Law and You > Business Laws > Indian Contract Act, 1872 > Discharge by Appropriation of Payments (Ss. 59 to 61 The Indian Contract Act, 1872)
The term ‘appropriation of payment’ means the application of payment. When a debtor owes several distinct debts to one creditor and makes a payment to the creditor which is insufficient to discharge all the debts, a problem may arise as to which particular debt, should the payment be applied. In some cases the debtor may himself expressly point out to which particular debt the payment be applied, while in others the circumstances may indicate the debt to which the payment is to be applied. But the difficulty arises when neither there is an express indicating nor can it be implied from circumstances. In India, the rules regarding discharge of contract by appropriation of payments are given in sections 59 to 61 of the Indian Contract Act, 1872.
Application of Payment where Debt to be Discharged is Indicated (S. 59 ICA)
According to Section 59 of the Indian Contract Act, 1872 where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying, that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly. This principle is also known as Appropriation by Debtor.
This is applied when there are several debts, not just one. The primary right of the debtor is the appropriation of payment made for his benefit. A debtor has the right to instruct his creditor to which particular debt the payment is to be applied. If the creditor accepts the payment, he is duty bound to follow the instructions. If the debtor expressly informs the creditor while making payment that the payment be applied to a particular debt, the creditor must do so. But if there is no express intimation by the debtor then the intention should be seen from the circumstances of the case.
If the creditor does not want to apply the payment as per the express or implied instructions of the debtor, he must refuse to accept the payment. In no case the creditor can alter the appropriation after accepting the payment.
- A owes B, among other debts, 1,000 rupees upon a promissory note which falls due on the first June. He owes B no other debt of that amount. On the first June, A pays to B 1,000 rupees. The payment is to be applied to the discharge of the promissory note.
- A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the debt of which B had demanded payment.
In Devayman v. Nobel case, commonly known as Clayton’s case, Mr. Clayton had an account with a banking firm, Devaynes, Dawes, Noble, and Co, that was a partnership. The bank’s partners were therefore personally liable for the debts of the bank. One of the partners, William Devaynes, died in 1809. The amount then due to Clayton was £1,717. After Mr. Devaynes’ death, Clayton made further deposits with the bank and the surviving partners paid out to Mr. Clayton more than the £1,717 on deposit at the time of Mr. Devaynes’ death. The firm went bankrupt in 1810. It was held that the estate of the deceased partner was not liable to Clayton. The payments made by the surviving partners to Clayton must be regarded as completely discharging the liability of the firm to Clayton at the time of the particular partner’s death. it was determined that if the debtor requests that the creditor appropriate the funds, he has provided to any of his debts, the creditor is obligated to listen to him and agree with him.
We can summarise as follows:
- The debtor must inform the creditor of all debt payments, stating that the specific amount paid was for the liquidation of that specific debt. If the creditor does not agree with it or does not want to accept it, the creditor has the right to refuse. But, after the creditor has accepted, the creditor cannot alter the terms.
- It is the debtor’s responsibility to provide an appropriate intention as to why he wants appropriation in the manner he wants and then to prove it.
- The debtor is the only person with a right of appropriation. It is not provided to sureties, given the fact that they are bound by the creditor’s appropriation. Unless specifically asked, the surety cannot insist on the appropriation of any payment related to a guaranteed debt.
Application of Payment where Debt to be Discharged is Not Indicated (S. 60 ICA)
- According to Section 60 of the Indian Contract Act, 1872 where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. This principle is also known as Appropriation by creditor.
If, while making the payment, the debtor does not intimate and there are no circumstances indicating to which debt the payment is to be applied, then the creditor has the option to apply the payment to any lawful debt due from the debtor. The amount, in such a case, can be applied even too a debt which has become time-barred. However, it cannot be applied to a disputed debt. But, once an appropriation has been made by the creditor and the debtor is informed, the creditor cannot change his option later on.
Application of Payment where Neither Party Appropriates (S. 61 ICA)
According to Section 61 of the Indian Contract Act, 1872 where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionally. This principle is also known as Appropriation by law.
Where neither the debtor nor the creditor makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether or not they are time-barred. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately.
It should be noted that where moneys are received by the creditor without any definite appropriation on either side, the money so received must first be applied in payment of interest and then in payment of principal.
Case Laws:
In Industrial Credit and Development v. Smithaben H. Patel (1999) the Court observed that such an amount is to be adjusted firstly strictly in accordance with the directions contained in the decree and in the absence of such direction, adjustments, be made firstly in payment of interest and costs and thereafter in payment of the principal amount. The provisions of Sections 59 to 61 of the Contract Act are applicable in cases where a debtor owes several distinct debts to one person and do not deal with cases in which the principal and interest are due on a single debt.
In Kundan Lal v. Jagannath (1915) case, the Allahabad High Court applied the Clayton’s rule. The Court held that: What the Indian Legislature did by Sections 59-61 of the Indian Contract Act, was to adopt the rule of Civil law with certain modifications. Unless the meaning of Section 60 is that the debtor is to make his appropriation at the time of paying and the creditor to make his appropriation at the time of receiving the money, it is difficult to conceive what is the meaning of Section 61 or how it could be applied.
Conclusion:
The discharge of a contract by appropriation of payment under the Indian Contract Act, 1872, is a significant aspect of contract law that addresses how payments made towards multiple debts or obligations can be allocated. This principle ensures clarity and fairness in the fulfillment of contractual obligations, allowing parties to specify how payments should be applied, thus avoiding disputes over outstanding amounts. When a debtor makes a payment but does not specify its application, the creditor has the right to appropriate the payment to any outstanding debt. However, if the debtor has directed the payment toward a specific obligation, the creditor is bound to honour this designation. This mechanism protects the rights of both parties, ensuring that debts are settled according to their intentions and agreements. The importance of appropriation is further underscored in situations where a debtor has multiple debts to a creditor. It enables the debtor to exert some control over how their payments are applied, which can be critical in managing their financial responsibilities. Moreover, this principle promotes transparency and accountability in financial transactions, as it requires clear communication between the parties involved.
In conclusion, the discharge of contract by appropriation of payment is an essential provision under the Indian Contract Act, 1872. It facilitates the orderly resolution of debts and helps prevent misunderstandings between creditors and debtors. By allowing parties to specify the application of payments, the doctrine fosters fair dealings and contributes to the integrity of contractual relationships, ultimately promoting confidence in the legal framework governing contracts in India.