Clayton’s Rule of Appropriation of Payments under Contract Act
Clayton’s Rule of Appropriation of Payments
1. What is Clayton’s Rule?
Clayton’s Rule is a legal principle used to determine which debt a payment made by a debtor is to be applied against, when the debtor owes multiple debts to the same creditor.
2. Origin and Basic Principle
The rule originates from the English case Clayton’s Case (1816) 1 Mer 572.
The principle is that when a debtor makes a payment to a creditor who is owed multiple debts, the payment is first applied to the earliest debt (i.e., the debt incurred first in time).
If the amount of payment is less than the earliest debt, it is fully appropriated to that debt.
If it exceeds the earliest debt, the excess is applied to the next debt, and so on.
3. Application Under Contract Law
The rule helps in the appropriation of payments when a debtor owes multiple sums to a creditor under a contract or multiple contracts.
It avoids confusion and disputes regarding which debt has been discharged when a partial payment is made.
4. Illustration
Suppose a debtor owes a creditor:
₹10,000 (Debt A) contracted on 1st Jan 2024
₹8,000 (Debt B) contracted on 1st March 2024
If the debtor pays ₹12,000, under Clayton’s Rule:
₹10,000 is appropriated to Debt A (earliest debt)
₹2,000 is appropriated to Debt B
Debt A is fully discharged; Debt B still has ₹6,000 outstanding.
5. Exceptions to Clayton’s Rule
While Clayton’s Rule offers a default approach, courts or parties may override it:
Express appropriation by the debtor: If the debtor explicitly states which debt the payment is for, that appropriation holds.
Appropriation by the creditor: If the creditor applies the payment to a particular debt and informs the debtor.
Mutual agreement between parties can decide appropriation differently.
If the application of Clayton’s Rule leads to injustice or absurdity, courts may refuse to apply it rigidly.
When debts are of a different nature or time frame, courts may interpret appropriation differently.
6. Relevant Legal Position in India
The Indian Contract Act, 1872, does not explicitly codify Clayton’s Rule, but it is recognized as a principle of law and applied by Indian courts.
The principle is often applied in matters involving payments in accounts, bills of exchange, and banking transactions.
7. Case Law Reference
Clayton’s Case (1816): The foundational English authority.
Indian courts have followed this rule as a common law principle unless the parties specify otherwise.
For example, in Bank of India Ltd. v. R.S. Bhatia (1995), the Supreme Court recognized the rule while dealing with banking transactions and payment appropriations.
8. Summary
| Aspect | Details |
|---|---|
| Rule | Payments first apply to the earliest debt |
| Origin | Clayton’s Case (1816) |
| Purpose | To determine which debt is discharged on partial payment |
| Exceptions | Express appropriation by debtor/creditor, agreement, injustice |
| Application in India | Recognized by courts, not explicitly in Contract Act |
| Practical Use | Banking, multiple debts, contract payments |
Conclusion
Clayton’s Rule is a helpful legal principle to settle disputes in payments when multiple debts exist between the same parties. However, courts may depart from this rule to do justice or according to the parties' intent.
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