Rule in Clayton's Case
Encyclopedia
The rule in Clayton's Case (or, to give it its full legal name and citation: Devaynes v Noble (Clayton's Case) (1816) 1 Mer 572) is a common law
presumption in relation to the distribution of monies from a bank account. The rule is based upon the deceptively simple notion of first-in, first-out to determine the effect of payments from an account, and will normally apply in the absence of evidence of any other intention. Payments are presumed to be appropriated to debts in the order in which the debts are incurred.
In Clayton’s Case, one of the partners of a firm with which Clayton had an account died. The amount then due to Clayton was BP 1,717. The surviving partners, thereafter paid out to Clayton more than that amount while Clayton himself, on his part, made further deposits with the firm. On the firm being subsequently adjudged bankrupt, it was 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 regarded as completely discharging the liability of the firm to Clayton at the time of the particular partner’s death.
It is based on the legal fiction
that, if an account is in credit, the first sum paid in will also be the first to be drawn out and, if the account is overdrawn, the first sum paid in is allocated to the earliest debit on the account which caused the account to be overdrawn.
It is generally applicable in cases of running accounts between two parties, e.g., a banker and a customer, moneys being paid in and withdrawn from time to time from the account, without any specific indication as to which payment out was in respect of which payment in. In such case, when final accounts, which may run over several years, are made up, debits and credits will be set off against one another in order of their dates, leaving only final balance to be recovered from the debtor by the creditor.
The rule is only a presumption, and can be displaced. The rule is one of convenience and may be displaced by circumstances or by agreement. In Commerzbank Aktiengesellschaft v IMB Morgan plc and others [2004] EWHC 2771 (Ch) the court elected to not to apply the rule on the fact of the case (sums held in bank accounts derived from victims of Nigerian advance fee fraud
s).
Notwithstanding the criticisms sometimes levelled against it, and despite its antiquity, the rule is commonly applied in relation to tracing claims
where a fraudster has commingled unlawfully obtained funds from various sources.
and the fiduciary's personal money. In such a case, if the trustee
misappropriates any moneys belonging to the trust
, the first amount so withdrawn by him will not be allocated to the discharge of his funds held on trust but towards the discharge of his own personal deposits, even if such deposits were, in fact made later in order of time. In such cases, the fiduciary is presumed to spend their own money first before misappropriating money from the trust; see Re Hallett's Estate (1879) 13 Ch D 696. The rule is founded on the principles of Equity. If a fiduciary has mixed his or her own money with sums of trust money in a private account, withdrawals are attributed to his or her own money as far as possible, Re MacDonald [1975] Qd R 255. However, if the funds of two beneficiaries
, or of a beneficiary and an innocent volunteer, are mixed the rule determines their respective entitlements, Re Diplock [1948] Ch 465.
s upon the death of a partner. In most jurisdictions, the death of a partner ordinarily has the legal effect of dissolving
the firm. The partners' personal representative
s have no right to step into the partner's shoes; they cannot take part in its management; they can only claim the deceased partner's share in the assets of the firm. The banker, who provides financial accommodation to the firm, can have no objection in continuing the account; the bank can presume that the surviving partners will account to the representatives of the deceased for his share in the assets. Where the firm has a debit balance the account should be stopped to fix the liability of the estate of the deceased partner and to avoid the operation of the rule in Clayton's case.
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
presumption in relation to the distribution of monies from a bank account. The rule is based upon the deceptively simple notion of first-in, first-out to determine the effect of payments from an account, and will normally apply in the absence of evidence of any other intention. Payments are presumed to be appropriated to debts in the order in which the debts are incurred.
In Clayton’s Case, one of the partners of a firm with which Clayton had an account died. The amount then due to Clayton was BP 1,717. The surviving partners, thereafter paid out to Clayton more than that amount while Clayton himself, on his part, made further deposits with the firm. On the firm being subsequently adjudged bankrupt, it was 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 regarded as completely discharging the liability of the firm to Clayton at the time of the particular partner’s death.
It is based on the legal fiction
Legal fiction
A legal fiction is a fact assumed or created by courts which is then used in order to apply a legal rule which was not necessarily designed to be used in that way...
that, if an account is in credit, the first sum paid in will also be the first to be drawn out and, if the account is overdrawn, the first sum paid in is allocated to the earliest debit on the account which caused the account to be overdrawn.
It is generally applicable in cases of running accounts between two parties, e.g., a banker and a customer, moneys being paid in and withdrawn from time to time from the account, without any specific indication as to which payment out was in respect of which payment in. In such case, when final accounts, which may run over several years, are made up, debits and credits will be set off against one another in order of their dates, leaving only final balance to be recovered from the debtor by the creditor.
The rule is only a presumption, and can be displaced. The rule is one of convenience and may be displaced by circumstances or by agreement. In Commerzbank Aktiengesellschaft v IMB Morgan plc and others [2004] EWHC 2771 (Ch) the court elected to not to apply the rule on the fact of the case (sums held in bank accounts derived from victims of Nigerian advance fee fraud
Advance fee fraud
An advance-fee fraud is a confidence trick in which the target is persuaded to advance sums of money in the hope of realizing a significantly larger gain...
s).
Notwithstanding the criticisms sometimes levelled against it, and despite its antiquity, the rule is commonly applied in relation to tracing claims
Tracing in English law
Tracing in English law is a procedure to identify property that has been taken from the claimant involuntarily. It is not in itself a way to recover the property, but rather to identify it so that the courts can decide what remedy to apply...
where a fraudster has commingled unlawfully obtained funds from various sources.
Exception to the rule
The rule does not apply to payments made by a fiduciary out of an account which contains a mixture of trust fundsTrust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
and the fiduciary's personal money. In such a case, if the trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
misappropriates any moneys belonging to the trust
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
, the first amount so withdrawn by him will not be allocated to the discharge of his funds held on trust but towards the discharge of his own personal deposits, even if such deposits were, in fact made later in order of time. In such cases, the fiduciary is presumed to spend their own money first before misappropriating money from the trust; see Re Hallett's Estate (1879) 13 Ch D 696. The rule is founded on the principles of Equity. If a fiduciary has mixed his or her own money with sums of trust money in a private account, withdrawals are attributed to his or her own money as far as possible, Re MacDonald [1975] Qd R 255. However, if the funds of two beneficiaries
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
, or of a beneficiary and an innocent volunteer, are mixed the rule determines their respective entitlements, Re Diplock [1948] Ch 465.
Applications to a partnership
The rule has special application in relation to partnershipPartnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s upon the death of a partner. In most jurisdictions, the death of a partner ordinarily has the legal effect of dissolving
Dissolution (law)
In law, dissolution has multiple meanings.Dissolution is the last stage of liquidation, the process by which a company is brought to an end, and the assets and property of the company redistributed....
the firm. The partners' personal representative
Personal representative
In common law jurisdictions, a personal representative is the generic term for an executor for the estate of a deceased person who left a will or the administrator of an intestate estate. In either case, a surrogate court of competent jurisdiction issues a finding of fact, including that a will...
s have no right to step into the partner's shoes; they cannot take part in its management; they can only claim the deceased partner's share in the assets of the firm. The banker, who provides financial accommodation to the firm, can have no objection in continuing the account; the bank can presume that the surviving partners will account to the representatives of the deceased for his share in the assets. Where the firm has a debit balance the account should be stopped to fix the liability of the estate of the deceased partner and to avoid the operation of the rule in Clayton's case.