Most contracts for the sale of goods and services contain a standard provision regarding the application of payments on overdue accounts, such as: “When more than one invoice is past due at the same time, Seller shall be entitled, at its sole discretion, to specify the particular invoice to which any subsequent payment shall be applied.” Additionally, those contracts also may contain a provision that payments on overdue invoices shall first be applied to any accrued interest, and thereafter to any amounts outstanding.
The U.S. Fifth Circuit recently concluded that a seller’s confirmation of payment of an invoice in full precluded “reallocation of that payment in a different manner at a different time.” World Fuel Services, Inc. v. MAGDALENA GREEN M\V, No. 11 – 30722 (5th Cir. Mar. 14, 2012). As a result, a bunkers supplier’s arrest of a vessel for alleged late payment of an invoice for fuel was properly vacated because the seller had acknowledged the underlying debt had been paid in full.
SESL executed a general bunkers contract with WFS, which contained the payment allocation provisions mentioned supra. SESL subsequently time chartered the MAGDALENA GREEN and another vessel, the UTA, and thereafter purchased approximately $245,000 in bunkers from WFS for both vessels. After WFS demanded payment in full for fuel supplied to both vessels, SESL forwarded an e-mail: “Please find the attached remittance slips. All payments are made. Please re-confirm thanks.” WFS replied, “Thanks – confirmed all paid.”
Six months later, WFS filed suit against the MAGDALENA GREEN for SELS’s untimely payment for fuel, and the vessel was arrested. In response to the owners’ defense that the invoice for the bunkers provided to the vessel had been paid in full, WFS argued that the provisions of its contract allowed it to apply payments to accrued contractual interest and fees from older invoices, presumably from other vessels, leaving the invoice for the bunkers provided to the MAGDALENA GREEN outstanding after receipt of the $245,000 payment from SESL. The Fifth Circuit affirmed the district court’s dismissal of WFS’s suit.
The court noted the payment allocation provisions of WFS’s contract. However, the court concluded WFS’s unconditional acceptance of that payment as “all paid” nullified those payment allocation provisions.
By confirming “MAGDALENA GREEN paid today,” WFS exercised its discretion to specify the invoice to which SESL’s payment would be applied. WFS has the contractual right to allocate payments when they are made, but it does not have the right to then allocate those payments in a different manner at a later time.
Id. at 4. Once the MAGDALENA GREEN’s debt to WFS had been paid, its liability and WFS’s maritime lien were extinguished.
In order for ship suppliers to take advantage of the payment allocation provisions of their contracts, they need to first decide how they are going to allocate such payments. If they allocate the payment first to older invoices and/or to interest, prudent practice suggests that they advise their purchasers within a reasonable time after payment is received as to how the payment has been applied to the overdue account. As the Fifth Circuit concluded, much like Lady Macbeth’s lament, once the seller tells the purchaser that an invoice is “all paid,” it cannot undo what’s been done.