Devaynes v Noble (Clayton's Case) [1816] 1 Mer 572

Facts

• The case involved the banking partnership of Devaynes, Dawes, Noble & Co., which became insolvent.
• Clayton, a customer, deposited funds into his account with the bank and subsequently made withdrawals.
• The main dispute concerned the allocation of payments made by Clayton between the bank and its creditors following the bank's insolvency.
• The court was required to determine whether such withdrawals should be applied to the earliest deposits (FIFO) or allocated proportionally across all deposits.
• There were no specific instructions regarding the order of appropriating deposits and withdrawals.

Issues

1. Whether, in the absence of specific instructions, withdrawals from a mixed bank account should be attributed to the earliest deposits (the FIFO rule).
2. How equitable tracing principles apply to withdrawals from commingled funds.
3. Whether the rigid application of the FIFO rule leads to unjust outcomes in cases involving multiple beneficiaries or complex financial arrangements.

Decision

• The court held that, absent contrary instructions, withdrawals are presumed to discharge the earliest deposits first, establishing the "first-in, first-out" (FIFO) rule.
• The rule was justified on the presumption that debtors naturally aim to settle the oldest debts first.
• The FIFO rule provided a clear method for allocating withdrawals in mixed bank accounts in cases of insolvency, trust law disputes, and financial disputes involving commingled funds.
• The judgment recognized criticisms regarding the rigidity and potentially inequitable results of the rule but maintained it as a practical solution in the absence of alternative instructions.

Legal Principles

• The FIFO rule presumes that, in the absence of specific direction, withdrawals from a mixed account deplete the earliest deposits first.
• Equitable tracing enables claimants to follow misappropriated funds through various transactions, with the FIFO rule as a default mechanism for mixed accounts.
• The FIFO rule’s rigidity may lead to inequitable results, especially when later depositors or beneficiaries are disadvantaged, prompting some jurisdictions to adopt flexible alternatives such as the lowest intermediate balance rule or proportional allocation.
• Despite criticisms, the FIFO rule remains a foundational principle in common law jurisdictions concerning tracing and allocation of commingled funds.

Conclusion

Devaynes v Noble (Clayton’s Case) established the first-in, first-out principle for withdrawals from mixed bank accounts, profoundly influencing common law approaches to tracing and payment allocation, though its rigidity has led to ongoing debate and the development of alternative tracing mechanisms in some jurisdictions.