law: Indian Contract Act, 1872 
  74.Compensation for breach of contract
  
  where penalty stipulated for
   15  [When a contract has been broken, if a sum is named in the
  
  contract as the amount be paid in case of such breach, or if the contract
  
  contains any other stipulation by way of penalty, the party complaining of the
  
  breach is entitled, whether or not actual damage or loss is proved to have been
  
  caused thereby, to receive from the party who has broken the contract
  
  reasonable compensation not exceeding the amount so named or, as the case may
  
  be, the penalty stipulated for.
  Explanation :  A stipulation for increased interest from the
  
  date of default may be a stipulation by way of penalty.]
  Exception :  When any person enters into any bail bond,
  
  recognizance or other instrument of the same nature or, under the provisions of
  
  any law, or under the orders of the Central Government or of any State Government,
  
  gives any bond for the performance of any public duty or act in which the
  
  public are interested, he shall be liable, upon breach of the condition of any
  
  such instrument, to pay the whole sum mentioned therein.
  Explanation :  A person who enters into a contract with the
  
  government does not necessarily thereby undertake any public duty, or promise
  
  to do an act in which the public are interested.
  Illustrations
  (a) A contracts with B to pay B Rs. 1,000 if he fails to pay B
  
  Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to
  
  recover from A such compensation, not exceeding Rs. 1,000, as the court
  
  considers reasonable.
  (b) A contracts with B that, if A practices as a surgeon within
  
  Calcutta, he will pay B Rs. 5,000. A practices as a surgeon in Calcutta. B is
  
  entitled to such compensation; not exceeding Rs. 5,000 as the court considers
  
  reasonable.
  (c) A gives a recognizance binding him in a penalty of Rs. 500
  
  to appear in court on a certain day. He forfeits his recognizance. He is liable
  
  to pay the whole penalty.
   16  [(d) A gives B a bond for the repayment of Rs. 1,000 with
  
  interest at 12 per cent at the end of six months, with a stipulation that, in
  
  case of default, interest shall be payable at the rate of 75 per cent from the
  
  date of default. This is stipulation by way of penalty, and B is only entitled
  
  to recover from A such compensation as the court considers reasonable.
  (e) A, who owes money to B, a money-lender, undertakes to repay
  
  him by delivering to him 10 maunds of grain on a certain date, and stipulates
  
  that, in the event of his not delivering the stipulated amount by the
  
  stipulated date, shall be liable to deliver 20 maunds. This is a stipulation by
  
  way of penalty, and B is only entitled to reasonable consideration in case of breach.
  (f) A undertakes to repay B a loan of Rs. 1,000 by five equal
  
  monthly installments, with a stipulation that, in default, of payment of any
  
  installment, the whole shall become due. This stipulation is not by way of
  
  penalty, and the contract may be enforced according to its terms.
  (g) A borrows Rs. 100 from B and gives him a bond for Rs. 200
  
  payable by five yearly installments of Rs. 40, with stipulation that, in
  
  default of payment of any installment, the whole shall become due. This is a
  
  stipulation by way of penalty.]