Q19704 Please explain Clayton’s Rule of Appropriation by pointing out the relevant provisions of law
ANSWER:
Introduction: The Rule in Clayton’s case is “Quiequid solvitur secundum modum solventis” which means, “whatever paid is paid or is to be applied according to the mode laid down by the payer.” The Rules relating to Clayton’s case are mentioned in Sections 59 to 61 of the Indian Contract Act, 1872. When any party pays an amount of debt to another party which is creditor then the creditor is to take note of these sections before applying the payment to due amount because the creditor would be inclined to appropriate payments to the debt which is not likely to be realized easily. Where both parties do not specify the appropriation then the law would take the responsibility and appropriate accordingly. As per question, I have to narrate Clayton’s Rule of Appropriation by pointing out the relevant provisions of law.
Concept & Application: The rules relating to Appropriation are as under:
- Where the debtor intimates (Sec. 59):
- As per law described in sec 59, appropriation of payment is a right primarily of the debtor and for his benefit. In case, if the party who is making payment, expressly intimates at the time of actual payment that the payment must be applied towards the discharge of a particular debt, the creditor must do so.
- Secondly, if there is no express intimation by the debtor, the rules mentioned in the law will look to the circumstances attending on the payment for appropriation. As decided in case law – Craft Vs. Lumlay, it is to be applied according to the express will of the payer or debtor, not to the receiver.
Example:
A owes to B two distinct debts of Rs. 35000 and Rs. 39600. On particular date, A pays Rs. 39600 to B. In this case, it will be presumed that it is the payment of the latter debt as it is revealed from the amount of the second debt.
2. In case debtor does not intimate regarding appropriation and the circumstances are also not indicative (Sec. 60):
- As per rules mentioned in section 60 of Indian contract act 1872, when any debtor does not expressly intimate or where the circumstances attending on the payment do not display any intention, the creditor party may apply his own discretion to any lawful debt actually due and payable to him from the debtor.
- As decided in case law of Simson Vs. Ingham, the creditor may also, until he has declared appropriation to the debtor, alter the appropriation. It was also clarified in this case that debtor cannot, however, apply the payment to a disputed and unlawful debt, but he/she may apply it to a debt, which a barred by the law of limitation.
3. In case of Part-payment by debtor, amount is applied for the interest first and for the principal afterwards:
As per rules mentioned in the Indian contract act, in case of part-payment by any debtor the general principle, subject to any contract to the contrary, is that the payment should first be applied to the interest and after the interest is fully paid off, to the principal. This fact has been decided in case law of Rubia Devi Vs. Raghunath Prasad.
4. Appropriation of payment as per debit due date:
This rule is applicable where both the parties have a current account and, in such cases, appropriation impliedly takes place in the order in which receipts and payments take place and are carried into the account. As per case law decided, unless there is contrary intention, the items on the credit of an account must be appropriated against the items on the debit in order of date.
5. When both parties fails to appropriate (Sec. 61):
In case, where the debtor does not expressly intimate and where the creditor fails to make any appropriation, the payment shall be applied in discharge of the debt in chronological order, i.e., in order of time. In case, debts amount is paid randomly then the payment shall be applied in discharge of each proportionately.
Example:
Ram owes Sham three loans-(1) Rs. 1,00,000 taken on 1st April, (2) Rs. 70,000 taken on 1st May, and 1,20000 taken on 1st July. If he pays Rs. 2,00000, the payment shall be appropriated towards the 1st and 2nd loans in full and the rest Rs. 30000 towards the third one.
Famous judgement of Clayton’s case which has been approved in the case of Gurpreet Singh v. Union of India by Hon’ble Supreme Court of India’ Is narrated below
Facts of the case: Mr Clayton had an account with a banking firm, a partnership named Devaynes, Dawes, Noble, and Co. After some time, one of the partners of the partnership deed, William Devaynes, died at that time, the amount then due to Clayton was £1,717.
Balance surviving partners, thereafter paid out to Mr. Clayton more than that amount while Clayton himself, on his part, made further deposits with the firm but the banking firm subsequently went bankrupt. And Mr Clayton also claimed the money. In this case, court had held that the estate of the deceased partner was not liable to Clayton, as the payments made by the surviving partners to Clayton must be treated as payment for old debts.
Conclusion: After going through the Clayton’s Rule of Appropriation as per rules mentioned in the Indian contract act, it can be concluded that debtor’s has to specify that he/she is making payment for which debts otherwise creditor has the choice to adjust the payment received as per his/her choice and if payment of interest and principal is due from someone and that party pays some random amount then in that case, creditor will adjust received payment first against the due amount of interest and the balance against the principal amount.
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