Legal Memorandum: Application of Advance Payments in Contracts

Issue: Can advance payments be imposed in a contract in a loan document that is not entirely free from ambiguity such that it will relieve a business of its monthly payment obligations?

Area of Law: Banking & Finance Law, Business Organizations & Contracts
Keywords: Advance payments; Loan agreement; Ordinary rules of contract construction
Jurisdiction: California, Federal
Cited Cases: 528 P.2d 1041; 228 P.2d 333; 265 P.2d 160; 421 So. 2d 758; 446 P.2d 220; 470 S.W.2d 633
Cited Statutes: None
Date: 05/01/2011

Applying ordinary rules of contract construction, most courts to have considered the application of advance payments have held that, when a contract gives the payee a right of prepayment, any extra payments in excess of a scheduled installment payment are applied to the outstanding loan principal without excusing any scheduled payments called for by the loan agreement. 

In the absence of an agreement to the contrary, it is undoubtedly the rule in installment cases providing for the payment of a specific amount or more at fixed intervals, that an excess payment made prior to or on one installment date is not effective to reduce the amount of or obviate the necessity of paying subsequent installments as they fall due according to the agreed schedule.

Smith v. Renz, 265 P.2d 160, 163 (Cal. Ct. App. 1954) (emphasis in original). 

In Harman v. Walsh, a real estate contract called for a $100 down payment with “monthly payments of $100 or more dollars, per month on the 1st day of September, 1945, and the first day of each succeeding month thereafter.”  Harman v. Walsh, 228 P.2d 333, 334 (Cal. Ct. App. 1951).  When the purchaser made excess payments in some months and failed to make the $100 payments in others, the seller declared the purchaser in default of the purchase agreement.  Reviewing the terms of payment in the contract, the court found the purchaser in default. 

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