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Appropriation of Payment: Sections 59, 60, and 61 of the Indian Contract Act, 1872

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CA Preeti Aggarwal

On September 5, 2025

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Appropriation of Payment: Sections 59, 60, and 61 of the Indian Contract Act, 1872

In contractual relationships involving debts, confusion can arise when a debtor owes multiple distinct debts to a single creditor and makes a payment without specifying which debt it is intended to discharge. The Indian Contract Act, 1872 addresses this issue under the provisions of Sections 59, 60, and 61, which govern the appropriation of payments. These sections provide clarity on how payments are to be applied in such cases, safeguarding the interests of both debtor and creditor.

Section 59: Application of Payment Where Debt to be Discharged is Indicated

Section 59 states that when a debtor owes several distinct debts to one person and makes a payment with either an express intimation or circumstances implying that the payment should be applied to discharge a particular debt, the creditor must apply the payment accordingly if it is accepted.

Key points:

This section applies only when the debtor has indicated (expressly or implicitly) which debt the payment is meant to discharge.
The creditor cannot apply the payment to any other debt once the debtor’s intention is clear and the payment is accepted.
It applies to several distinct debts, not different parts of a single debt.

Example:
If A owes B Rs. 1,000 due on a promissory note and other debts, and on the due date pays Rs. 1,000 specifically to discharge the promissory note, the payment must be applied to that note.

Section 60: Application of Payment Where Debt to be Discharged is Not Indicated

Section 60 addresses the scenario where the debtor makes a payment but does not specify the debt to which it should be applied. In such cases, the creditor has the discretion to appropriate the payment to any lawful debt due and payable from the debtor, whether or not the creditor’s right to recover the debt is barred by limitation laws.

Key points:

The creditor’s right to appropriate is limited to lawful debts that are actually due and payable.
The creditor cannot appropriate the payment to a debt that is not due or lawful.
This section respects the creditor’s right to decide appropriation in the absence of debtor’s instructions.

Example:
If a debtor owes three debts and pays a sum without specifying which debt it is meant to clear, the creditor can choose to apply that payment to any one of the debts due to them.

Section 61: Application of Payment Where Neither Party Makes Any Appropriation

Section 61 provides a default rule for appropriation when neither the debtor nor the creditor indicates how the payment is to be applied. In such cases, the payment is applied to the debts in the order of time — meaning the oldest debt is discharged first. If the debts are of equal standing (incurred at the same time), the payment is applied proportionately to each debt.

Key points:

This section acts as a fallback mechanism.
The payment discharges the oldest debts first (first in, first out).
If debts have the same date, the payment is divided proportionally.

Example:
If Rahul owes Priya Rs. 10,000 in January, Rs. 15,000 in March, and Rs. 20,000 in July and makes a payment without specifying which debt it covers, the payment would be applied to the January debt first.

Importance of These Provisions

These appropriation rules help avoid conflicts and misunderstandings in the payment of debts, ensuring fairness and clarity in financial transactions. They reflect the principle that the debtor’s intention should be honored first, then the creditor’s discretion, and finally the court’s intervention if neither party specifies the appropriation.

Conclusion

The provisions of Sections 59, 60, and 61 of the Indian Contract Act, 1872 collectively provide a comprehensive framework for the appropriation of payments in cases of multiple debts between the same parties. They emphasize respecting the debtor’s instructions, followed by the creditor’s right, and lastly a legal default rule to discharge debts in chronological order. Understanding these provisions is essential for both debtors and creditors to ensure clarity and avoid disputes in contractual financial dealings.