Answer 2.

In the light of facts of instant case, the action of Vijaya Bank is valid in the eyes of law since
it exercised its right of appropriation in the absence of assertion of the same right available to
Mr. Abhilash.

Special Features of Banker-Customer Relation

The primary general relationship is that of debtor and creditor respectively, which arises out
of a contract between them. It is governed by various terms of agreement between them. In
addition to this, there is a special relationship between a banker and customer which brings
about special obligations and rights of the banker against the customer and vice-versa.

The rule of law underlying Appropriation of Payments is that where a customer pays in
money for a stated purpose, the banker is obliged to apply such payment only for such stated
purpose. Where, however, the customer gives the banker no particular instruction as regards
the mode of application of his deposit, the banker may appropriate the deposit so as to reduce
a debt of the customer if already subsisting. Where there is no special appropriation necessary
to be made, then the banker may hold the amount paid by the customer to be the payment of
the earlier unpaid debit in the account. This has been laid down in the case of Devaynes v.
Noble, (1816) 1 Mer 529.

Under this rule, if a customer owes more than one debt to the banker, and pays him a sum of
money inadequate to meet all of the debts, it becomes a matter of decision as to which of the
debts outstanding should receive the payment. For this, the rule in the Clayton’s case
provides that-

·A debtor making a payment has a right to appropriate it to the discharge of any debt due to
the creditor;

·If at the time of the payment, there is no express or implied appropriation thereof by the
debtor, then the creditor has a right to make the appropriation;

·In the absence of any appropriation by either debtor or the creditor, an appropriation is made
by presumption of law, according to the items of account, the first item on the debit side,
being the item discharged or reduced by the first item on the credit side.
The above principles have been incorporated into Indian practice vide section 59, 60 and 61
of the Indian Contract Act, 1872. Hence, right of appropriation is a special feature of banker-
customer relation between Vijaya Bank and Mr. Abhilash.

Validity of the action of Vijaya Bank

In the present case, Mr. Abhilash has two sets of transactions which indebted him to the bank;
overdraft on current account, and, loan availed for residential apartment and a car. An
overdraft arrangement with the bank is essentially a contract [Indian Overseas Bank,
Madras v. Naranprasad Govindlal Patel, Ahmedabad], and so does the loan. Any pecuniary
liability, which has been quantified or is capable of being quantified, on the basis of a
contract or on the principles of law, is a debt. [Paras Nath Hira Lal v. Kishan Lal Chuni
Lal]. This establishes a banker-customer relationship between both the parties. Resulting
from this relationship is the right of appropriation when Mr. Abhilash deposited certain
cheques towards the debts without specifying the particular debt to be appropriated. The
following table would show the chronology of the transactions:

There are several distinct debts owed to Vijaya Bank, which makes it fit to invoke the right of
appropriation. [Banambar Das v. Udayanath Pattanaik] However, in order to ascertain the
right of appropriation, it is important to note that appropriation is a matter of intention of
parties. It is essentially a rule of evidence and not a rule of law and any stipulation of the
parties would prevail over any strict procedure of appropriation. [Westminster Bank v. Cond
(1940)]. Given that, following are the reasons to hold the actions of Vijaya Bank valid and
legal:

Under the Rule in Clayton’s case, when a debtor makes a payment, he has a right to have it
appropriated in such manner as he decides and if the creditor accepts the payment, he is
bound to make the appropriation in accordance with the directions of the debtor. The
appropriation by the debtor should be communicated to the creditor either expressly or
impliedly so that the creditor knows that his right of appropriation does not arise. The debtor
may specify his appropriation impliedly by showing other circumstances indicating that his
intention at the time of payment was to appropriate to a specific debt or account. [Industrial
Credit and Development Syndicate v. Smithaben H Patel, 1999] However, when the debtor
has not himself made any appropriation, the right devolves on the creditor who can exercise it
at any time, as provided in section 60. In the instant case, Mr. Abhilash, while paying the
cheques, did not intimate Vijaya Bank the debt towards which the amount was intended to be
appropriated. Hence, there is no right of appropriation available with Mr. Abhilash.

According to section 60 of the Indian Contract Act 1872, where, the debtor has neither
intimated the application of a payment to a particular debt, nor are there any circumstances
from which, an intimation may be implied, the creditor has an option to make an
appropriation, according to his discretion. In the instant case, it is the discretion of Vijaya
Bank to appropriate the amount that it received, towards any debt.

A banker, while exercising his right of appropriation, has considerable latitude to make the
appropriation of payments, and is entitled to place himself in the most advantageous position.
[Manamathi Munusawmi v. Perumal Mudaly, (1919)]. He is entitled to appropriate the
payment towards debts, in a chronological order, or even contrary to any intermediate
direction from the debtor, given after the payment, irrespective of any prejudice that may be
caused to the debtor.

Hence, the actions of Vijaya Bank are valid in the eyes of law since it exercised the special
feature of banker-customer relation; creditor’s right of appropriation