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

Vikram borrowed Rs. 10,000 from Suresh and executed a bond promising repayment with interest at 12 per cent, with a stipulation that on default interest would be payable at 75 per cent from the date of default. Vikram defaulted. According to the Indian Contract Act, 1872, what is the legal position?

Suresh can recover only reasonable compensation. Under Section 74, a stipulation for increased interest from the date of default may be a penalty, so the Court allows reasonable compensation not exceeding the stipulated amount, rather than the full 75 per cent rate.

  1. ASuresh can recover the full increased interest at 75 per cent as agreed
  2. BSuresh can recover nothing because the stipulation is void
  3. CSuresh can recover only reasonable compensation, as the stipulation for increased interest on default may be by way of penaltyCorrect
  4. DSuresh can recover only the principal and no interest at all

Explanation

Under Section 74, a stipulation for increased interest from the date of default may be a stipulation by way of penalty, and the creditor is entitled only to reasonable compensation as the Court considers fit, not exceeding the stipulated amount. Option A ignores this limit. Options B and D wrongly deny any compensation.

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