Rule in Clayton's Case
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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. 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, a payment in is allocated to the earliest debit on the account which caused the account to be overdrawn.
The rule is only a presumption, and can be displaced. In Commerzbank Aktiengesellschaft v IMB Morgan plc and others [2004] EWHC 2771 (Ch) the court elected to disapply the rule on the fact of the case (sums held in bank accounts derived from victims of Nigerian advance fee frauds).
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.
The rule does not apply to payments made by a fiduciary out of an account which contains a mixture of trust funds and the fiduciary's person money. 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.
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