The Rule in Clayton & Invoice Allocation

Invoices should never remain outstanding beyond the period specified by the Terms & Conditions that form the basis of the Contract, and everybody knows that.

That invoices do remain outstanding long – sometimes very long – past their due date isn’t as unusual as it should be, and everybody knows that, too.

One other thing that everybody knows: not only do some debtors fail to pay to terms, they also insist upon paying or part paying outstanding invoices intermittently and in defiance of any logical pattern or system – so much so, indeed, that incredulous credit personnel on the receiving end of these intermittent funds are left to wonder whether their client counterparts are playing some hitherto unknown form of Lotto, and pay invoices only as they are hauled out of a bin, randomly and at irregular intervals.

The Rule in Clayton’s Case (Devaynes-v-Noble(1816) 35 ER 781) enables a Creditor, if it so wishes, to legally and justifiably allocate payments received on a ‘first in’, ‘first out’ basis. The debtor should be told that this is being done, and why – and does not have the right to argue the point.

Clayton’s Case was good law in 1816, and it is good law now – and as many Companies follow it (whether they know of its existence or not) and allocate payments received to debts in the order in which debts are incurred, the fact that invoices are not paid in the correct sequence wouldn’t seem to matter very much, but where there are a great many pro forma invoices, this apparently simple method of allocation can create such an impenetrable maze of possibilities that neither debtor nor creditor can be sure of what is, or is not, outstanding.

This does not means that moneys cannot be allocated on a ‘first in’, ‘first out’ basis, but it does mean that, sometimes, it shouldn’t be.

Allocating moneys received to the invoices that it is intended to pay, or part pay, enables the creditor to state with certainty that a debtor has paid this, this, that, and part of that on such a date, and that this, this, that, and part of that therefore remains unpaid, and is due and owing as of today.

Keeping things on track in this way is not the neatest or the easiest way to go – and everybody know that – but it keeps the record straight, avoids the possibility of future confusion and disagreement, and will save a lot of time and trouble in the end.

No one wants to spend an entire weekend – to say nothing of most of the preceding Friday and a good chunk of the following Monday – sorting out a problem account if the origins of the problem are lost in the mists of time.

I know that.