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Allocation of payments and prescription - an appropriate remedy?

In January 2015, John and Michael enter into a contract in terms of which John will supply and deliver goods to Michael, and Michael will pay John’s invoices for same. John supplies and delivers the goods, and Michael makes regular, albeit short, payments towards John’s invoices. Opting against souring the relationship by demanding full payment, John elects rather to send Michael monthly statements of account, hoping that the ever-escalating outstanding balance will eventually trigger Michael’s conscience.

In July 2018, Michael terminates the contract and John realizes, to his horror, that in the three and a half years the contract has endured the outstanding balance has burgeoned to some R500 000.00. John’s attorneys immediately sue Michael for payment of the outstanding balance, only to be met with a special plea of prescription in respect of those invoices which were part-paid between January 2015 and July 2015 (i.e. those debts older than three years, which would ordinarily be extinguished by prescription).

In the absence of any agreement between the parties as to how payments will be allocated, when a debtor who is indebted to a creditor in respect of more than one obligation makes a payment of less than the total amount due by him to the creditor in respect of all such obligations, appropriation of payments occurs. In summary, the payment made by the debtor to the creditor will be appropriated, in accordance with common law rules, to the debtor’s debts as follows:

1. Interest is settled before capital (see Standard Bank v Oneate 1998 1 SA 811 SCA);

2. Enforceable debt is settled before unenforceable debt (see Pfeiffer v FNB 1998 3 SA 1018 SCA);

3. The most onerous debt is settled first (see Miloc v Logistic Tech 2008 4 SA 325 SCA);

4. Equal debts are settled in chronological order (see Italtile v Touch of Class 1982 1 SA 288 O);

5. Simultaneous equal debts are settled proportionally (see Pfeiffer supra).

Assuming, in our scenario above, that John and Michael did not agree on the allocation of payments, and that no interest or security/surety was involved, John may be able to rely on the common law rules governing appropriation of payments to remedy the problem of Michael’s special plea viz. that payments which were received by John were appropriated to the oldest debt first.

In the recent case of Premier Attraction 300 CC v City of Cape Town 2018 JDR 0822 SCA, Premier attempted to defeat a special plea of prescription in exactly this manner. Claiming for non-payment of contractual price increases arising from 2010 to 2012, which would at the time of instituting action otherwise have been prescribed, Premier alleged that it was entitled to allocate payments which it had received from the City of Cape Town to the oldest outstanding debt owed to it by the City. Unfortunately, the court, having dismissed the appeal for other reasons, made only an obiter dictum (passing comment) in this regard to the effect that Premier did not state that it had in fact made these allocations, and that the facts of the case were inconsistent with such an ex post facto construction.

It is submitted that, instead of placing reliance on the rules of appropriation to address prescription of historical debt, a far simpler method of protecting yourself as a creditor is to include a term in your agreement to the effect that you have the right to allocate all payments received by the debtor as you see fit. For assistance in drafting such a clause, or indeed if you are concerned about recovering historical debt, you are welcome to contact our offices.

Contributor:  TAMSIN JONES (Associate) (Litigation Department) (Umhlanga Office)

E-Mail:  tamsinj@tmj.co.za

Tël:  031 566 2207