What is the Rule in Clayton’s case?
Right of Appropriation: (Clayton’s Rule)
This is the right of a banker to appropriate the money paid by the customer to any one of the loans including a time- barred debt. But, however, once the customer gives specific directions regarding appropriation, the banker has no right to alter them. It is his bounden duty to carry out the instructions of the customer. In the absence of any such direction from the customer, the banker shall have the right to appropriate the payment to any debt or account according to his discretion.But the banker should inform the customer accordingly.
In case both the banker and the customer have not used their powers, the rule given in Clayton’s case would be applied. In this case, it was laid down that if no specific appropriation is made, whether by the’ debtor or the creditor, the law appropriates the payment by discharging or reducing the first item on the debit side of the current account by the first item on its credit side. Thus under this rule the sum first paid in is the sum that is first paid out. This rule is popularly known as the Rule in Clayton’s case and vitally affects current a accounts, especially when overdrawn. The facts of the case are it as follows :
Clayton’s Case IDevaynes Vs Noble (1816)].
A firm of bankers known as Devaynes, Davies, Noble & Co. has five partners. Devaynes, one of the partners died and the surviving partners carried- on the business of banking under the same name. The executors of the deceased partner objected to the continuance of the name of the Devaynes in the firm’s name. After a year the firm became insolvent and all the customers (creditors) of the firm made their claims against the estate of Devaynes, the deceased partner.
N. Clayton was one of the creditors who continued to deal with the surviving partners by making payments to and receiving payments from the firm. At the time of death of Devaynes, Clayton’s balance was £ 1713. During the next few days he withdrew several times and made payments and thus the balance was only £ 453 at the time of bankruptcy of the firm. A summary of the transactions between the firm and Clayton shown that the firm had paid him more then £ after the death of Devaynes. But Clayton claimed the balance amount £ 453 from the estate of the deceased partner following contention:
The withdrawals from the account after the death of partner were paid out of the deposits made by him in same period and thus the credit balance standing at the of death of Devaynes was recoverable from his estate.
But these arguments were not accepted by the court Clayton’s claim was rejected. Sir William Grant M.R. obser the general rule of appropriation as follows :
“This is the case of banking account where all the sums paid in the form of one blended fund; the parts have no longer any distinct existence. In such a case there is no room for any
other appropriation than that which arises from the order in which the receipts and payments take place and are carried into the account. Presumably, it is the, sum first paid in, that is
first drawn out. It is the first item on the debit side of the account, that is discharged or reduced, by the first item on the credit side”. Thus the first item on the debit side will be the
item to be discharged or reduced by a subsequent item on the credit side. The credit entries in the account adjust or set-off the debit entries in the chronological order. The rule derived from the Clayton’s case is of great practical significance to the banks.
What is the Rule in Clayton’s case?
What conditions should be fulfilled to exercise the right of set-off?
SPECIAL FEATURES OF RELATIONSHIP OF BANKER AND CUSTOMER
Explain the banker is a privileged debtor
Due diligence-In Good faith and without negligence
CASH TRANSACTIONS REPORT (CTR) AND SUSPICIOUS TRANSACTION REPORT (STR)
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