This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Payment made in pursuance of a pre-existing contract as to its application is treated in law as being so applied,1 especially if the rights of third persons are prejudiced thereby, as where, in reliance upon an agreement to apply a payment to a debt secured by a deed of trust, a third person has acquired a lien upon the property secured by such trust deed.2 Under a contract to pay rent by doing certain work no further application of such payment is necessary. The mere doing of such work operates as such payment.3
Payment made pursuant to a contemporaneous agreement is treated in law as being so appropriated.4 If a debtor tenders a payment on condition that such payment, as well as former payments, shall be applied to a certain debt, the acceptance of the later payment amounts to an application of such payment and of such prior payments.5 A prior direction, which does not amount to a contract, may be changed by the debtor when payment is made.6
If there is no agreement as to the application of a payment, and the debtor intends a specific application of a payment made by him, he must notify the creditor of his intention.7 Such notice may be given in express terms,8 or it may be implied from the circumstances of the payment.9 If the interest of a debtor under a conditional sale contract will be forfeited if payments made by him are not applied to a note which he has given in pursuance of such contract of conditional sale, instead of being applied to a demand note, his conduct in making payments without indicating to which note they are to be applied will be regarded under the circumstances as equivalent to a direction to apply them to the note, default of which will terminate his rights under the contract.10
14 Smith v. Moore, 112 Ia. 60, 83 N. W. 813.
15 Wilcox v. Fairhaven Bank, 89 Mass. (7 All.) 270.
16 Maddox v. Teague, 18 Mont. 593, 47 Pac. 209.
17 Maddox v. Teague, 18 Mont. 593, 47 Pac. 209.
1 Ketchum v. St. Louis, 101 U. S. 306, 25 L. ed. 999; Wyman v. Herard, 9 Okla. 35, 59 Pac. 1009.
2 Coney v. Laird, 153 Mo. 408, 77 Am. St. Rep. 721, 55 S W. 96.
3 Stanley v. Turner, 08 Vt. 315, 35 Atl. 321.
4 Augusta Cooperage Co. v. Parham, - Ark. - , 213 S. W. 737; Hansen v. Rounsavell, 74 III. 238 (obiter).
5 Royal Colliery Co. v. Alwart Bros. Coal Co., 276 III. 193, 114 N. E. 499.
6 Ray v. Borgfeldt, 169 Gal. 253, 146 Pac. 679 (obiter).
7 Long v. Miller, 93 N. Car. 233; Hill v. Southerland, 3 Va. (1 Wash.) 128.
The secret intention of the debtor has no legal effect.11 An entry or memorandum made by the debtor and not brought to the attention of the creditor is not a sufficient application.12
8 Terhune v. Colton, 12 X. J. Eq 232.
9 England. Shaw v. Picton, 4 Barn. & C. 715.
Arkansas. Terry v. Klein, 133 Ark. 366, 201 S. W. 801.
California. Kay v. Borgfelt, 169 Cal. 253, 146 Pac. 679.
Connecticut. Cavanaugh v. Marble, 80 Conn. 389, 15 L. R. A. (N.S.) 127, 68 Atl. 853.
North Carolina. Stone Co. v Rich, 160 N. Car. 161, 75 S. E. 1077 (obiter).
Vermont. Ballantine v. Fenn, 88 Vt. 166, 92 Atl. 3.
10 Cavanaugh v. Marble, 80 Conn, 389, 15 L. R. A. (N.S.) 127, 68 Atl. 853.
"It is unquestionable that the debtor in making a payment may ordinarily direct to which of two or more debts due from him to the creditor the payment shall be applied, and, if he fails to so direct the creditor ordinarily may apply it as he may elect. But it is not necessary that the debtor should direct the application in express words. If his intention as to the application appears from the facts and circumstances connected with the payment and his purpose can be fairly implied therefrom by the creditor, that is enough. Sawyer v. Tappan, 14 N. H. 352; Lauten v. Rowan, 59 N. H. 215; Roakes v. Bailey, 55 Vt. 542;
Pardee v. Markle, 111 Pa. 548, 56 Am. Rep. 299, 5 Atl. 36; Perot v. Cooper, 17 Colo. 80, 31 Am. St Rep. 258, 28 Pac. 391; Newmarch v. Clay, 14 East, 239. The court has found that it was always the intention of the payors that the payments should apply on the note for $74250. We think that the court was right in its conclusion that the facts and circumstances known to the plaintiffs at the time the payments were made were such that they were bound to presume that the payments were to apply on that note. It was payable in instalments. The conditions of the sale were broken if the instalments were not paid. The first two payments were made before the existence of the mortgage note. The latter note was not payable in instalments, but on demand, and no actual demand for its payment is shown. Under such circumstances, the plaintiffs were not warranted in assuming that the vendees sent these payments, in-tending that the plaintiffs might apply them to either note at their option." Cavanaugh v. Marble, 80 Conn. 389, 15 L. R. A. (N.S ) 127, 68 Atl. 853.
11 Pearce v. Walker, 103 Ala. 250, 15 So. 568
12 Terhune v. Colton, 12 N. J. Eq. 232; Brice v. Hamilton, 12 S. Car. 32