Development of Modern Equity - Term Paper Example

Development of Modern Equity 2006 Introduction Equity is a derivative of the common law, which most countries, particularly those that were earlier colonies of Britain, follow. It includes all types of non-statutory laws, supported by precedence of judgments over the centuries. Typically in Britain and the erstwhile colonies, the statutes laid down by legislature are in the nature of general principles which can be interpreted in various ways, unlike in the United States where the entire statutes are codified. The jurisdiction of common law of Britain is much indebted to civil law, continental and code jurisdictions that in turn are influenced by codes of Roman, Napoleanic and German laws determined through years of customs and precendence. Till the early 20th century, the courts of law in most countries could award only money damages. Besides, the courts of law recognized only the owners of property, not trusts of property. However, there is always the possibility that relief cannot be granted through money. The courts of equity or the Court of the Chancery that granted equitable remedies, therefore, were empowered to grant relief through injunctions, that is, issue notice to stop some action and also deal with trusts. Cases of equity come into play typically when neither party has gone against law but there is conflict of interest between them. While courts of law decided through the jury, the courts of equity decided on the good conscience, fairness and sense of justness of the judge and precedence. Through the years, the courts of law and equity have merged but common law has continued to remain distinct from equity and trusts even when modern equity has resulted in its operation different rights, obligations, remedies and procedures (wikipedia.com). In this paper, we will review the difference between common law and equity and study the statement whether as Mason (1994) says, equity’s concern with standards of conscience, fairness, equality and its protection of relationships of trust and confidence, as well as its discretionary approach to the grant of relief stand in marked contrast to the more rigid formulae applied by the common law”. In the process, we will look at the main differences between common law and equity in terms of 1) conscience and fairness, 2) protection of relationship of trust and confidence and the 3) discretionary approach to grant of relief. Thereafter, we will also review the different types of trusts, mainly, constructive and secret trusts and the conditions that put restraints on equity – the certainties of trust, perpetuity and formality. In conclusion, we will wind up our investigation to see whether the statement by Mason (1994) is correct. Difference between Common Law and Equity The goal of equity was to prevent fraud, “…not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a court of conscience (Per Viscount Haldane LC in Nocton v Lord Ashburton [1914] AC 932 cited in Ellisson). The equity system developed in pre-modern England when the courts of law were unable to provide justice in cases of conflict between parties. Swift (1796, quoted in belcherfoundation.org) wrote, “Courts of law, by adopting narrow views, and illiberal maxims at an early period, became stationary, and refused to grant relief in all the cases which justice required.  On this basis, equity erected its superstructure, systematized every branch of cases, as fast as they came under its cognizance, and at the same time continued to exercise the great leading principle of abating the rigor and supplying the defects of law, the perpetual operation of which extended the power of the chancery, and furnished a system of relief, commensurate with the wants of mankind.  --- From these observations, it is evident that courts of law might have assumed, and that the legislature might now transfer to them, the whole business of courts of equity, and that there is no necessity for two distinct tribunals, to administer justice between man and man.” The most important distinction between law and equity is the set of rules governing each. While law is governed by the statutes of law, equity is governed by a flexible guideline, known as “maxims of equity”. The guidelines for equity are only general in nature, presupposing the set of common laws, and the grant of relief is based on the judge’s approach to conscience, fairness and justice. The common maxims of equity relate to the following: 1) the court of equity will grant a remedy for a wrong, 2) equitable remedy will not, in general, go against common law, 3) ensure that remedies on common law will not lead to inequality, 4) in case of conflict over property, the first to approach will have the advantage, 5) anyone who appeals for equity must be ready to accept so, 6) the party who claims equity must come with clean hands, that is, cannot be accused of any wrongdoing, 7) there should be no delay in equitable remedy, 8) equality is the last resort when there is conflict of interest, 9) equity looks at intent rather than the form of action, 10) any act by a party is considered as an intent of an obligation, even when the act is contradictory, 11) equity considers an obligation as done. (Unlocking Trusts) Historically, the Lord Chancellor, who granted relief on cases of equity on behalf of the King of England, gave judgment according to his conscience hence was open to criticism. However, over the years, the history of precedents in cases of equity have been taken as the benchmark for judgments, thereby losing much of its flexibility and becoming akin to law. Although theoretically, equitable set of rules could be in contradiction to common law, in operation it is rarely so. The most important contribution of equity is perhaps in ‘trusts’, or ‘use’, as it was originally known, by which the property was transferred to a beneficiary through an intermediary. This procedure was made necessary according to the principle of equity as common law did not recognize transfer of property. Instead, the latter only allowed for ownership of property. Hence, equity contributed to exclusive jurisdiction to rights like that of trusts, mortgages, partnerships, estate administration, bankruptcy and company law were the statutes of law could not deliver. Besides, while common law could only grant money damages, equity remedies could enforce specific performance like order the defendant to stay by his bargain, issue injunctions for some wrongdoings, rectify an agreement made by the defendant on appeal by the plaintiff, etc. Conscience & Fairness - The court of equity grants remedies on the basis of conscience of the judge as well as the principle of fairness that is laid out as the estoppels, which is the basic procedural principle that a party cannot deny an agreement with another party who subsequently represented to the court when there is violation of the agreement. From this basic estoppel, various forms gave birth. To quote Lord Denning, the basic estoppel is “a house with many rooms” (cited in Debrauche, 2005). Debruche (2005) gives the example of a test case in which the plaintiff makes a representation to the defendant to modify the dividing line between their lands even though they had agreed on it earlier. Since the defendant had already built his house up to the line, it would be detrimental to him to demolish it. Hence, the judicial conscience and fairness would prompt a refusal to the demolition. Similarly, injunctions are another way to equitable remedy is particularly receptive to conscience although they are discretionary. The moral premise of the equity principle was laid down by Swift (1796) as “The whole of the jurisdiction of the court of equity was acquired by the assumption of the principle, of deciding according to conscience in the administration of justice, where the courts of law furnished no redress, or their judgments were hard and oppressive, and it is on this broad basis, that the court of equity now rests its authority.  In England, courts of law will render judgment on a bond for the whole penalty, without regarding the sum due in justice: But a court of equity from a regard to justice, will decree the payment of the principal and interest only.  Where a contract has been executed in legal form, a court of law must on a breach of it render judgment for the damages: but a court of equity tho the contract be binding at law, will not decree a specific performance of it, if it be unreasonable and obtained by fraud, or taking an unfair advantage of the party.  There is a substantial difference in principle, between courts of law and equity.  Courts of law have adhered to positive rule, tho the consequence was, that in particular cases, their judgments contravened the principle of justice: courts of equity have disregarded positive rules for the purpose of attaining compleat justice.” Equity makes a distinction between “actual” and “constructive” fraud, the latter being a state of violation of a standard of conduct that the party is presumed to be aware of (Parkinson, 1996). For example, in a case Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, the Amadios signed documents as a guarantor for their house mortgage when their son took an advance from the bank for his business. At the time of signing the mortgage, the bank was aware that the parents did not understand the implications yet, along with the son, coerced the Amadios to sign the papers. The court set aside the mortgage on the premise of the bank’s unconscionable conduct under a provision of special disability (Ellison). Protection of Relationships of Trust & Confidence – Relationship of trust and confidence may, however, be hazy at times. For example, in the case RE DIPLOCK (1948) 2 All. ER 318, Caleb Diplock left his property to a trust when he died in 1936. The trust was to distribute the money to benevolent charitable trusts, which the beneficiaries did. However, the next-of-kin wanted to trace the money on finding that all the benevolent organizations were not in the nature of ‘charitable’. However, the organizations that had received the money had already used the money for building and other purposes and the court ruled against the tracing since the money was no longer identifiable. Discretionary Approach to Grant of Relief – The basic premise of equitable remedy is discretion in relief, unlike common law that is based completely on precedent. However, the court must make sure that the injunctive relief is not misused, the reason that there is usually hesitation over the discretionary approach to grant relief. Some are of the opinion that money damages, the relief granted by common law, is less harmful than injunctive relief in case of mistake hence the former is preferable. But, it should be noted that equitable relief is granted only when common law does not provide any relief in the situation hence not mutually exclusive. Typically, if the court grants legal relief and considers it adequate, it does not grant equitable relief even when it is in favor of the plaintiff. In the early days of English court, legal and equitable remedies were granted simultaneously. The Chancery usually granted equitable remedies in favor of the poor when they approached them directly instead of the court of law, which was typically the case. In order to check the clash of interest between the court of law and the chancery, the “no adequate remedy at law” requirement was imposed for equitable remedy. In modern times, however, there are reasons why discretionary grant of equitable relief is considered less effective than legal remedies. Firstly, equitable relief is more inclusive since it requires certain standards of conduct. Secondly, injunctive relief as in equity is administratively problematic since it requires complicated drafting and follow-up. Thirdly, jury trial, as in legal court, is found preferable to equitable relief since it depends on the discretion of the judge (Wasserman, 1990). Resultant, Constructive & Secret Trusts Resultant trust is the outcome when a person buys property in the name of a trust, thereby the title of the property being held by the trustee rather than the purchaser. Hence, during the transaction, there is a presumption that the trustee is holding the property under the purchaser’s trust. In the case of the Gillingham Bus Disaster Fund (1958) Ch. 300, the mayor of an English town collected funds from citizens. However, when the insurance company paid for the entire claim, the mayor asked the court what he would do with the fund collected. The court mandated that the money had to be returned to the citizens, however difficult the process was since the mayor was the resultant trust (Duhaim Law Centre). As opposed to resultant trust, which is effected by the wish of the settlor, constructive trust is effected by law, hence referred to as remedial, corrective or punitive in case of fiduciary gains, breach of confidence or in order to redress a mistake. It emphasizes that a fiduciary position should not be exploited but be judged conscientiously, as the court held in the case Aas v. Benham (1891) 2 Ch. 244 that to "hold that a partner can never derive any personal benefit from information which he obtained as a partner would be manifestly absurd" (cited in Duhaim Law Center). Constructive trusts can be of two types – “recipient liability”, when the defendant receives trust property but the fiduciary parties, like the trustees, professional advisors or advocates fail to inform or “accessory liability”, when someone has assisted in breach of duty. In the first case, the defendant has to establish breach of fiduciary duty, trace the asset or the money of the trust and finally, and most difficult, that the recipient had knowledge of the breach (Robinson & Cristin, 2000). In a landmark ruling of the Privy Council in the Royal Brunei Airlines v Tan case, Royal Brunei established that dishonesty has to be proved and breach of fiduciary duty is not enough. Lord Nicholls in Royal Brunei stated that dishonesty “has a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated” (cited in Robinson & Cristin, 2000). In another case of Brinks Ltd v Abu Saleh & Others (No 3), the wife assisted the husband with 3m pounds in cash on assumption that it was meant for tax evasion. Instead, as it turned out, the money was out of the bullion robbery at the Brinks Mat Ltd in Heathrow in 1983 in which an employee was involved. Since the wife, Rimer J, had limited knowledge, she could not be tried as an accessory to fiduciary breach of duty. The matter was referred to by Mance LJ in the Group Torras SA v Al Sabah case, “The problem with which Rimer J was concerned was the not unusual problem that, if she had assisted at all, the defendant would plainly have been dishonest in a general sense, since it was clear that the whole purpose of the trip was dishonest tax evasion. But the answer to this problem seems to lie in recognizing that, for dishonest assistance, the defendant’s dishonesty must have been towards the plaintiff in relation to property held or potentially held on trust or constructive trust, rather than in the introduction of any separate criterion of knowledge of any such trust” (cited in Robinson & Cristin). In most English cases, the establishment of dishonesty, rather than inference of such, has been deemed as important. In the Court of Appeal decision of Jyske Bank (Gibralter) Ltd v Spjeldneas case, Colman J said, “It is important in this analysis to be very clear that the material question is not the objective test whether he ought as a reasonable businessman to have appreciated that the funds subject to his control had been fraudulently procured from the bank or that there was a real probability that they had been, but the subjective test whether he did indeed appreciate that the funds had been or been probably so procured” (cited in Robinson & Cristin). In the remedial constructive trust, a fiduciary relationship is not essential. But, it still does not form part of the English law although it is included in the United States and Canadian law. In the House of Lords, Lord Browne-Wilkinson said in the Westdeutsche Bank v Islington said, “the remedial constructive trust, if introduced into English law, may provide a more satisfactory road forward. The court by way of remedy might impose a constructive trust on a defendant who knowingly retains property of which the plaintiff has been unjustly deprived. Since the remedy can be tailored to the circumstances of the particular case, innocent third parties would not be prejudiced and restitutionary defences, such as change of position, are capable of being given effect. However, whether English law should follow the United States and Canada by adopting the remedial constructive trusts will have to be decided in some future case when the point is directly in issue” (cited in Robinson & Cristin, 2000) Restraints on Equity Trust are constrained by the three certainties that are required: 1) Certainty of intention, in which wordings clearly show the intention of the settlor to impose an obligation on the trustee, 2) Certainty of object, by which the beneficiary is named, identified and workable, 3) Certainty of subject matter, by which the property under consideration is defined and ascertained. Absence of certainty of intention would result in the property being considered as a gift to the trustee; absence of certainty of object would imply the resultant in favor of the settlor and absence of certainty of subject matter would result in the trust failing. The common law rule mandates that the perpetuity period is no longer than life plus 21 years, so that the period of the trust is not distanced too far ahead after death of the settlor. Equitable remedies are also constrained by the timing of filing of claim by the plaintiff. The court of England introduced the “doctrine of laches”, which were the defense of the person sued. If the defendant claimed that the plaintiff has delayed the filing, he may plead that he is prejudiced to defend himself. The doctrine is synonymous to the “statutes of limitation” in the court of law by which negligence and revival of stale cases is barred, unless the plaintiff is handicapped by disability or infancy. Conclusion Modern equity has developed from the common law of England, which could grant relief only in the form of money damages. Qualitative relief in the form of injunctions were given through the Court of Chancery, first simultaneously with the common law relief, and later only when no legal relief was available. Equitable relief is particularly applicable in cases of trusts, partnerships and other fiduciary relationships where money damages would not be effective. The basic principle of equity was grant of relief on the basis of discretion related to fairness and justice. Equity is considered as the conscience-keeper of the court as, instead of depending on the jury, it gives discretionary powers to the judge’s conscience. However, the misuse is limited by the three uncertainties of trusts, problems of perpetuity (like in common law) and administrative issues in drafting injunctions. Works Cited Rhonda Wasserman, Equity Transformed: Preliminary Injunctions to Require the Payment of Money, 70 B.U. L. Rev. 623 (1990), http://www.law.pitt.edu/wasserman/law5d.htm Robinson, Anthony, D and Bedell Cristin, A Review of Recent Cases Including “Constructive” Trusts and “Sham” Trusts, Paper Presented at the World of Trusts Planning and Management, 15 September, 2000, http://www.bedellcristin.com/sections/infoservices/conferences/conadr2.pdf Mason, A. The Place of Equity and Equitable Remedies in Contemporary Society, 110 LQR 238, 1994 Electronic Sources http://en.wikipedia.org/wiki/Common_law http://en.wikipedia.org/wiki/Equity Unlocking Trusts, Historical Outlines of Equity, Chapter 1 http://www.unlockingthelaw.co.uk/samples/trusts_ch01.pdf Anne-Françoise Debruche, Judicial Fairness in the Realm of Strict Law: Comparative Insights around a Classic Encroachment Case, vol 9.4 ELECTRONIC JOURNAL OF COMPARATIVE LAW, (December 2005), Belcher Foundation, Moral Law in the form of Equity http://www.belcherfoundation.org/moral_law_in_the_form_of_equity.htm Zephaniah Swift, A System of the Laws of the State of Connecticut (Volume 2, 1796) Ellisson, Minter, Law Students Society Student Tutorial http://www.lss.unimelb.edu.au/docs/tutorials/2005/equity/equity1.doc DUHAIME'S ELDER LAW, WILLS, TRUSTS & ESTATES CENTRE, http://www.duhaime.org/Will/ca-trus6.aspx Read More