for Rs. 200 against a loan of only Rs. 100. Tara can therefore recover only reasonable compensation. The Exception for public-duty bonds does not apply to a private loan.

  1. AIt is not a penalty, because acceleration clauses are always enforceable
  2. BIt is a stipulation by way of penalty, because the bond is for double the amount borrowedCorrect
  3. CIt is a penalty only if Sunil actually defaults on the first instalment
  4. DIt falls within the Exception and the whole Rs. 200 is payable

Explanation

Unlike the plain Rs. 1,000 loan in instalments, here only Rs. 100 was borrowed but Rs. 200 is secured, so the acceleration is treated as a stipulation by way of penalty. The Exception covers bail-bonds and public-duty bonds, not private loans, so it does not apply.

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