Introduction:

".Payment" denotes the specific performance of an obligation to give a sum of money to

another. He to whom the money is owing is called creditor; he from whom it is due, debtor;
and the sum itself, debt. The word debt is also used to denote sometimes the debtor's
obligation, and sometimes the correlative right of the creditor. According to the above
definition, payment presupposes not only a sum of money due, but a sum of money which is
either ascertained in amount, or at least capable of being ascertained by a mere arithmetical
process. It is obvious that an obligation to pay an unascertained sum' cannot be specifically
performed at all; until the amount of the money owing be definitely fixed, an obligation to
pay cannot be determined by performance. However, when the sum is ascertained, it may be
treated as if it had previously been so. Again, where there is no obligation there can be no
payment, but only a gift, loan, and where a right to a sum of money is determined otherwise
than by the actual receipt of that sum, there is likewise no payment, in the proper sense of the
word. The right may be extinguished in a mode more or less similar to payment, as by accord
and satisfaction, where something other than the sum due is accepted in satisfaction of the
right to that sum; or by set-off, where the right to a sum of money is extinguished wholly or
partially by an obligation to pay another sum of money to the person from whom the first is
due ; but these modes of extinguishing a right depend upon principles, and are governed by
rules materially different from those applicable to payment. With reference to the subject-
matter of the present inquiry, it may be useful, although scarcely necessary, to remind the
reader that the position of a creditor is not, juridically speaking, altered by a refusal to accept
in satisfaction of his right, something other than that which is due to him, whilst his position
is most naturally altered by a refusal to accept payment. Such a refusal is, inpoint of fact, a
refusal to allow the debtor to free himself from an obligation by that which, ex hypothesis' a
due performance of it. Refusal to accept a partial payment (sometimes called a payment on
account,) is, however, obviously very different from a refusal to accept complete payment,
and is by no means attended by the same consequences. Ss. 60, 61, by a mortgage bond the
debtor agreed to repay the loan made to him by the creditor in kind by delivery of certain
species of grain, or at his option in cash at a specified rate of interest, and the creditor applied
several payments in grain made by the debtor to other antecedent debts, it was held that the
creditor was not entitled to do so, as the stipulation to repay the loan by delivery of grain,
combined with the absence of evidence to show that the previous debts were to be liquidated
by payments of grain, was a circumstance indicating that the payment was to be applied to
the debt secured by the mortgage bond.

Under this section the creditor has a discretion to appropriate a payment by a debtor either to
the principal or the interest of his debt. It is for the debtor to show that he had acted in such a
way in respect of the payment as to limit the discretion of the creditor (u). As stated by the
Judicial Committee, " unless the [debtor] could satisfy [the Court] that there had been an
appropriation at the time of payment to the payment oft of the principal, the creditor had a
right to consider it as a payment on account of the interest ". The same rule applies to
judgment debts. Thus when a sum is realised on account of a decree, that amount is to be
deducted from the interest and not from the principal. " It appears to be a well-settled practice
of the Courts to appropriate payments made upon a bond first to the interest due thereon, and
thereafter, if any balance remains, to the principal ". Where a payment is made by way of
dividend or composition for the benefit of creditors generally, the payments must, by the
nature of the transaction, be rateably apportioned among the several debts ; and in any
question arising with third parties, as, for example, sureties for any portion of the debts, every
payment is deemed to be specifically appropriated " as so much in each and every pound of
the whole amount of the debt ". When a debtor, who owes several debts to the same creditor,
makes a payment which is insufficient to satisfy the whole indebtedness, the question arises,
"as to which of the debts the payment is to be applied?" Sections 59 to 61 of the Contract Act
answer this question and lay down the following rules:

1. Debtor's express instruction must be followed:

If there are no express instructions, then debtor's implied intention should be gathered from
the circumstances attending the payment and appropriation must be done accordingly.

2. Debtor's implied intention must be followed:

If there are no express instructions, then debtor's implied intention should be gathered from
the circumstances attending the payment and appropriation must be done accordingly.

Illustrations :

(a) A owes B, among other debts Rs. 1,000 upon a promissory note wi. ch falls due on 1st
June. He owes B no other debt of that amount. On the 1st June A pays to B Rs. 1,000. The
payment is to be applied to the discharge of the promissory note.

(b) A owes to B, among other debts, the sum of Rs. 567. B writes to A and demands payment
of this sum. A sends to B Rs. 567. This payment is to be applied to the discharge of the debt
of which B had demanded payment.

3. Appropriation by creditor:

If there is no express or implied direction by the debtor regarding appropriation, then the
creditor has got the option to apply the payment to any debt lawfully due from the debtor,
including a debt which is barred by the Limitation Act.

4. Appropriation by law:

Where neither the debtor nor the creditor has made any appropriation, then according to law,
the payment is to 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.

5. When principal and interest both are due?

If a payment has been made without expressly stating whether it is towards interest or
principal, payment is to be applied towards interest first, and then the balance to principal
(Srinivasulu vs Kondappa).

It may be emphasized that if the creditor accepts the payment, he must follow the above rules
of appropriation, otherwise he must refuse to accept the payment.

We proceed now to examine the mutual rights of debtor- and creditor when a payment
is about to be or has been made in respect of debts due from the former to the latter.

In the first place, then, let us inquire a-to the Bight of the Debtor. When a person is indebted
to another on various accounts, the 'former has the option of paying which he likes first, and
is at -liberty to appropriate any payment he may make to whichever of ,the debts he chooses.
This doctrine is evidently derived from the -Roman law. Ulpian says: " Quotie quis debitor ex
pluribue vausms unum deUitum olvit, est in arbitrio solventii, quodpotius ebtum votuerit
olutum; et quod dixerit, id erit solutum."' This vtle was firmly established in the reign of
Elizabeth, as appears - a debtor was entitled to have a payment made by him appropriated to
the account upon which he expressly made it. The reason for this rule is variously given:
Ulpian says :--Possumus vnim certain legem dicere ei quod solvimu." Other writers refer it to
the fact that the money actually transferred belongs to the debtor, who can part with what is
his own on his own terms, or not at all. It has already been observed, that were the rule
otherwise, the law would lend its assistance to the prevention, on the part of the creditor, of
the due performance of the obligation to which the 'debtor is subject; and this is, perhaps, as
satisfactory a reason as any. The rule in question is not, however, one -which obtains under
all circumstances and at all times: for, -first, it does not necessarily apply unless the payment
is sufficient completely to extinguish the debt on account of which it is made; and, secondly,
it applies only where the debtor appropriates the payment at the time he makes it. These
limitations of the rule require further development. A creditor is not prejudiced by refusing to
accept , partial payment on account of a larger sum due.' If, therefore, he does not choose to
accept a partial payment on the account upon which the debtor desires to make it, the creditor
is in a position either to decline altogether to take the money, or to insist, if he takes it, upon
applying it to the account which best suits himself. If a partial payment is accepted without
objection, the inference naturally is that the creditor agrees to apply it to the account to which
it was expressly or impliedly appropriated by the debtor, and the money must be treated as
appropriated accordingly. But if at the time a partial payment is made, the creditor refuses to
accept it unless he is allowed to appropriate it to some particular account, the inference, if the
money is left with him, is, that the debtor agreed that the money should be appropriated in
accordance with the declared will of the creditor. The rule, therefore, so broadly laid down,
applies only 1. where the sum paid equals all that is due on the account on which it is paid;
or, 2. Where the sum paid (being less than all that is due on the account on which it is paid) is
received by the creditor without objection. In other cases the rule which applies is Quidguid
recipitur, recipitur in modum recipientis.' 2. By the law of this country the period within
which a debtor can exercise his right of appropriation is very limited; so limited, that unless
exercised at the time of payment his right to appropriate is gone forever. The debtor is not
indeed called upon to state expressly upon what account he makes the payment; that may
sufficiently appear from other circumstances. But, notwithstanding an opinion to the contrary,
reported to have been expressed by Lord Kenyon at Nisi Prius,-' the law appears to be clearly
settled that the right of the debtor to appropriate a payment must be exercised, if at all, at the
time the payment is made, and not afterwards. This rule may be thought extremely harsh, but
it must not be forgotten that in the generality of cases payments on account are not equal to
what is owing on any account in particular, and that therefore it more commonly occurs than
not that the debtor has no right at any time to insist on an appropriation to which his -creditor
would not assent. In the majority of cases a contrary rule would be extremely prejudicial to
the creditor, as it would deprive him of the opportunity of objecting at the fitting time to
receive a payment on the account desired by the debtor. And with regard to payments which
are not partial, when it is considered that payment of a sum exactly equal to what is due on
any particular account goes far to show an appropriation by the debtor to that account, the
rule will by no means be found to be so harsh upon the debtor as at first might be supposed.
Whether, however, the rule be thought justifiable or not, the cases already cited and those
which will be presently referred to, show that it is acted upon with great strictness by English
judges. We will in the next place speak of the Right of the Creditor. If the debtor when he
makes a payment does not appropriate it to any debt in particular, the laws of England and of
most countries, agree in conferring a right of appropriation upon the creditor. The extent of
this right as well as the time at which it must be exercised, require to be examined. As regards
the time at which the creditor can exercise his right, the Roman law' expressly declares that
he must make the appropriation at the time of payment: Permittitur ergo creditor constituere,
in quod velit solutum, . . sed constituere in re presenti, hoc est statim atgue solutum est. This
rule, however, does not prevail in this country.' In the well known case of Peters vs.
Anderson,1the creditor was held to have appropriated a general payment by the mode in
which he framed his action. In Sinson vs. IngLam,2Best, J., thought the creditor had only a
reasonable time ; but in the latter case of Philpott vs. Jones, 3it was expressly decided by Lord
Denman and the other judges of the Court of Queen's Bench, that the appropriation of a
general payment might be made by the creditor at any time, at least at any time before action.
This decision has been approved by the Court of Common Pleas.' Moreover, no appropriation
by the creditor is binding until communicated to the debtor ; and, therefore, until such
communication has been made, a creditor can change his mind as often as he likes. Simson
vs. Inglam,4 is the leading authority for this doctrine, has never been doubted.' Upon the
whole, therefore, we conclude that a creditor can exercise his right of appropriation at any

1 (5 Taunt. 596,)

2 (2 B. & C. 65,)

3 (2 A. & E. 41,)

4 (2 B. & C. 65,)
time he pleases, but that when once he has, by bringing an action or otherwise, notified to his
debtor what appropriation has been made, no different appropriation is allowable. 2. As
regards the debt to which the creditor can appropriate a general payment, the Roman law lays
down as its fundamental principle, that the creditor must act towards his debtor as he would
have the debtor act towards him, if their relative position were reversed ;'" and it is only in
cases of comparative indifference to the debtor that the creditor is allowed to make such
appropriation as he pleases : Quoties vero non dicimus id, quod solutum sit, in arbitrio est
accipientis, cui potius debito acceptum ferat, dummodo in id constituat solutum, in quod ipse,
si deberet, esset soluturus, quoque debito se exoneraturus esset, si deberet .......... .quissimum
enin visurn est ereditoremn ita agere ren debitoris, ut suam ageret. To what extent this rule
was carried is not clear; it could however, only apply where a payment was attempted to be
appropriated by the creditor, adversely to the interest of his debtor, and without his
knowledge. The rule could not apply if the appropriation were attempted to be made in spite
of the wish of the debtor, for, as we have seen, he had the option of making such
appropriation as he liked, and the creditor's right could only be exercised statim atque
solutum est; nor could the rule apply if the debtor, knowing of the appropriation, were silent,
for silence under such circumstances, would be deemed consent. According to the law of our
own country, a creditor is by no means bound to make such an appropriation as best suits the
convenience of his debtor. The debtor Can take care of himself by stating in liquidation of
what debt he makes a particular payment; And if he does not either expressly or impliedy
exercise this right, the creditor can appropriate a payment to the discharge of whatever debt
he pleases;' provided, of course, it be owing from the person by or on whose behalf the
payment is made. To such an extent is this allowable, that a debt, payment of which cannot be
actively enforced, may be liquidated by a creditor in preference to a debt which the creditor
could by action be compelled to pay. Thus, if one of two debts be barred by the Statute of
Limitations, the creditor is at liberty to appropriate a general payment in liquidation of the
barred debt.2 Moreover, the debts need not be of an equally high nature; whether they are or
not is wholly immaterial. In Peters vs. Anderson, 5 and Ohitty vs. Naish,6 , the creditor was
allowed to appropriate a general payment to a simple contract debt in preference to a
specialty debt, and as, in both instances, the specialty was the older of the two debts, the same
cases are authorities to show that the creditor's right of appropriation is independent of the
relative ages of his demands.'

APPLICATION OF PAYMENTS BY THE CREDITOR IN THE ABSENCE OF ANY

DIRECTION BY THE DEBTOR-

It is a general rule that where a debtor owing on several demands to the same person, makes a
payment without directing its application, the creditor may apply it to that obligation which
he may elect.' Though creditor need not make this election immediately, he does have to
5 5 Taunt. 596,

6 2 Dow. 511
exercise the right before suit is brought upon the demand.: But after the creditor has applied
the payment the debtor is bound by his application.4 This right of the creditor to make the
application in the absence of any appropriation by the debtor is subject to some restrictions.
Where the rights of third parties have intervened, the creditor cannot make an application
which would be injurious to them; nor can he apply the payment to an illegal demand.6 But
the creditor may apply the payment to a debt which is merely un- enforceable because of the
statute of frauds.7 So he may make an application to a claim which is barred by the statute of
limitations.8 But on the question as to whether the bar of the statute applies as to the
remainder of the debt by such application, the cases are conflicting. One line of authority
holds that the remainder of the debt is not thereby taken out of the statute.9 This ruling is
upon the ground that, in order to revive the debt, the debtor must have intended to revive, and
that the mere making of a general payment does not raise such a presumption.10 The contrary
view is based upon the theory that the debtor is pre- sumed to have intended any application
which the creditor has made 11 and that an intended payment on the debt is a recognition
thereof which takes it out of the statute. By the weight of author- ity the creditor may apply a
general payment to a debt not al- ready barred by the statute of limitations, and thereby
interrupt the running of the statute.12 In the case of a debt not due for obvious reasons a con-
trary rule applies and there can be no application thereto, without the consent of the debtor.13
The recent case of D'Yarmtett v. Cobe (Okla), 151 Pac. 589, is in line with this ruling. If the
principle enunciated by those courts which hold that a debt barred by the statute of limitations
is taken out of the operation of the statute by the creditor's application of a payment thereon,
is applied to this kind of a case, the opposite result would be reached. It is unlikely that any
court will carry a presumption of intention to this extent and, aside from the question of the
soundness of that theory in regard to the debts barred by the statute of limitations, it is hardly
relevant in the case of debts not due, because of the great dissimilarity of liability on a debt
past due and barred and on one not yet due. In D' Yarntett v. Cobe, the note not due was also
one against which the defendant claimed the defense of failure of consideration. Whether a
creditor has a right to apply a general payment to such a note was not decided in that case
except incidentally. It would seem that such an application would be compelling the debtor to
pay a debt which might be without foundation, and hence should not be permitted.

Must a creditor obey debtors direction as to which of several debts a

payment is to be put towards?

Except that I had a feeling creditors were obliged to apply debtors payments to the oldest
outstanding debt, I have never known until recently what the law was exactly in relation to a
creditors obligations and entitlements where a debtor makes a payment which could be
applied to one of several debts. I suspect many lawyers are in the same situation. Experience
teaches that allocations of payments against debts can have many ramifications, the most
obvious of which are in relation to interest, and the application of statutes of limitations. This
statement was recently re-stated as good law in Victoria:
When a debtor is making a payment to his creditor he may appropriate the money as he
pleases, and the creditor must apply it accordingly. If the debtor does not make any
appropriation at the time when he makes the payment the right of application devolves on the
creditor.

It is a statement of Lord McNaughten in Cory Brothers & Company v Owners of Turkish

Steamship Mecca7 and Deeley v Lloyds Bank Limited 8 is apparently to like effect. In
response to the original version of this post, two readers, fellow barrister blogger in
MelbournePaul Duggan and Brian Lambert of Brisbanes Birch & Co, alerted me to an
additional proposition, being the one I had had a vague undertanding of. Namely that where
neither creditor nor debtor makes any conscious appropriation (as will frequently be the
case), the default position is that the payment will be applied to the oldest debts
first: Devaynes v Noble (Claytons Case)9.
The rule was re-asserted by Mason CJ and Dawson, Toohey and Gaudron JJ inSibbles v
Highfern Pty Ltd 10. His Honour said:
A debtor who owes two debts to a creditor is entitled to appropriate a payment which he
makes to his creditor to one debt rather than to the other. If he omits to do so, the creditor
may make the appropriation. If neither makes any appropriation, the law appropriates the
payment to the earlier debt. If there is specific appropriation by the debtor cadit quaestio. In
the absence of a specific appropriation it is a question of fact whether there was any
appropriation by the debtor. To constitute an appropriation there must be more than an
intention to appropriate by the debtor. I respectfully adopt the following passage from the
judgment of Greene L.J. in Leeson v. Leeson 11:-

7 [1897] AC 286 at 293

8 [1912] AC 756, 783

9 (1816) 1 Mer 572

10 (1987) 164 CLR 214

11 (1936) 2 K.B. 156 at pp. 162-163

When, however, he does not notify the creditor of his intention, and when the circumstances
are such that the creditor receives the payment merely in satisfaction of the debts and the
payment is not more appropriate to the payment of the one debt than to that of the other the
creditor is entitled to make the appropriation. When it is said that there need not be an express
appropriation of a payment, but that the appropriation can be inferred, that does not mean that
appropriation of a payment can be inferred from some undisclosed intention in the mind of
the debtor. It is to be inferred from the circumstances of the case as known to both parties.
Any other view might lead to injustice, as the creditors right to appropriate a payment would
be defeated. When the matter is examined upon principle it will be found that an undisclosed
intention in the mind of the debtor is not sufficient to support an appropriation. If authority is
needed for that proposition it can be found in the judgment of Lush J. in Parker v. Guinness 12
where he said: What is to be considered is this. Is the true inference to be drawn from all the
circumstances of the case that the debtor paid the moneys generally on account, leaving the
creditor to apply them as he thought fit, or is the true inference that he paid them on account
of special portions of the debt for the purpose and with a view to wipe these out of the
account? His undisclosed intention so to do would, of course, not benefit him. It is what he
did in fact, and not what he meant to do that is to be regarded. A debtors undisclosed
intention to appropriate a payment to one of two debts owed by him to a creditor cannot
benefit him.

12 27 Times L.R. 129, 130