Stipulation by way of Penalty | 'A' borrows Rs.100/- front 'B' and gives him a bond for Rs. 200/-, payable by five yearly installments of Rs. 40/- with a stipulation that in default of payment of any installment, the whole shall become due. Can 'A' get any relief?

Question: Stipulation by way of Penalty | ‘A’ borrows Rs. 100/- front ‘B’ and gives him a bond for Rs. 200/-, payable by five yearly installments of Rs. 40/- with a stipulation that in default of payment of any installment, the whole shall become due. Can ‘A’ get any relief? [RJS 1976]

Find the answer to the mains question only on Legal Bites. [Stipulation by way of Penalty | ‘A’ borrows Rs. 100/- front ‘B’ and gives him a bond for Rs. 200/-, payable by five yearly installments of Rs. 40/- with a stipulation that in default of payment of any installment, the whole shall become due. Can ‘A’ get any relief?]

Answer

The rule incorporated in Section 75 of the act that where a sum is named in a contract as the amount to be paid in case of a breach, regardless of whether it is a penalty or not, the party suffering from a breach is entitled to receive reasonable compensation not exceeding the amount so named. The named sum constitutes the maximum limit of liability. The court cannot order damages beyond that.

The amount contemplated by the parties will be reduced only if it appears to be by way of penalty. Otherwise, the whole of it is recoverable as liquidated damages. The first explanation to the section uses the word “penalty“.

It provides that “a stipulation for increased interest from the date of default may be a stipulation by way of penalty“. Where, for instance, the sum of Rs 100/- is borrowed but a bond is given for Rs200, which further provides that in default of payment of any installment the whole shall become due. This is a penalty.

The facts of the proposition have been borrowed from the illustration (d) appended to Section 74 of the Indian Contract Act, 1872. ‘A’ borrows Rs 100/- from ‘B’ and gives him a bond for Rs 200/- payable by five yearly installments of Rs 40/-, with a stipulation that, in default of payment of any installment, the whole shall become due. This is a stipulation by way of penalty. Thus, the party suffering from breach i.e. ‘A’ is entitled to receive reasonable compensation not exceeding the amount so named.

In Hari Lahu Patil v. Ramji Valad Panda, [ILR (1904) 28 Bom 371], the court held that “A compound interest is in itself perfectly legal, but compound interest at a rate exceeding the rate of interest on the principal money, being in excess of and outside the ordinary and usual stipulation, may well be regarded as in the nature of a penalty.”

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X