The Fundamental Differences between Equity and Trusts - Essay Example

(Equity and Trust Law (LLB) - Are trusts simply a 'branch' of equity or are they something fundamentally different from the rest of equity Introduction: This essay deals with the fundamental differences between equity and trusts and examines whether trusts are just a branch of equity or whether trust and equity differ fundamentally. Equity was introduced as a means of alleviating the application of legal rules by Royal Courts or the Courts of Common Law. If the legal rules did not provide a solution to the problems, it was possible to petition the Crown. The origins of jurisdiction have brought in the principles of equity that could now be applied to every civil court in the land. According to some judicial interpretations, trusts are one of the greatest inventions of equity so such definitions would not make any fundamental distinction between trusts and equity and would consider trust as a branch of equity. Equity and Trusts: Differences/Similarities Trust law however applies to every situation in which a person places trust or confidence in another person to manage daily affairs and activities. Equity governs the trust law in such a sense and applies to a wide range of situations and cases such as family relationships, charities, pensioners etc. The courts deal with the formalities of property law and secret trusts, although trust law applies to all such situations, and understanding of trust law applies to express trusts, fixed trusts, discretionary trusts, resulting trusts, constructive trusts, charitable trusts, proprietary and personal solutions. Equity relates to the part of the legal system that follows within the English Common law context and resolves all disputes on the basis of principles of conscience, fairness and justice. Equity law comes into play when none of the parties could be blamed directly for any misdeed or breaking of law but their rights are in opposition. Equity could be contrasted with law which is a set of principles although the difference law and equity could be specified in the solutions. Financial damages are sought through court law although equity can relate to injunctions or decrees and can specify actions to be followed. For example a person who has lost an asset to a neighbour may not want the monetary value of the asset but the asset itself. Courts may also specify writs which are however more rigid than an injunction. However apart from solutions offered and the nature of damages claimed in terms of finances or actions, there are other distinctions such as the jury may not be available in equity and equitable remedies may not be subject to intervention of the jury. Within the common law systems, the distinction between legal and equitable titles may be an important one. A case depends on the decision of the jury depending on the type of remedy expected as for financial damages claim or claim of lost property, the remedy is considered legal and the jury is able to decide on the case. For declaratory judgements, injunctions and specific performances contract changes and modifications, and other non financial damage claims, equity claims are made1. The important distinction between law and equity relates to the source of rules that determine the decision making processes and legal decisions are made by reference to legal statutes and doctrines whereas equity is based on appeals to judgement involving conscience fairness and flexibility. In fact equity has not been guided by fixed rules like laws and faced many criticisms although equity has become more rigid to suit into the framework of English Common law. The difference between law and equity is more historical than legal as law would refer to the principles followed in courts of law with restrictions to the types of claims that can be brought to court. Equity is also a body of rules although rules of equity have not been fixed and tend to vary. In fact equity is based more on the sense of fairness and justice rather than a strict set of principle or statutes. Equity is thus referred to a system of rules or principles that supplement the ordinary rules of law and is not as rigid in application as rigid legal frameworks. Equity is thus referred to means of achieving 'natural justice'. So equity is a part in most legal systems, and in most legal systems, judges tend to apply both the rules of strict law and the principles of equity in reaching their decisions to achieve a balanced decision through law and equity. Equity developed both as complementary and supplementary to Common Law of England due to the inadequate and unsatisfactory resolution of cases through the English Common law system. The common law was inflexible from its introductory stage and because of corruption in the legal system the decisions of court based only on the common law were often harsh, unjust and not based on fairness. With the petition of judgments against such court decisions, a number of Chancellor doctrines developed and with the variations of these doctrines resulting in the establishment of the system of equity.2 In case of misuse or equity fraud one person is usually guilty of fraud and the transaction is deemed unconscionable if the person had taken an inappropriate advantage to obtain a bargain in the contract. Undue influence and other forms of pressure can work for the equity's intervention as seen in the case of Barton v Armstrong (1973) 47 ALJR 781 an agreement was attempted between a major shareholder and one of the directors. The director issued serious threats to the shareholder to force an agreement. This type of pressure may be illegitimate as it may be against consent. So it is important to discuss on the basis of equity law whether the pressure induced a person into a contract and is the pressure legitimate. Equity acts 'in personam' and equitable interests and titles protect the legal owner from bankruptcy and even bind third parties to legal transactions. In land transactions for instance everyone other than the purchasee is usually bound. However, in a particular case of Cave v. Cave, an equitable owner was also bound, and in another case of Hunt v. Luck3, the purchaser of legal title was affected by constructive notice. In this case Dr. Hunt had been swindled into conveying legal freehold of 27 houses to an estate agent, named Gilbert, who was letting them to tenants on his behalf. But Gilbert, mortgaged the properties to the defendant mortgagees. Hunt retained equitable title to the houses and the case provides authority that where the owner is not in occupation, the purchaser should enquire of those who are in possession, and will take subject to their rights based on constructive notice. The effects of the 1925 property legislation involved removal of the equitable notice doctrine for land transactions and this has been mentioned in cases such as Midland Bank Trust Co. Ltd. v. Green [1981] AC 513 and Lloyds Bank v. Carrick in which a purchaser took notice of unregistered land charge4. The Land Charges Act 1972 applies to a list of land charges and if a new equitable interest do not come to the list, old notices remain valid and a purchaser with notice remain bound by unregistered equitable interest in the land. This is seen in cases of E.R. Ives Investment Ltd v. High [1967] 2 QB 379, Kingsnorth Trust v. Tizard [1986] 1 WLR 783. Considering the difference and distinction between Equity and law, we might try to understand the exact relationship between equity and trusts or trusts law and equity when considered together. Although Equity law refers to the legal system and applies to cases or circumstances which cannot be decided by Common law, the difference between law and equity seems to have faded in recent times and the courts are more powerful in providing a decision based on a balance of law and equity. Within common law legal systems, s trust is a relationship in which the trustee holds legal entitlement to certain property and is bound to exercise legal control over the property for the benefit of individuals who hold the beneficial or equitable titles. Thus there are dual titles which can be legal or equitable and legal title would involve control, possession of property or management and beneficial, equitable title involves enjoyments, benefits or uses of the property. The trust terms are governed by trust agreements and local laws and are an important aspect of the common law legal systems. The person creating the Trust is often known as the Trustor, the Creator or Grantor. The person, institution or committee holding legal title to the property is the Trustee. The persons who are intended to benefit from the Trust are known as Beneficiaries. Trust law developed out of the law of equity and is often considered a part of equity law. Yet trust law may be completely different from equity law and some civil law systems also incorporate trusts in their civil codes. Trusts can be created inter vivos while the trustor is alive or testamentary only upon a grantor's death. A trust thus involves a situation in which one person or trustee holds assets for the benefits of another person who is recognized as the beneficiary. A trust is a type of legal entity used to hold legal and equitable titles to property for the benefit of one or more persons. In case of will, trust laws are applicable after the trustor's death and trust ownership are usually split between legal and equitable ownership as given to the trustee and the beneficiary5. A trust is established only when a document is signed and money or property is transferred from settlor to trustee, thus signing itself does not create the trust but there has to be some sort of asset transfer6. In certain cases a corporate trustee may avoid accepting real estate due to environmental issues or other concerns. Trust law is thus based on confidence on another person as the trustor entitles the trustee with legal powers to protect the beneficiary in some cases. Sometimes properties or assets are transferred to trusts and becomes the trust estate and the trust estate has all property, rights and obligations of the trust managed in terms of the legal document that created the trust. Trust law is however marked by the fact that in trusts, there is a distinction between legal and equitable interests as there are distinctions between trustee and beneficiary interests and the right to trace property in equity depends on the existence of a fiduciary relationship or presence of a trustee7. The process of creation of trust involves separation of legal and equitable titles as before the creation of trusts the settler has legal and equitable titles although after creation of the trusts, the legal title is vested in the trustee or trustees and equitable title was in the beneficiaries. The case involving decision of House of Lords in Westdeutsche v Islington BC [1996] 2 All ER 961 separated legal and equitable titles8. A trust involves separation of legal and equitable titles and before this case of Westdeutsche the separation of legal and equitable titles also naturally implies the existence of trusts. Also in property law legal and equitable interests are distinguishable by the fact that legal interests are rights and are framed by legal statutes whereas equitable interests are based on uses and benefits rather than legal interests. The Land Charges Act 19729 made a few number of equitable interests registrable although certain equitable interests may be outside legal statutes. Hudson (2003) presents the traditional doctrines of equity and trust within the context of contemporary issues in international commercial activity, the acquisition of rights in the family home, transfer or property will and the provision of welfare services, charitable trusts. Considering whether Equity is a part of trusts or something fundamentally different from trusts we could say that although equitable interests is a part of trusts, equity is by itself as distinct from law as it is from trusts. We argue that equity is fundamentally different from trusts considering that equity law refers to cases which are not under the system of common law whereas trust law has definite legal consequences in the context of the trustor-trustee relationship. The process of creation of trusts involves a separation of legal and equitable interests and some cases of equitable interests may be discussed using examples from National Provincial Bank v Ainsworth [1965] AC 1175) case in which a couple lived in a house that belonged to the husband who deserted his wife and mortgaged the house to the bank and for defaults, the bank sought possession of the house. The court held that the wife is not entitled to the property and a deserted wife's equity is not a right against third parties but just a personal right against the husband. The Matrimonial Homes Act 1967 now gives protection to those with property rights although in this case, the legal entitlements took precedence over equity. However considering the Westdeutsche v Islington BC [1996] 2 All ER 961 case, the main focus of this case has been based on the fact that trusts depend on the conscience of the recipient (or legal owner or trustee) who is legally responsible for protecting the property of the beneficiary10. Based on this, automatic trust arguments could be rejected, as is the notion that a voluntary transferor of legal title can retain the equitable title if he does not transfer it. This particular case of Westdeutsche v Islington BC [1996] 2 All ER 961 gives the following propositions that the basis of all trusts is conscience and that equitable titles have no meaning unless there is a distinction between legal and equitable titles. The case suggested that one person is legally entitled to the property, but equitable rights are encompassed within the legal title and has been considered a part of the legal rights. If a resulting trust is set up, the settlor may not start with both legal and equitable title, parting with legal title and retaining equitable title. The equitable title is instead created with the transfer of the legal title, as it deals with the 'conscience' of the recipient. This case seems to highlight the fact that both equity and trusts have one thing in common that is an appeal to conscience. The case also conclusively notes that it is possible to have a separation of legal and equitable titles without there being a trust11. In case where an innocent volunteer takes up trust property, the volunteer takes subject to the trust, but is not a trustee. By contrast, a knowing legal receiver is a trustee, because equity imposes on his or her conscience. Thus an initial fiduciary relationship between the trustee and trustor is required in equity and only after the relationship is established that equity is also awarded. Conclusions: The difference between equity and trusts seem to be characterized by the fact that trusts can be based on both equitable and legal interests. However this would not mean that equity is merely a branch of trust but considering its wide range of applications beyond trust law and beyond the legal framework in general equity and trusts could be separately studied and considered. Equity is simply not a branch of trust but a fundamentally different category of legal system, in fact considering the history of equity, equity may not fall within the strict legal framework and is based on conscience and fairness as well as personal judgments. Equity law tends to vary. This aspect of conscience, and focus on fairness is also common in trusts although trusts tend to have both the legal and equitable aspects. We can say equity goes beyond trust law and has wider range of applicability other than just trusts. Considering the similarities of trust and equity and also keeping in mind the fact that equity has it applications in cases other than trust law we argue, contrary to popular belief that equity is not just a branch of trust but fundamentally different and should be considered as a new branch of the legal system. Bibliography: Curzon, L. B.(Leslie Basil), Equity & trusts /L. B. Curzon. 2nd ed. London :Cavendish,c1996 Hudson, Alastair. Equity & trusts /Alastair Hudson. 3rd ed. London :Cavendish,2003. Keeton, George W.(George Williams), A casebook on equity and trusts /by George W. Keeton and L.A. Sheridan. 2nd ed. London :Professional Books,1974. Pettit, Philip H. Equity and the law of trusts. 5th ed. London :Butterworth,1984. Todd, Paul Cases and materials on equity and trusts /Paul Todd. 3rd ed. London :Blackstone,2000. Case List: National Provincial Bank v Ainsworth [1965] AC 1175 City of London Building Society v Flegg [1988] 1 AC 54 Barton v Armstrong (1973) 47 ALJR 781 Westdeutsche v Islington BC [1996] 2 All ER 961, Midland Bank Trust Co. Ltd. v. Green [1981] AC 513 Hunt v. Luck [1902] 1 Ch 428 CA Cave v. Cave (1880) 15 Ch D 639.Fry J. E.R. Ives Investment Ltd v. High [1967] 2 QB 379 Kingsnorth Trust v. Tizard [1986] 1 WLR 783. Midland Bank Trust Co. Ltd. v. Green [1981] AC 513 Lloyds Bank plc v. Carrick. [1996] 4 All ER 630 Read More