Asset Tracing & Recovery: The FraudNet World Compendium

Book by Bernd H. Klose, Jonathan Altalef, and Lucas E. Barreiros

Page 128 The Fundamentals of a Civil Asset Recovery Action

9.1 The rule in Clayton's Case

Under English law, when there has been no express appropriation of property, the rule
of convenience, known as the rule in Clayton's Case, of 1816, is sometimes applied.
This is confined to cases where there is an unbroken account between the parties, or
“one blended fund,” as in the case of a current account at a bank or between traders.
The effect of the rule is that in the absence of any express appropriation, each
payment is impliedly appropriated to the earliest debt that is not statute-barred. The
appropriation is made by the very act of setting the two items against each other.
Another way of saying this is “first in, first out” – whereby the first payment out is set
against the first payment in, and vice versa.

Sometimes, under English law, a bank will break an account and open a new and
distinct one. In such a case, entries before the break will not be affected by entries
after the break. Where there are two or more concurrent and interdependent accounts
of the same nature at a bank, however, the bank may treat the rule as applying to the
accounts as if they were combined. Otherwise the rule will be applied to each account
separately.

The rule under English law is excluded if the parties otherwise agree, or a contrary
intention appears from the circumstances. It is not enough however merely to show
that the bank refused to allow cheques to be drawn on an over-drawn account unless
credits of an equivalent amount were paid in; such credits thus go in reduction of the
oldest debts and not in offsetting the newly-drawn cheques.

Snells Principles Of Equity Ed. 25th

TRUSTS

(c) Rule in Clayton's Case

(1) THE RULE. When there has been no express appropriation, the rule of
convenience known as the rule in Clayton's Case is sometimes applied. This is
confined to cases where there is an unbroken account between the parties, or “one
blended fund,” as in the case of a current account at a bank or between traders; it does
not apply where there is no such account or fund, but merely distinct and separate
debts. The effect of the rule is that in the absence of any express appropriation, each
payment is impliedly appropriated to the earliest debt that is not statute-barred. “It is
the first item of the debit side of the account, that is discharged, or reduced, by the
first item on the credit side. The appropriation is made by the very act of setting the
two items against each other.” In short, “first in, first out the first payment in is set
against the first payment out, and vice versa.

(2) SEPARATE ACCOUNTS. Sometimes a bank will break an account and open a
new and distinct account. In this case entries before the break will not be affected by
entries after the break. Thus if a bank takes a mortgage from X to secure his overdraft,
and later the bank receives notice that X has granted Y a second mortgage on the
property, it should at once break X’s account and open a new account with him; for
otherwise all subsequent payments into the account will go towards reducing the
existing overdraft, and the bank will be unable to claim priority over Y for subsequent
payments to X, since they will be made with notice of Y’s mortgage. But where there
are two or more concurrent and interdependent accounts of the same nature at a bank
(and not, e.g., one a loan account and the other a current account), the bank may treat
the rule as applying to the accounts as if they were combined; otherwise the rule will
be applied to each account separately.

(3) CONTRARY INTENTION. The rule is excluded if the parties otherwise agree, or
a contrary intention appears from the circumstances. It is not enough, however,
merely to show that the bank refused to allow cheques to be drawn on an overdrawn
account unless credits of an equivalent amount were paid in; such credits thus go in
reduction of the oldest debts and not in offsetting the newly drawn cheques.