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A debtor promises a creditor ₹1,000 if the debtor fails to pay ₹500 on the agreed day. The debtor fails…

Section 74 caps compensation at the amount named for breach and requires that the sum awarded be reasonable. Here the cap is ₹1,000.

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A debtor promises a creditor ₹1,000 if the debtor fails to pay ₹500 on the agreed day. The debtor fails to pay on that day. What compensation does section 74 of the Indian Contract Act, 1872 permit on these facts?

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Answer and explanation

Correct answer C

Section 74 caps compensation at the amount named for breach and requires that the sum awarded be reasonable. Here the cap is ₹1,000.

Option feedback

Option A

The unpaid sum is ₹500. Section 74 does not require compensation to equal that amount in the illustration.

Option B

The named sum is a ceiling, so compensation cannot be unlimited.

Option C

Illustration (a) permits reasonable compensation up to the named ₹1,000.

Option D

The provision does not impose a mandatory ₹500-plus-interest formula in the illustration.

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