[1948] Ch. 465 (CA).
Summary, claim in personam, claim in rem, Clayton's case vs. pari passu, change of position defence, mixed accounts in general
Money was paid to charitable institutions by the executors of the testator's will under a direction which was subsequently declared by the House of Lords to be void for uncertainty, in Chichester Diocesan Fund v. Simpson [1944] A.C. 341. In other words, it was paid under a mistake of law.
The charitable institutions were volunteers, having provided no value for the gifts that were made to them. The next-of-kin, having exhausted their remedies against the executors, successfully claimed the money back from the charities in personam and in rem.
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The Court of Appeal held that the plaintiffs had a right to claim in personam in equity against the recipients, even though they were innocent volunteers who took in good faith, with no notice of the next-of-kin's title, and that this personal action was not liable to be defeated by the fact that the payment to them had been made under a mistake of law by the executors.
N.B. There is no claim at common law, in money had and received, where money is paid under a mistake of law, rather than fact. But the next-of-kin had made no mistake at all, either of law or fact.
Note also the requirement that any remedies against the executors must be exhausted first, before the personal action can be brought.
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Note that Lord Greene M.R.’s remarks on the real action were not just dicta, although since the personal actions succeeded it might be thought that they were - but they were relevant to the claims for interest payments.
The claims in rem worked in principle, subject to the ability to identify the money (which was not possible in all cases).
Generally, equitable tracing is allowed where trust money is mixed with that of an innocent third party who was a volunteer, even if not a trustee or other fiduciary.
The equitable tracing claim also succeeded where Diplock (i.e., next-of-kin) and volunteer money was mixed, and used to purchase land or stock.
But:
1. The Hallett's Estate principle was not applied to identify Diplock money in the mixed funds. Hallett’s Estate depends on the defendant being in some sense "guilty", whereas the charities were innocent volunteers.
2. No tracing was possible where the money had gone into improvements to buildings already owned by a charity, or the removal of an incumbrance, since it would be unfair to force a sale by using the equitable charge.
3. A similar principle was applied where debts were paid off, whether or not secured.
Clayton's case (1816) 1 Mer 572 was applied to running bank accounts. In the case, this meant that Clayton’s case was applied in the cases of Dr. Barnardo's Homes and the National Institute for the Deaf (the latter only on the second appeal, where the issue was whether the volunteer had unmixed the fund - which of course assumes that he could do this). The application of Clayton’s case in Dr. Barnardo's Homes was not done with enthusiasm, and the reason for it was essentially pragmatic: [1948] Ch 465 at 553-554:
"But in the case of an active banking account this [pari passu] would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution. What, then, is to be done? In our opinion, the same rule as that applied in Clayton's case (1816) 1 Mer. 529 should be applied. This is really a rule of convenience based on so-called presumed intention."
This obviously raises the question whose presumed intention is relevant. It cannot be Diplock’s next of kin because they did not choose where the money was to go - so must be the volunteer. This looks wrong in principle, and in case it is not easy to reconcile with the pari passu distribution in Sinclair v. Brougham.
Note that in the Clayton situation itself, there is a common intention between banker and customer.
The result of the application of Clayton's case in Barnardo was that all the Diplock money could be traced into bonds, whereas in the National Institute for the Deaf no Diplock money remained.
By contrast, in the cases where Diplock money was used to purchase war stocks where the charity already had similar stocks, Clayton was not applied, but instead pari passu to sales of stock (where further stock was later added and sold).
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It is often assumed, but has not been decided, that a change of position defence applies to both Diplock actions. It may even apply to all restitutionary actions - certainly it applies to money had and received claims: Lipkin Gorman v. Karpnale.
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For current bank accounts, the rule developed in Clayton's case (1816) 1 Mer 572 enshrines the principle of "first in, first out." The first payment in is appropriated to satisfy the earliest debt. The basis of the rule is said to be the presumed intention of the person operating the account. A preferable solution, in the opinion of the authors of the Report of the Review Committee on Insolvency Law and Practice (Cook Report 1982, Cmnd 8558), paras 1076-1080, would be to divide the mixed fund rateably (i.e., in pari passu). However, in Barlow Clowes International Ltd v. Vaughan [1992] 4 All E.R. 22, noted [1993] Conv 370, the Court of Appeal held that Clayton's case normally applied, Dillon L.J. observing that (at pp. 32 and 33):
If the application of Clayton's Case is unfair to early investors pari passu distribution among all seems unfair to late investors. ...
It is indeed correct that the precise situation in the present case did not arise in the reported cases. In Re Hallett's Estate there were indeed two separate beneficiaries claiming, but both were paid in full when it was ruled that the account holder must be deemed to have exhausted his own moneys first. ...
None the less the decisions of this court, in my judgment, establish and recognise a general rule of practice that Clayton's Case is to be applied when several beneficiaries' moneys have been blended in one bank account and there is a deficiency. It is not, in my judgment, for this court to reject that long-established general practice.
The rule in Clayton's case is only the starting point, however, and applies only where it provides a convenient method of determining competing claims. In the particular case, the presumed intention (from the application of the rule) was rebutted as being impractical and unjust, because a small number of investors would get most of the funds, and the fund was divided in pari passu.
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