Of the Indian Contract explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
When a debtor owes several distinct debts to the same creditor and pays an amount that does not clear them all, which debt does the payment reduce? Sections 59 to 61 answer in three steps: first the debtor's direction (express or implied), then the creditor's discretion, and finally the order of time. If a payment has been applied in a way you dispute, a legal notice can record your position.
If the debtor indicates, expressly or by circumstances, which debt a payment is for, and the payment is accepted, it must be applied accordingly (s.59). If the debtor does not, the creditor may apply it at his discretion to any lawful debt actually due and payable, whether or not barred by limitation (s.60). If neither party appropriates, the payment goes to the debts in order of time; debts of equal standing are paid off proportionably (s.61).
Section 59: where the debt to be discharged is indicated
"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."
Key words:
- "Several distinct debts to one person": the section is about one creditor and several debts.
- "Express intimation, or ... circumstances implying": the debtor can say so, or the circumstances can show it.
- "If accepted": the creditor who accepts the payment must apply it as indicated.
The Act's illustrations.
| Illustration | Facts | Result |
|---|---|---|
| (a) | A owes B, among other debts, Rs. 1,000 on a promissory note due on the first June, and no other debt of that amount. On the first June A pays B Rs. 1,000. | The payment is applied to the promissory note. |
| (b) | A owes B, among other debts, Rs. 567. B writes to A and demands payment of this sum. A sends Rs. 567. | The payment is applied to the debt of which B had demanded payment. |
Both illustrations show appropriation by circumstances: the due date and amount in (a), and the creditor's own demand in (b).
Section 60: where the debt to be discharged is not indicated
"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."
Three limbs:
- The debtor has not indicated, and no circumstances show it.
- The creditor may apply it "at his discretion". Note: discretion is permitted, which is wider than a duty to apply to the oldest debt.
- To "any lawful debt actually due and payable". The debt must be lawful, and due and payable. Time-barred debts are expressly included: "whether its recovery is or is not barred" by the law of limitation. This article does not discuss the Limitation Act; refer to it separately for limits on suing.
Section 61: where neither party appropriates
"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 proportionably."
Here too, barred debts are treated alike. The two default rules:
- Order of time: older debts first.
- Equal standing: spread the payment proportionably across them.
The three-step ladder
| Step | Who chooses | Section | Rule |
|---|---|---|---|
| 1 | Debtor (express or by circumstances) | 59 | Payment, if accepted, applied accordingly |
| 2 | Creditor, if debtor does not indicate | 60 | At his discretion to any lawful debt actually due and payable |
| 3 | Nobody | 61 | In order of time; equal debts proportionably |
A modern example (ours)
Kaveri Tools has three unpaid invoices to supplier Mehta Steel: Rs. 50,000 dated 1 July, Rs. 70,000 dated 1 August and Rs. 40,000 dated 1 September. All three are due. Kaveri sends Rs. 70,000 with the note "against August invoice". Under s.59, if Mehta accepts, the payment is applied to the August invoice. If Kaveri sends Rs. 70,000 with no note and nothing else points to a particular invoice, Mehta may apply it at his discretion under s.60. If Mehta also makes no appropriation, s.61 applies the payment to the debts in order of time, starting with the 1 July invoice. (If two invoices were of equal standing, the payment would be spread proportionably among them.)
What can the parties change?
The sections do not say "unless a contrary intention appears", but the first rule already makes the debtor's direction the starting point. A contract can set out how payments will be applied (for example, "first to interest, then to principal, then to oldest invoice"). Whether such a clause displaces sections 60 and 61 depends on the contract and is not answered by the text.
Practical points
- Debtors: write the purpose on every part-payment: invoice number, loan account and date, in the covering email, cheque narration or bank reference.
- Creditors: do not accept a payment with a stated purpose and then apply it differently; section 59 says it "must be applied accordingly".
- Keep a ledger of which debt each payment reduced.
- Watch limitation. Sections 60 and 61 apply whether or not a debt is time-barred; for the effect on suing, read the Limitation Act separately.
- For related rules on a debtor and creditor agreeing a new arrangement, see section 62, and for a creditor who accepts a lesser sum in satisfaction, see sections 63 to 65.
Need help with a payment dispute?
When payments and invoices do not match, a short written notice stating how the payment is to be applied, or disputing how it was applied, helps keep the record clear. Our legal notice team can prepare it from your ledger and correspondence. Send the account statement and the covering messages for each payment.
Key takeaways
- A payment accepted with a stated or implied purpose must be applied to that debt (s.59).
- If the debtor has not indicated, the creditor may apply it at his discretion to any lawful debt actually due and payable, even a time-barred one (s.60).
- If neither appropriates, payment goes to debts in order of time, and equal debts proportionably (s.61).
- Always write the purpose of each part-payment.
Read next
- Section 62: novation, rescission and alteration of contract
- Sections 57 and 58: reciprocal promises partly illegal and alternative promises
- Sections 63 to 65: remission of performance, rescission and restitution
Disclaimer: Based on the text of the Indian Contract Act, 1872 as consulted on 1 October 2026. Many questions under this Act turn on case law and on the wording of the particular contract, which this article does not cover. It is general information, not legal advice; check the official text and take advice before acting.