FUNDAMENTAL OF BANKING

LAW
GENERAL CONCEPTS OF BANKERS
CUSTOMER
 MEANING OF THE TERM
BANK/BANKER
• There are different ways of defining a ‘banker,
Provided hereunder are some of the
definitions of the ‘banker’.
• i. ‘Bank’ as is popularly known.
• ii. ‘Bank’ as defined by economists
• iii. ‘Bank’ as defined by the law / the legal
definition of the ‘banker’.
 MDEANING AS Bank’ as is popularly known.

• The most common idea of a bank is that, it is a

building wherein to people would go to
deposit and withdraw their money
• or just a place where small and well
established businessmen would go to secure
loans for their businesses and execute such
other related transactions.
 Bank’ as defined by economists

• Crowther, an economist, defines banker in

terms of services that are offered and he thus
says: the banker is a person whose business is
to take the debts of other people and to offer
his own in exchange, and thereby create
money. (Crowther, G. An Outline of Money,
1958)
• Kent, also an economist, defines a bank as “an
organization whose principle operations are
concerned with the accumulation of
temporarily idle money of the general public
for the purpose of advancing to others for
expenditure”.(Kent, R.P. Money and Banking,
4th edition,1961
Bank’ as defined by the law / the legal definition
of the ‘banker’.
• The most important statutes that relate to
banking in Tanzania include the Bank of
Tanzania Act, 2006, the Banking and Financial
Institutions Act, 2006, The Bills of Exchange
Act, Cap 215, The Tanzania Evidence Act,
1967, (no. 6 of R.E 2002), The Anti-Money
Laundering Act, 2007, Proceeds of Crime Act,
1991 etc.
1. The Banking and Financial Institutions Act,
2006 under section S.2 defines a bank as; ‘an
entity that is engaged in the banking
businesses’. ii. The Bank of Tanzania Act, 2006
provides for a similar definition.
2. The Bills of Exchange Act, Cap 215 [2002]
defines ‘banker’ as “a body of persons whether
incorporated or not, who carry on the business
of banking”.
3. The Tanzania Evidence Act, No. 6 of 1967
under section 76 which provides for definitions
of terms defines ‘bank’ or ‘banker’ as ‘any
person carrying on the business of banking in
the United Republic…”
4. The Proceeds of Crime Act, 1991 under s. 3 (1)
the word bank is defined with strict reference to
the Banking and Financial Institutions Act, 2006.
See also section 3 of the Anti Money Laundering
Act, 2007 which defines a bank by referring to
the Banking and Financial Institutions Act, 2006.
 MEANING OF BANK BY CASE LAW
• The word bank has also been defined by
decisions pronounced in various court cases.
In the 20th century, the mostly acceptable
definition of a bank is the
• . Lord Denning MR said in the United
Dominion Trust v. Kirkwood 3 s case that:
• ‘…Like many other beings, a banker is easier
to recognise than to define.”
• Joachimson v. Swiss Bank Corporation [1921]
2 K.B 110.
• “A bank is the one which undertakes to
receive money, and to collect bills for its
customers account. The proceeds so received
are not to be held in trust for the customer,
but the bank borrows the proceeds and
undertakes to repay them”.
 INSTITUTIONS RESEMBLING BANKS / NON BANK FINANCIAL
INSTITUTIONS

• Institutions that resemble banks are

commonly known as non- bank financial
institutions or simply financial institutions.
Financial institutions are defined by section 3
of the Banking and Financial Institutions Act,
no. 5 of 2006 as;
• “an entity engaged in the business of banking,
but limited as to size, locations served, or
permitted activities, as prescribed by the Bank
or required by the terms and conditions of its
license.”
• Under section 17 (1) banks have to start
business with a capital of Tshs 5 billion.
Financial institutions are not bound by this
provision
 ….
• Although non-bank financial institutions are
not banks, they are allowed to identify
themselves as banks and as such to use the
word bank in their names. Section 13 (1) of
the BFIA allows only entities licensed as either
banks or financial institutions to use the word
“bank” to the exclusion of all others. They are
institutions which are not commercial banks.
Since their functions are essentially the same
it has been customary now to refer to banks
together with financial institutions.
• In Tanzania the major groups of non bank
financial institutions include, micro finance
companies, the Development Banks, the
contractual Savings Institutions, Hire Purchase
Companies, Savings and Credit Cooperative
Societies, Lotteries, The Informal Deposit and
Credit Groups.
• The following are the basic characteristics to
capture the essential features of Banking:
• (i) Dealing in money: The banks accept
deposits from the public and advance the
same as loans to the needy people. The
deposits may be of different types - current,
fixed, savings, etc. accounts. The deposits
• are accepted on various terms and conditions
2. Deposits must be withdrawable: The deposits
(other than fixed deposits) made by the public
can be
•withdrawable by cheques, draft or otherwise,
i.e., the bank issue and pay cheques. The
deposits are
•usually withdrawable on demand
3. Dealing with credit: The banks are the
institutions that can create credit i.e., creation
of additional
•money for lending. Thus, “creation of credit” is
the unique feature of banking.
4. Commercial in nature: Since all the banking
functions are carried on with the aim of making
profit, it is
•regarded as a commercial institution.
• 5. Nature of agent: Besides the basic function
of accepting deposits and lending money as
loans, bank
• possesses the character of an agent because
of its various agency services.
 Who is a customer of a bank?
• The term ‘customer’ of a bank is not defined
by law. Ordinarily, a person who has an
account in a bank is considered is customer
 INTRODUCTION
• banker’s customer, Most case laws suggest
that a person becomes a banker’s customer
under the two circumstances.
• a) when the bank accepts to open an
account for him (by paying cash, or by
depositing a cheque)
• b) when a bank accepts to offer other
services than opening an account such as
giving an advice to a person who seeks it.
• In the case of Great Western Rly v London
&Country Banking Co [1899] 2 QB ,To make a
person a customer there must be some sort of
an a/c either deposit or current, or some
similar relation.
• In Ladbroke & Co. v. Todd, [1914] 20 TLR 422
• It was held in this case that “the mere opening
of an account… was sufficient to constitute the
relationship of a banker and customer”
• Again in the case of Woods v Martins Bank ltd
• [1959] 1 QB 55, The court ruled that,
Acceptance/willingness by bank to give advice,
and acceptance by bank of instructions given to
it by a person is enough to make him customer.
• So that relationship may start the moment
parties enter into relations or negotiations which
are to be considered part of the contract
concluded.
• In Banbury v Bank of Montreal [1918] A.C.
626 .a customer sought advice from the bank on
the financial standing of a company in which he
intended to invest him money. Upon the banks
advice the customer invested his money. The
company was not good as the customer lost
money, He sued the bank for the advice it had
given him leading to loss of his money. The court
said that there was no such duty, However if
bank undertakes to advice a person it must do
so using reasonable care and skills or else it will
incur liability if it advises negligently.
 HOW TO CONCLUDE A BANKING
CONTRACTUAL RELATIONSHIP
• Opening of a/c
• before the bank accepts a person as new
customer it must make a diligent search
relating to the integrity and responsibility of
the intending customer.
• The new intending customer must.
• -be introduced to the bank by customer of
the bank, referees if necessary, signature.
 TYPES OF CUSTOMERS OF A BANK.

• any person who is legally capable of entering

into a contract of a banker and customer
qualifies to be a banker’s customer and the
word person has a more meaning than an
individual as hereunder shown:
• Joint customers, Are customers which open
account in the names of two or more of them.
• Under joint accounts the bank must consider
the following item to done by customers.
 TYPSES CONTINUE
• The name(s) of those who will sign the cheque.
• Liability of parties, either joint or several.
Whether parties can be sued collectively or
individually.
• That if one party dies, then the remaining ones
can authorize release of funds and the account
becomes a sole account in the remaining parties
name(s).
•
 Types continues
• Corporate Customers, It includes customers
which are legal entities, apart from banking law,
corporation are also regulated by the companies
Act.
• The law requires for a company to operate must
be registered or incorporated.
• When a company incorporated it acquires the
status of a legal person distinct from its members
and therefore qualified to become a bankers
customer.
• However being a customer of a certain bank
incase of company it depends with the nature
of a company itself especially in matter
concerning liabilities. example we have kinds
of company like
• -Company limited by share
• -Subsidiary company.
• A company Limited by share
 for these companies members cannot be
more liable than they have subscribed to.
 So it is important for a bank to contend
themselves as to the extent of such liability
and engage with the customer accordingly
o Subsidiary company
o A subsidiary company is a company which is
controlled by another company.
 continues
 When a company has control over another
company it is known as a holding company

 may be limited in their decisions as most of the

decisions are controlled by the controlling
company.
• A subsidiary company cannot resolve to be a
customer of a bank by itself in exclusion of the
controlling company. Banks must be aware of
that.
GENERAL INDICATORS THAT A COMPANY QUALIFIES TO BE A
CUSTOMER OF THE BANK
- That the company has a certificate of incorporation/
registration.
- That it has passed a resolution over opening a bank
account and appointment of the signatories thereto.
• -That the objects of the company must allow opening
bank account
• Banks mandate that details who should sign cheques
and endorse the bills.
 Types continues
• Executors and Administrators of estate
• An executor is appointed by will of a person
who has died but before his death.
• An administrator is appointed by court when
the dead person did not leave a will.
• To an executor the court gives a document
known as a probate while to the administrator
the court gives a document known as letter of
administration.
• The two must open account with a bank into which
money from the estate of the deceased person will be
deposited prior to distribution to the creditors. The
bank must make sure the two have the said legal
documents.
• Trustees
• A trustee is a person who deals with property which is
under his control for the benefit of others known as
beneficiaries. A trustee is appointed through a trust
deed and the trust must be registered vide the
trustees Incorporation Act (RE: 2002).
 Types continues
• The bank must make sure that the trustee has
the trust deed and a certificate of
incorporation. Short of that, the bank can be
sued by benefiaries and can be liable for
damages.
• Clubs and Associations
• Under clubs and associations decision and
other matters are passed in general meetings
by involving members to that particular club.
• Bank must use a standard mandate that
authorizes chairman, secretary and treasurer to
sign cheques
• Persons other than Account Holders
• Woods v. Martins Bank Ltd [1959] 1 Q.B 55, that
“a person may become a customer of a bank
without opening an account”
• This category of customer can be referred in the
case of In Banbury v Bank of Montreal [1918]
A.C. 626
 continue
• a mortgage is created when a person seeks a
loan from, for example, a bank where he
pledges his property as a collateral/security
against the loan. Under this circumstance it is
not necessary for a mortgagor to maintain an
account with the bank
 THE RELATIONSHIP OF A BANKER
AND CUSTOMER
• What is the nature of this relationship?
• The relationship OF BANKER AND CUSTOMER IS ONE OF
CNTRACT
• Generally the nature of bank-customer relationship is that
of a debtor –creditor arising or resulting from a contract.
• A debtor-creditor relationship is based on agreement –
contract. Therefore a bank - customer relationship is based
on contract.
• However, the terms and conditions of banker-customer
contract are not express rather they implied.
 Relationship continues
• Debtor- creditor relationship
• It was stated in the case of Foley v Hill (1818),
That banker-Customer relationship is one of
debtor-Creditor. Where a/c is in credit banker
become a debtor and customer is creditor.
• So a bank is a debtor. But what kind of
debtor? A debtor who is under duty to repay
the customer when the customer instructs
him to do so.
 Relationship continues
• Specifically the banker – customer debtor –
creditor association has the following unique
characteristics;
• a)Proper manner of making demand;
• Demand can be presented by bringing a
cheque, bank drafts or withdrawal forms
widely available in all banks.
•
 Relationship continues
• b) Place and time of demand;
– Demand must be made only to the bank branch
where the account is kept
– It must be presented only during working hours
for a demand may not be honoured if presented
before or after that time.
 Relationship continues
• By summing up it can be said that, a bank is
not like an ordinary debtor who must seek out
the creditor and repay his debt. Demand on
the part of customer is a condition precedent
to repayment of the debt;
• Mortgagee –mortgagor relationship?
• The law relating to mortgages in Tanzania is
contained under part X of the Land Act 1999
which at Section 2 defines a mortgage as:
 Relationship continues
• When a customer seeks for a loan from a bank
the mortgagee – mortgagor relationship between
banker and customer arises since the latter gives
out his property to secure the loan advance.
• If the loan is not repaid the banker will exercise
his power of sale of the property as may be
agreed under the mortgage deed. And if this
happens the court can not interfere with the
exercise of this power.
 continues
• National Bank of Commerce v Dar es Salaam
Education And Office Stationery [1995] TLR 272
(CA), Where a mortgagee is exercising its power
of sale under a mortgage deed the court can not
interfere unless there was corruption or collusion
with the purchaser in the sale of the property.
• Mortgagee- mortgagor relationship between a
banker and customer is special and results from
the general banker- customer relationship.
•
BANK AS AN AGENT OF CUSTOMER
Is this relationship that of agent and principal?
•This idea of agency in banking arise from two
facts
1. In some cases bank does certain things on
behalf of a customer.
2. That the bank has a duty to act in trust for the
customer , a duty sometimes known as that
secrecy. This duty also exist in an agency.
 BAILOR- BAILEE RELATIONSHIP
• Bailment means keeping someone’s goods or
money in safe custody. This can be done
either for reward i.e the owner of the goods
(bailor) paying the bailee for the service or it
can be done gratis i.e free of charge.
• Generally, the nature of Banker customer
relationship is that of creditor debtor arising
out of contract.
• Bank act as bailee of customer goods
especially items of special value and
document (title deeds, certificate, wills
BANKERS OBLIGATION TO CUSTOMER
• Once the bank accept to open an account for
a customer, from that moment banker
customer relationship is created.
• Out of this relationship there rights and
obligations available to both parties.(banker
and customer)
• The obligations of banker become
automatically rights of customer and vice
versa is true.
 Obligation continues
• 1)Obligation to pay on demand
• The banker has an obligation to pay his
customer upon demand which is formally
represented by way of cheques or other
withdraw authorities.
• Cheque contains the terms of customer's
order and it is primary and fundamental
obligation of the bank to obey the terms of
this mandate exactly as they are given.
 Obligations continues
• The duty of banker to pay customer arises only when
demand is placed. This means the banker in absence of
customers demand, is not obliged to do the
repayment.
• Forley v Hill (1848),it was established that: Money,
when paid into bank ceases to be money of the
principal…..it is the bankers money to with it as he
pleases. Only to repay to principal when demanded.
• If the drawee bank refuses to pay or delays payment
without good reasons it will held liable in damages to
customer for injury.
LIMITS/EXCEPTION OF BANKS DUTY TO
PAY ON DEMAND
• The duty of the banker to pay a customer on
demand is not absolute. As there
circumstance where a banker is under no
obligation to pay its customer even though a
demand or an order for payment is well
placed. These circumstances are as follows
• i) Where there is insufficient funds
available in customers account. This may
happens in two ways.
• a)When customer's account has no adequate
credit balance
• b)when there is no express agreement btn
banker and customer over an overdraft facility
where customers account has no funds.
• ii)When customers cheque is defective a
banker can not pay.eg when the cheque is
overdrawn, it was drawn past six month.
• iii) When there is Court's order not to pay.
e.g. Garnishee order
• iv ) When it has come to bank's notice that
the customer is either dead, has become
insane or insolvent.( despite customer's
demand)
• Vi)When the bank has information that a
company has commenced winding up
activities.
 Limits continues
• Vii)When in case of a cheque, the bank
becomes aware that the person claiming
payment of cheque is not entitled to it.
 Obligations continues
• 2) Obligation to obey with customer's
instructions.
• Customers instructions can take two forms.
• a)an order such as transfer money from one
account to another account. However bank is
entitled to refuse to follow customer's instruction
in money laundering cases. Banks and financial
institution are to report Financial Intelligence
Unit(FIU) any suspicious transaction by any
customer.s.17 of The Anti-Money Laundering
Act.
 continues
• 3)Obligation to exercise care( duty of care)
• This duty requires the bank not to act in such
a way that it causes loss. The bank suppose to
perform its required activities with care and
reasonably and not negligently.
• The bank can be liable on negligence if it does
one of the following without proper care
• a)If it over debts or under credits customer's
account.
• b) If it offers advice to customer who
subsequently suffers loss having acted on such
advice. As a general rule there is no duty upon
the bank to advice a customer but if it chooses to
do so a special degree of care must be exercised.
• c) if it holds customers cheques for collection.
• The bank has to take reasonable care when
collecting customers cheque because there
incidence where cheque get lost in course of
collection. National Bank of Commerce v Perma
Shoe Co (1988)
 Obligations continues
• 4) Obligation to guard against forgeries.
• Duty to disclose forgeries is imposed on both
a bank and customer. Either party to the
banking contract who knows or has reason to
suspect that a forgery is being perpetrated is
under duty to inform the other about it.
• Greenwood v Martins Bank Ltd [1932] all E.R.
318.
 continues
• In Brown v Westminster Bank (1964) ,
• The court held that, since the customer had
confirmed that the cheques were valid, he
was not entitled to sue the bank for
negligence.
• 5) The bank has a duty to give reasonable
notice before closing a customer’s account
• Prosperity v Lloyds Bank (1923) it was held
that one month notice which usually banks
use was inadequate for a business with
complex banking relationship. Where,
however, a case of fraud is established it is a
condition for immediate closure.
• 6) Obligation not to divulge the state of
customers a/c. Duty of secrecy or
confidentiality
 Obligation continues
• This duty is implied under general banking
contract.
• That the bank is under obligation not to
disclose the state of customers account.
• Why the duty of secrecy?
• The duty is well imposed upon the banker
because the transactions between the banker
and customer are regarded as being of
pecuniary private character
 Obligation continues
• if disclosed may cause considerable damage to
his credit standing and tarnish business
reputation
• In Tournier v. National Provincial and Union
Bank of England, [1923] All ER 550, It is an
implied term of the banker’s contract with his
customer that the banker shall not disclose the
account or transaction relating thereto of his
customer except in certain circumstances”.
•
 Obligation continues
• In Tanzania, section 48 (2) of the Banks and
Financial Institutions Act. speaks about the
duty of secrecy to all banks and FI.
• Therefore since its an implied term under
bankers contract, the banker is under
obligation of not divulge to third person
without express or implied consent of the
customer either, State of customers account
and transaction relating to.
 EXCEPTIONS
• Exception to the duty of secrecy is elaborated
more in the case of Tournier v. National
Provincial and Union Bank of England, The court
pointed out for instances in which
disclosure/divulgence is allowed.
• a) Compulsion by law
• i)The law of evidence legislation may compel a
banker to produce copies of entries in bankers
books, which include Ledgers, day-books, Cash
books and a/c books.S.76,81 of Evidence Act.
 Exceptions continues
• ii)Prevention and Combating of corruption
Act,2007, No 11 of 2007. S.12 (1), that Gives
power the Director general to authorize any
officer to search any person( Bank), if its
reasonably suspected that such person(bank)
is in possession of property corruptly or illicitly
acquired.
• b)Duty to public disclosure
• Where there is a public duty to perform that
requires information to be obtained from
banks.
• -Example where the bank is on the view
that customer is trading with enemies during
war time.
• - breaches of faith to the state (typical of
escrow saga)
 EXCEPTIONS
• - customer violates laws of the country
• c) Where the interests of the bank require
disclosure. E.g when a banker is making demand
on Guarantor he may say what the principal
debtors overdrawn balance is.
• d) where the customers interest demand
disclosure, Intending guarantor wants to know
about the financial standing of the
customer(intending borrower) bank has to
answer truthfully. this is on interest of customer.
 EXCEPTIONS
• Where the customer permits.
• NOTE: Duty of non-disclosure does not end
the moment customers a/c is closed. It
continues
CUSTOMERS OBLIGATION TO BANKER
(i) Duty to exercise reasonable care in drawing his
cheques and in handling them. if the customer
is careless or negligent in drawing his orders,
forgery is committed and the bank pays-the
bank will not be held liable to pay the customer.
London joint stock Bank v McMillan &
Arthur[1918] A.C 777
It was held that, when customer draws cheque or
give instructions to draw money he must
exercise due care. Same as when handling his
instructions or cheque.
 Obligation continues
• (b) To advise the bank when discovered that cheques
are forged.
• This duty requires the customer to disclose or report
forgeries relating to cheques to the bank. This duty is
placed upon the customer because it is presumed that
a customer stands in a better position to guard against
forgery. In the case of Green wood v. Martins Bank
[1933] A.C pg. 51, the court held that, A could not
succeed because he breached his duty to inform his
bank about the forgery immediately after discovering
the same
 Customers obligation to banker
continues
• (c) Duty to exercise care when using cash
cards/ATM cards.
• Cash cards are the property of the bank. The
customer must exercise care as laid down in the
cards conditions of use. These are on a form that
must be signed by the customer. The code
number of the cash card otherwise known as the
PIN number (Personal Identification Number)
must not be disclosed to any person or written
down anywhere.
CUSTOMERS OBLIGATION TO BANKER
• d) Duty to keep cheque books in a safe place
• Most forgeries with regards to cheques are
done because those who are involved in
forging have access to cheque books which is
caused by carelessness of the owners of these
cheques in the way they keep
them.Greenwood v Martins Bank
Ltd[1932]all E.R 318
 Obligation continues
• e) Duty to inform the bank on changes
• When there is any change of circumstances
such as customers address, change of name
and any change that may affect the banker
customer relationship. This change may affect
also the way a customer’s account is
operated. If a cheque book is lost, to prevent
forgery, the customer has to report
immediately.
 The rights of the banker over
customer’s deposits.
• If we understand the obligations or duties of a customer as
the rights of the banker then the following are the other
rights of the bank in relation to his customers’ deposits
• i) Right to commission
• Ii) Right to repayment on demand of an overdraft
• Iii) ) Right to indemnity
• When the bank does or acts on any thing for the customer
and incurs cost the bank retains the right to be indemnified
by the customer.
•
• (4) Right of lien
 A LIEN
• In Halsbury’s Laws of England, it is stated:
"Lien is, in its primary sense ,a right in one
man to retain that which is in his possession
belonging to another until certain demands of
the person in possession are satisfied. In its
primary sense, it is given by law and not by
contract."
 A LIEN
• general lien is a the right a creditor has in the
goods, securities or any other assets that he
possesses but belonging to the debtor to
retain them until the debt is repaid, provided
that there is no contract express or implied, to
the contrary. It is a legal claim by one person
on the property of another as security for
payment of a debt.
 BANKERS LIEN
• A lien is a right to retain goods of another in
order to enforce fulfillment of an obligation.
There is no right to sell the goods.
• A banker lien is an exceptional type of lien
because it include a power of sale. in
Brandao v Barnett(1846) 3 CB 519 Where
Lord Campbell defined a bankers lien as an
implied pledge
• Bankers lien does not attach to each and
every kind of property.
• Property subject to lien is that property which
comes into the hands of the bank to be dealt
with his business.
• Therefore Bankers lien ordinarily attaches on
bills, cheque or notes paid into customers
bank to be collected and credited to his
account.
 PROPERTY NOT SUBJECTED TO
BANKERS LIEN
• All types of property where there is an express
agreement to that effect.
• Valuable deposited for safe custody
• Securities deposited with bank for safe
custody
• Money paid into the bank.
• Particular lien (see s. 122 of the Law of Contract Act,
Cap 345): is commonly exercised by such persons who
have spent time and labour on things they retain. All
banks have a right of lien to customer’s property.
• A good example of a particular lien is the lien
exercised by a bailee in situations where he has
rendered a service in respect of bailment agreement
that involves exercise of labour or skill regarding the
goods bailed. He enjoys the right to retain the goods
until he has received his due remuneration. All banks
have a right of lien to customer’s property.
•
 LIEN CONTINUES
• Banker’s lien: The banker’s lien is a general
lien. See s. 123 of the Law of Contract Act, Cap
345, provides that:
• bankers…may, in the absence of a contract
to the contrary, retain, as a security for a
general balance of account, any goods bailed
to them;
 BANKERS OBLIGATION RELATING TO
APPROPRIATION OF PAYMENTS
• Appropriation means application of fund paid in
by the customer.
• In Banking Practice as far as banking is
concerned, appropriation refers to the
application of funds paid in by a customer to
discharge separate debts that the customer owes
the bank. The bank customer who has more than
one account may wish to: appropriate any of the
accounts as he wishes or to repay a particular
debt item within a particular account as he
wishes.
 Appropriation continues
• Debtor has first right of appropriation either
expressly or by implication.S.59,60 and 61 of the
law of contract Act.
• Creditor has the second right to appropriate
where debtor has not, and he may apply the
payment to any debt even that which is
otherwise time-barred.
• Where the bank appropriates as a creditor it
must inform the customer of such appropriation.
Simson v Ingham (1923)2 B
• The general rules relating to appropriation of
payment.
• The rules governing appropriation of payment
are covered by Ss 59, 60 and 61 of the Law of
Contract Act.
• Where neither debtor nor creditor
appropriates then the law appropriates and
this is called default rule of appropriation.
 CLAYTONS CASE
• Appropriation by law is regulated by the rule
in Devayness v Noble(1816) pg 529, popularly
known as Clayton's case. The rule states that:
in the case of current account payment in are
in absence of any express indication to the
contrary, applied in the discharge of the debts
in order of time. In other words the rule is to
the effect that in a current account money
first paid in is the money first paid out.
• It is the first item on the debt side that is
discharged or reduced by the first item on the
credit side.
• Here below is an overdraft facility of Tshs
10,000,000/= on which the customer can
draw.
 example
• The payment in of 15 Dec wiped out the debt of
10 Dec, and reduced the debt of 3,000,000/= on
12 Dec by 1000,000/=.
• The payment in on 17 Dec discharged the
balance of debt 2,000,000/= of 12Dec.Discharged
the debt of 1,000,000/= 0f 15Dec. And reduced
by 1000,000/= the debt of 17Dec.
• The payment in of 20Dec, discharged the balance
of 1,000,000/= of 17Dec and Discharged the debt
of 20Dec.
 Importance of the rules relating to
appropriation of payments on bankers
• A) Where the debtor does not appropriate the
banker creditor is allowed to appropriate
 Overdraft facility of 10,000,000
Date Debit Credit Balance on Balance of the
which to draw debt
8Dec. - - 10,000,000/= 10,000,000/=
10 Dec 2,000,000/= - 8,000,000/= 10,000,000/=
12Dec 3,000,000/= - 5000,000/= 10,000,000/=
15Dec 1,000,000/= 3,000,000/= 4,000,000/= 7,000,000/=
17Dec 2,000,000/= 4,000,000/= 2,000,000/= 3,000,000/=
20Dec 2,000,000/= 3,000,000/= - -