Law of Contract – Appropriation of Payments

 

APPROPRIATION OF PAYMENTS

Appropriation means distribution or allotment for a specific purpose. The question of appropriation arises when a person owes a number of debts to another person, and he makes payment. The question that arises is to which debt the payment has to be appropriated.


The rules of appropriation of payment are as follows –

(A). It is the primary right of Debtor (person making the payment) to make payment with express intimation that the payment is to be applied to the discharge of some particular debt. The Creditor is bound by such intimation.


(B). If there is no express direction from the debtor, the intention of appropriation is to be gathered from the circumstances under which the payment is made. Here again, the creditor is bound by the circumstances and must appropriate the payment accordingly. For example, 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 that promissory note.

(C). 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. In such a case, creditor may also appropriate the payment towards any debt the recovery of which is barred by limitation. Thus, if the debtor does not make any appropriation, at the time of payment, the right devolves on the creditor. Creditor may also appropriate the payment towards the outstanding interest, rather than principal amount.

(D). When neither party makes an appropriation, the payment shall be applied in discharge of debts in order of time. Further If the debts are of equal standing, the payment shall be applied in discharge of each proportionately.


The lesson worth learning from the above rules is that while making payment, one must specifically state the debt to which the payment has to be appropriated.

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