The Rule in Clayton’s case is Quiequid solvitur secundum modum solventis. It means, “whatever paid is paid or is to be applied according to the mode laid down by the payer.” Thus, according to this maxim,” when a debtor makes a payment, he may appropriate it to any debt he pleases, and the creditors must apply it accordingly.
In India the Rule in Clayton’s case has been followed subject to the provision of the Indian Contract Act, 1872.
The Rules relating to the appropriation of payments made by a debtor, who owes a number of distinct debts to his creditor are contained in Sections 59 to 61 of the Indian Contract Act, 1872.
ADVERTISEMENTS:
These rules are:-
1. Where the debtor intimates (Sec. 59):
(i) Appropriation of payment is a right primarily of the debtor and for his benefit. If the debtor expressly intimates at the time of actual payment that the payment must be applied towards the discharge of a particular debt, the creditor must do so.
(ii) If there is no express intimation by the debtor, the Law will look to the circumstances attending on the payment for appropriation. There is an established maxim that when money is paid, it is to be applied according to the express will of the payer, not to the receiver. [Craft Vs. Lumlay]
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ADVERTISEMENTS:
Example:
X owes two distinct debts of Rs. 350 and Rs. 396. He pays Rs. 396. It will be presumed that it is the payment of the latter debt as it is revealed from the amount of the second debt.
2. When the debtor does not intimate and the circumstances are not indicative (Sec. 60):
(i) When the debtor does not expressly intimate or where the circumstances attending on the payment do not indicate any intention, the creditor may apply his own discretion to any lawful debt actually due and payable to him from the debtor.
(ii) The creditor may also, until he has declared appropriation to the debtor, alter the appropriation.[Simson Vs. Ingham]
ADVERTISEMENTS:
(iii) He cannot, however, apply the payment to a disputed and unlawful debt, but he may apply it to a debt, which a barred by the law of limitation.
3. Part-payment is applied for the interest first and for the principal afterwards:
Regarding part-payment, the general principle, subject to any contract to the contrary, is that the payment should first be applied to the interest and after the interest is fully paid off, to the principal.[Rubia Devi Vs. Raghunath Prasad]
4. Appropriation in order of receipts and payments:
The Rule of Clayton’s Law is applicable where the parties have a current account. In such case appropriation impliedly takes place in the order in which receipts and payments take place and are carried into the account.
Thus, as per the Rule, unless there is contrary intention, the items on the credit of an account must be appropriated against the items on the debit in order of date. [Rule of Clayton’s Law]
5. When the debtor does not intimate and creditor fails to appropriate (Sec. 61):
Where the debtor does not expressly intimate and where the creditor fails to make any appropriation, the payment shall be applied in discharge of the debt in chronological order, i.e., in order of time
If the debts are of equal standing, the payment shall be applied in discharge of each proportionately.
Example:
X owes Y three loans-(1) Rs. 1,000 taken on 1st April, (2) Rs. 700 taken on 1st May, and 1,200 taken on 1st July. If he pays Rs.2,000, the payment shall be appropriated towards the 1st and 2nd loans in full and the rest Rs. 300 towards the third one.