Appropriation of Payment Under Indian Contract Act

Appropriation means 'application or allotment,' and payment is giving a certain sum of cash to discharge an obligation. Hence, appropriation of payments means the application of a certain amount paid by a person to the discharge of the various debts owing by the person to another.

Appropriation of Payments

Appropriation is the application of payments. Sections 59 to 61 of the Indian Contract Act, 1872, provide certain rules regulating the appropriation of payments in the case of a creditor and a debtor. When a debtor pays an amount to the creditor, the creditor must take note of these parts before applying payment to a specific debt, since the creditor is prone to making appropriate payments to debts that are likely to be easily repaid. If no party specifies the appropriation, the law will take on responsibility and appropriate accordingly.

The question of payment appropriation arises when a debtor owes many debts to the same creditor and makes a payment that is insufficient to satisfy the whole indebtedness.

• When a creditor to whom a debtor owes several distinct debts receives a payment from the debtor with express or implied instructions that it be applied to discharge a specific debt and the creditor accepts the payment, the creditor is obliged to discharge that specific debt.

• The creditor may apply the amount received to any debt lawfully due from the debtor, including time-barred debts, if the debtor has not provided express instructions or there are circumstances from which his intimation can be taken.

• If neither party makes an appropriation, the payment must be applied in timeline order, meaning that the earlier debt, including a time-barred debt, must be discharged first, and if both are of equal standing, the payment must be applied proportionately.

Classification of Appropriation of Payment

Following are the major types of appropriation of payment −

Appropriation by the debtor (Section 59)

Appropriation by a debtor is defined in Section 59 of the Indian Contract Act as when a debtor borrows various debts from the same creditor and then repays them by requesting the creditor to apply this specific payment to a specific debt, and if the creditor accepts it, the debtor is said to be obligated for their appropriation.

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. The creditor has a duty or responsibility to listen to a debtor who expressly specifies at the time of actual payment and towards the discharge of a specific debt.

The payment must be applied to the payment of a specific debt. If the debtor makes no signal, the law will consider the circumstances surrounding the appropriation of payment.

• When a debtor lends various amounts of money to a creditor, section 59 of the Indian Contract Act is applied. But, if there is just single debt, Section 59 does not apply, even if it is to be paid in installments.

Clayton’s Case

In England, appropriation by the debtor is considered the most important and basic rule. Since the case of Devayman vs. Nobel, commonly known as Clayton's case. In this case, 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.

• 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.

Appropriation by creditor (Section 60)

The creditor is also competent for appropriation under Section 60. If the debtor makes any payment without appropriation, the creditor may use his discretion to cancel any remaining debt. He may use it to pay off a prior debt or to wipe out a debt with a lower interest rate. The creditor keeps his right of appropriation until the last moment, even if he is examined at the trial or before any act that makes it inequitable for him to exercise this right. In this case, the creditor has a lot of scope for exercising his right; he may place himself in a better, more appropriate position. Furthermore, he is not required to express himself in clear words while doing so.

Appropriation by law (Section 61)

Under this section, neither party is appropriate. It is used when no party makes the appropriation; then, according to the rules, the debt that was taken first will be paid off or discharged first, whether or not it is time-barred discharged first, whether or not it is time-barred. Therefore, in the case of all-time debt, debt discharge will be in proportionate agreement.

Conclusion

There is a great deal of misunderstanding or lack of understanding in contract law about certain topics related to the subject of discharge. It is because few people use terms like condition and warranty alike, and the rest is due to fault reasoning concerning things that are clearly difficult. The best way to discharge a contract is through performance.

As a result, both parties follow all of the contract's terms and then seek its discharge. Discharge by breach, on the other hand, is the most unpleasant manner of releasing duties. As a result, discharge by breach also results in damages.

Frequently Asked Questions (FAQ)

Q1. What is Clayton's rule of appropriation of payment?

Ans. The "first in, first out" concept was established in Devaynes v Noble (1816), 35 ER 767 (also known as "Clayton's case"). Payments are presumed to be appropriated to debts in the order in which they are incurred unless otherwise stated.

Q2. What is Clayton rule in India?

Ans. When the liability of any party is decided, the Clayton's case rule applies to overdrawn current accounts. The Clayton's case rule, however, does not apply when a trustee combines trust money with his own money in his banking account.

Q3. Is appropriation of payment primarily the right of debtor?

Ans. The application of payment by a creditor to the discharge of the same specific debt is called to as appropriation of payment. When money is paid, it must be applied according to the payer's rules, not the receiver's. Appropriation is a right that belongs primarily to and benefits the debtor.