Looks like what Microsoft thinks of bad cluster doesn't equate to what it means in real life (as usual)
Not really. What it's saying is it reads the disk and looks for bad sectors (physical damage) and if it finds them, then it adds the clusters of data that are logically associated with those sectors to the list of damaged data. It will also where possible attempt to recover the damaged data and write it to a new undamaged disk sector.
It will then usually mark the damaged sectors in the partition table, so data is not written to them in future, and so programs looking for data that was on them will look for it in the correct place.
If you think of the disk as a book, then the sectors are the pages of the book, the data clusters are the writing on those pages.
Let's say for example that page 7 is damaged, then the writing for page 7 is transferred to say page 120, and the index for the book is altered to tell you to read the pages in the order .... 1, 2, 3, 4, 5, 6, 120, 8, 9 etc.