Be wary of the fine print in your contract about how payments are to be treated when received.
ACCORDING to the Oxford Advanced Learner’s Dictionary, to misappropriate is to take somebody else’s money or property for yourself, especially when they have trusted you to take care of it.
Misappropriating is a criminal offence, defined in the Penal Code in Section 403: “Whoever dishonestly misappropriates, or converts to his own use, or causes any other person to dispose of, any property, shall be punished with imprisonment for a term which shall not be less than six months and not more than five years and with whipping and shall also be liable to fine.”
“Appropriation of payments”, on the other hand, in the context of business and financial dealings, refers to how payments are to be treated when received, especially in the context of outstanding sums that are due and which need to be paid.
A reader asks whether there is such a topic in law. Whilst not a major subject, the aspect of appropriation of payments is referred to in the Contracts Act 1950. In fact, three sections deal with the subject of appropriation of payments.
Ordinarily, one may feel that the subject of appropriation of payments may not be of any significance. This is because one can owe another person money and when the payment is made, the debt is extinguished. So what does it matter?
However, it does, because if and when a dispute arises there can be issues as to whether the money has been correctly demanded or indeed is payable. And then there is the law of limitations which, broadly and generally, creates a six-year limitation period in Peninsular Malaysia but in some cases, a shorter period in Sabah and Sarawak.
Let me provide an illustration. One owes RM10,000 to another person for a loan more than six years ago. There is also RM10,000 owing to the same person for rental which is very recent and therefore within the limitation period.
If RM10,000 is paid without saying anything, what is the effect?
Section 60 of the Contracts Act 1950 reads: “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.”
However, when it is not stated how or to which debt the payment is to be applied, then the law allows the creditor to choose how the payment received is to be treated. This is on the basis of Section 61 of the Contracts Act which reads:
“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.”
Thus a debtor could, where there are two debts, specify that payment is for the rental and escape repayment of the loan. Of course this may not be morally the right thing to do, but this is how the law provides for the parties to deal with the appropriation issue.
But what if neither party pays attention to the payment sent and received? The sender does not state which debt it is for and the recipient does not state to which debt the payment has been applied. In such a case Section 62 of the Contracts Act 1950, which is somewhat self-explanatory, will apply. It reads:
“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 relating to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.”
Of course there are cases where the right to apply the payment received may have been agreed to very much in advance. This is the case with the documents involving financial institutions, where clauses are formulated to give very broad rights to the lender.
So it was in Ambank (M) Berhad v. Peter Marajin @ Peter Marazing & Ors which arose out of the manner in which the bank had treated payments that had been made and received.
The bank, the plaintiff, had granted a housing loan to the defendant with a monthly instalment payment of RM1,115.00 for the first year. The defendants had not failed to pay the monthly instalment amounts provided for in the loan agreement.
However, the plaintiff used part of the instalment payment made by the defendant to pay for insurance premium paid on the defendants’ behalf and legal fees incurred by the plaintiff, thus causing arrears in payment. In this connection, the bank relied on Section 14.08 in the loan documentation, which provided:
“The Chargee may apply any payment received from the Chargor(s) or any party towards satisfaction in whole or in part of the principal, interest or other sum then due and payable from the Chargor(s) under this instrument in any order that the Chargee deems fit, and the Chargor(s) hereby waive his/their right of appropriation under Section 60 of the Contracts Act, 1950.”
The objection of the borrower was that the section in question was invalid because it amounted to contracting out of Section 60 of the Contracts Act 1950.
However the Court took the view that Clause 14.08 was not invalid.
The Court decided that despite what was provided for by the Contract Act 1950 as to appropriation of payments, it was possible for both parties to contractually agree – meaning contract out of the Contracts Act 1950 – so that the bank could in principle apply the payment received towards payment of legal fees and interest.
Bhag Singh the STAR Home > Opinion > Columnists Law For Everyone Published: Thursday October 22, 2015 MYT 12:00:00 AM