Default interest treated as a penalty under contract law, and the reduced rate was upheld.

A default-interest clause may be treated as a penalty under Section 74 of the Indian Contract Act, 1872 where the contract allows no interest if instalments are paid on time but imposes an exorbitant rate from the date of default. The Court distinguished ordinary contractual interest from a high default rate operating as a sanction for breach, and held that such a stipulation can attract statutory relief even if only one rate is stated. It also held that interest cannot be cut down on purely equitable grounds outside Section 74. The reduced rate allowed by the lower appellate court was upheld.

---

---

Issues: Whether a stipulation that no interest would be payable if instalments were paid on due dates, but that a high rate of interest would become payable from the date of default, was a stipulation by way of penalty under Section 74 of the Indian Contract Act, 1872, and whether the Court could reduce the interest charged on that basis.

Analysis: The bond provided for repayment of the principal by instalments without interest if paid on time, but on default the debtor became liable to pay interest at a very high rate. The governing rule under Section 74 of the Indian Contract Act, 1872, as amended, permitted relief where a contract contained a stipulation by way of penalty. The authorities reviewed in the judgment drew a distinction between ordinary contractual interest and interest that was exorbitant or introduced as a sanction on default. The Court held that where the rate charged on default is exorbitant, even though only one rate is mentioned and interest runs only from the date of default, the stipulation may still be penal. The Court also held that no equitable reduction could be justified apart from the statutory power under Section 74, and that the stipulation in question was sufficiently high to attract that provision.

Conclusion: The stipulation for default interest was penal, and the reduced rate allowed by the lower appellate Court was upheld.

---