Introduction 

• When a debtor owing several distinct debts to one person, makes a payment, which is not sufficient to discharge all the debts the question arises which particular debt the payment is to be applied. 
• The Clayton’s Rule provides for the same.  
• Section 59, Section 60 and Section 61 provide for the clayton’s rule under the Indian Contract Act, 1857 (ICA). 
• Devaynes v. Noble (1816), a judgment passed by the Court of Chancery is commonly known as Clayton’s case as it laid down the rule. 
• It is to be noted that this rule applies only when there are several debts and not when there is a single debt. 

Devaynes v. Noble (1816) 

• Mr. Clayton had an account with a banking firm, Devaynes, Dawes, Noble, and Co, that was a partnership. 
• The bank's partners were therefore personally liable for the debts of the bank. 
• One of the partners, William Devaynes, died in 1809. The amount then due to Clayton was £1,717. 
• After Mr. Devaynes' death, Clayton made further deposits with the bank and the surviving partners paid out to Mr. Clayton more than the £1,717 on deposit at the time of Mr. Devaynes' death. 
• The firm went bankrupt in 1810. 
• It was held that  
  • the estate of the deceased partner was not liable to Clayton. 
  • 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. 

Section 59 of ICA 

• Section 59 provides for application of payment where debt to be discharged is indicated. 
• The essential features of Section 59 are: 
  • Debtor owes several distinct debts to one person 
  • Debtor makes payment either with express intimation or under such circumstances implying 
  • That the payment is to be applied to the discharge of a particular debt 
  • The payment if accepted must be applied accordingly 
• This principle is also known as Appropriation by Debtor. 

Section 60 of ICA 

• Section 60 provides for application of payment where debt to be discharged is not indicated. 
• The essential features of Section 60 are: 
  • Debtor owes several distinct debts to one person 
  • Debtor has omitted to intimate and there are no circumstances indicating to which debt the payment is to be applied 
  •  The creditor may apply it at his discretion to any lawful debt payable to him from the debtor. 
  • Whether the recovery of debt is or is not barred by a law in force as to limitation of suits. 
• This principle is also known as Appropriation by creditor. 

Section 61 of ICA 

• Section 61 provides for application of payment where neither party appropriates. 
• The essential features of Section 61 are 
  • Debtor owes several distinct debts to one person 
  • Neither party makes any appropriation 
  • The payment shall be applied in discharge of debts in order of time 
  • Whether they are or are not barred by law as to limitation of suits 
  • If the debts are of equal standing, the payment shall be applied in discharge of each proportionably. 
• This principle is also known as Appropriation by law. 

What are Important Case Laws? 

• Industrial Credit and Development v. Smithaben H. Patel (1999) 
  • Such an amount is to be adjusted firstly strictly in accordance with the directions contained in the decree and in the absence of such direction, adjustments, be made firstly in payment of interest and costs and thereafter in payment of the principal amount. 
  • The provisions of Sections 59 to 61 of the Contract Act are applicable in cases where a debtor owes several distinct debts to one person and do not deal with cases in which the principal and interest are due on a single debt. 
• Kundan Lal v. Jagannath (1915) 
  • Allahabad High Court in this case applied the Clayton’s rule. The Court held that : 
    • What the Indian Legislature did by Sections 59-61 of the Indian Contract Act, was to adopt the rule of Civil law with certain modifications. 
    • Unless the meaning of Section 60 is that the debtor is to make his appropriation at the time of paying and the creditor to make his appropriation at the time of receiving the money, it is difficult to conceive what is the meaning of Section 61 or how it could be applied. 

Conclusion 

Clayton’s rule provide for appropriation of amount when a debtor owes several distinct debts to one person. There are three types of appropriation- Appropriation by debtor, Appropriation by creditor and Appropriation by law.