CLAYTON’S RULE OF APPROPRIATION

INTRODUCTION:

In CLAYTON’S RULE OF APPROPRIATION the word “appropriation” means APPLICATION of payments.

Section 59 to section 61 of the Indian Contract Act defines the rules for appropriation of payments.
When a debtor pays an amount to the creditor, the creditor has to keep in mind these provisions before
appropriating the payments of a particular debt because the creditor will be inclined to appropriate the
debt which is not to be realized easily (bad debt). If both the debtor and creditor do not specify the
appropriation then the law should take the responsibility and apply the payments accordingly.

APPROPRIATION BY DEBTOR:

Section 59 of the Indian Contract act states that:

 “Application of payment where debt to be discharged is indicated.—Where a debtor, owing several

distinct debts to one person, makes a payment to him, either with express intimation, or under
circumstances implying, that the payment is to be applied to the discharge of some particular debt, the
payment, if accepted, must be applied accordingly. —Where a debtor, owing several distinct debts to
one person, makes a payment to him, either with express intimation, or under circumstances implying,
that the payment is to be applied to the discharge of some particular debt, the payment, if accepted,
must be applied accordingly."

In other words when a debtor owes several debts to the creditor and gives a certain amount of money
to the creditor and makes a payment to any of them and later asks the creditor to discharge the
payment to a specific debt. If the creditor agrees to this request then he is bound by this appropriation.
This is not applicable when the debt has merged into a decree. The appropriation is implied or
expressed by the creditor. The basic idea behind this rule is that it is applied according to express the
will of the payer and not the receiver. If the party to whom the amount is being paid does not apply it
accordingly to the will of the party offering it then he or she must refuse it, and stand with the rights
being offered by law.

This concept can be understood with the help of DEVYANES v NOBLE also known as Clayton’s Case:

Facts:

A partner in a banking firm died. The surviving partners continued to trade without making any changes.
They later fell into bankruptcy. Creditors of the bank at the date of the death still traded with the bank
with varying changes in their banking accounts.

Held:

The fact that they continued to trade with the continuing partners did not discharge the estate of the
deceased partner. Grant MR said: ‘I apprehend by the general mercantile law, a partnership contract is
several as well as joint. That may probably be the reason why courts of equity have considered joint
contracts of this sort, that is joint in form, as standing on a different footing from others.’

SEVERAL AND DISTINCT DEBTS:

This rule only applies in several and distinct debt and not where there is only one debt left even if it is to
be paid in installments. If the debts are distinct then creditor can sue for it separately.

APPROPRIATION BY CREDITOR:

This is defined in the section 60 of Indian Contract Act. The creditor is also competent for appropriation.
If the debtor makes any payment without any appropriation then the creditor can use his or her
discretion to wipe out any debt which is due. He may use it for the payment of a time-barred debt or
wipe out the debt which is carrying a lower interest rate. The right of appropriation lies with the creditor
until the last moment, even when he is examined at the trial or before any act which renders him
inequitable for him to exercise this right. The creditor, in this case, has a lot of scope for exercising his
right, he can put himself in the most advantageous position. Moreover, he need not express himself in
express terms while doing so. As long as notice has not been given in respect of the appropriation of any
amount, the creditor can change it and can appropriate some other claim.

APPROPRIATION BY LAW:

This is defined in section of the Indian Contract Act. 1872, it is applied in the situation when neither the
creditor nor the buyer makes the appropriation. So to resolve the issue the law gets the right to
appropriate. In such type of cases, the debt is settled in accordance with the order of the time they have
incurred. In case if all the debts are of same time then they are discharged proportionately.

CONCLUSION:

Under the appropriation of a contract, the debtor has the first right to intimate appropriation of a debt
at the time of payment if he fails to exercise his right, this right then goes on the creditor and if the
creditor also fails to exercise his right the appropriation will be done in order of time by the law itself. In
case of debts of equal standing, each will be appropriated proportionately.