Clayton’s Rule of Appropriation of Payments under Contract Act

Introduction:

Appropriation means ‘application’ of payments. In case of a creditor and a debtor, Section 59 to 61 of the Indian Contract Act, 1872, lay down certain rules regarding the Appropriation of payments. When a debtor pays an amount to the creditor, the creditor is to take note of these sections before applying the payment to a particular debt, because the creditor would be inclined to appropriate payments to the debt which is not likely to be realized easily. In case both parties do not specify the appropriation then the law would take the responsibility and appropriate accordingly.

Appropriation of Payments by Debtor:

Under Sec. 59 of the Indian Contract Act, 1872, it is stated that if the debtor owes several debts to the creditor, and makes a payment to any of them and later requests the creditor to apply the payment to the discharge of a particular debt. If the creditor agrees to this request, he is bound by such appropriation. This section applies to several distinct debts and not to a single debt, or to various heads of one debt. This is not applicable where the debt has merged into a decree. The appropriation may be implied or expressed by the creditor. The basic idea is that “When money is paid, it is to be applied according to express the will of the payer and not the receiver. If the party to whom the money is offered does not agree to apply it according to the will of the party offering it, he must refuse it and stand upon the rights which the law has given him”.

Clayton’s Rule of Appropriation of Payments:

In England, it has been considered a basic rule since the case of Devaynes vs Noble, also known as Clayton’s case. In this, it was held that the debtor can request the creditor to appropriate the amount to any of the debt in case he owes to the creditor several and distinct debts, if the creditor agrees to it, then he is bound by it. 

In the Devaynes vs Noble[1] case, 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. So, it was held that: The fact that they continued to trade with the continuing partners did not discharge the estate of the deceased partner. The Judge 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.’

Conclusion:-

In the Law of contracts, there is a great deal of misunderstanding or lack of understanding in regard to certain topics connected with the subject of discharge. It is due to the fact that few people use such terms as condition and warranty in the same sense, the rest is due to faulty reasoning concerning matters that are admittedly difficult. The best way of discharging a contract is based on performance. As this way both the parties follow all the terms of the contract and afterwards go for its discharge. On the other hand, discharge by the breach is the most unpleasant way to release one from duties. Therefore, discharge by breach results in damages too.

For more articles on Law of Contracts, Click Here.

For law notes, Click Here.

[1] (1816) ER 781

Author Details: Smruti Polke [3^rd year LLB (Hons) student at Renaissance Law College (DAVV University)]

For simplified payments, use any free online invoice generator app.