As a rule, when a debtor makes a partial payment towards a series of debts, the debtor has the right to choose the debts to which the payment is to be allocated. The corollary to this rule is that if the debtor does not choose, then the creditor can do so.
As an example, assume that a contractor has delivered a series of nine invoices for nine small contracts over 10 months and that the work for the last four invoices is still lienable. Assume that the owner pays a lump sum that is insufficient to pay all the invoices, but is sufficient to pay the last four invoices. If the owner is smart, it specifies that the payment encompass those invoices; if the owner does not specify, then the contractor should allocate the payment to the older invoices.
These rules were discussed in a construction context in Colautti Construction Ltd. v. Ashcroft Development Inc., a 2009 decision of the Ontario Superior Court of Justice.
The general brought a trust fund action against the owner regarding seven separate contracts on two projects.
The owner had issued many cheques to the general that it allocated to specified invoices. However, it did not allocate its last cheques to any one invoice or project. The general actually contacted the owner to request the invoice allocation, but the owner did not respond. Accordingly, the general applied the cheques to the oldest debts. In doing so, the general applied $394,000 to invoices other than the seven on which the general was suing.
In the action, the owner claimed that the general ought to have allocated those funds to the seven invoices and, had it done so, the owner would have owed no or less money for the seven invoices.
The judge found that there had been breaches of trust. There was insufficient evidence regarding the actual monies owed and the judge directed a reference in that regard. We will not comment on these aspects of the decision.
The judge stated that once the general requested the allocation and the owner ignored the request, the general was free to allocate the cheques as it wished. Accordingly, whatever was due on the seven invoices was not reduced by the aggregate of the cheques.
The judge noted that the parties had not given any real case law on point regarding the allocation. That was unfortunate because prior case law allows a creditor to choose the allocation if the debtor does not. There is no necessity for the creditor to enquire. The prior law has existed for over a hundred years and judges continue to apply it.
We do not understand why the owner was fighting the action on this issue. The other invoices, not part of the seven in issue, were for work done on the same two projects. If the general did not apply the cheques to the other invoices and had to apply them to the seven invoices, then the general would have included the other invoices as part of its breach of trust action.