I. Appropriation of Payments

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 244-246

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In the normal course of a bank and customer relationship, a customer may become indebted to a bank in various ways, for example, by an overdraft in one or more accounts or by virtue of a loan extended to the

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customer. Where the customer also has other assets deposited with the bank, for example, funds in other accounts or securities given to secure a loan, failure by a customer to discharge a loan raises the question of whether a bank may use those assets to pay down the loan either with or without the consent of the customer. Bank agreements typically provide that banks may do so, and such clauses reflect the common law in this regard.

There are three discrete situations in which banks may affect a customer’s funds: (i) by appropriation of payments within an individual account; (ii) by set-off between accounts, account consolidation or combination; and (iii) by exercise of a banker’s lien over other assets of the customer, in order to discharge in whole or in part a customer’s indebtedness. Each of these will be considered in this and the two succeeding sections.

The normal rule in debtor and creditor relationships is that when a debtor pays funds to a creditor, the debtor may decide to which debt the payment may be appropriated and the creditor is entitled to do so only when the debtor fails to designate the appropriation; furthermore, the creditor’s appropriation is completed only when communicated to the debtor.¹¹⁰

Where the right of appropriation devolves to the creditor, it may be exercised "up to the very last minute,"¹¹¹even during an examination of the debtor by the creditor in an action for debt.¹¹²

But in the bank and customer relationship, this presumption is displaced; that is, in relation to appropriation of payments, there is a presumption that the credit entries in an account extinguish the debt entries in historical order: the earliest payments in are attributed to the earliest drawings out. This is the "first in, first out" principle, known as the rule in Clayton’s Case.¹¹³

This rule is a presumption only as to the intention of the parties, but it has become the standard banking practice in the operation of bank accounts. Moreover, it is widely understood to apply only within a single account and not across accounts held by one customer at the same bank.¹¹⁴

However, the courts have found this presumption to be rebutted in a number of situations: (i) where a contrary intention is

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expressed...