Summary Princiles of equity and trusts

WHAT IS EQUITY? OVERVIEW OF PART I 3 Part I of this text examines the nature and current operation of equity. When considering the question ‘what is equity?’, it must be borne in mind that there is no single, definitive answer. The concept of equity has different meanings according to the social, ethical or legal context in which it is examined. Some of the more common interpretations include: symmetry, balance, harmony, morality, justice, fairness, a form of property interest and a recognised and established legal principle. In a legal sense, however, equity is primarily associated with justice. Equity has become a legal paradigm for the implementation of individual justice; equitable justice has both a palpable legal presence and an indefinite legal potential. Equity represents a nascent body of law which has developed to cater for the needs of individual justice as they have arisen in the past, and a system of justice capable of adapting to individual needs in the future. This does not mean that equity has an exclusive province over legal justice. The principles which have evolved under the common law also aim for justice; however, under the common law, justice is attained through more generalised legal norms. The vitality of equity lies in its individuality. As Aristotle points out: The source of the difficulty is that equity, though just, is not legal justice, but a rectification of legal justice. The reason for this is that law is always a general statement, yet there are cases which it is not possible to cover in a general statement ... Hence, while the equitable is just, and is superior to one sort of justice, it is not superior to absolute justice, but only to the error due to its absolute statement. This is the essential nature of the equitable; it is a rectification of law where law is defective because of its generality.1 The legal justice that equity represents has become an indispensable part of our civil legal system. Equitable principles have, and will continue to evolve to meet the demands of individual justice where the common law is deficient. This functioning of equity places it in a rather unusual position in the overall structure of our legal system. Equitable justice is detached from common law justice; however, its principles are very much a part of the law. This has tended to encourage uncertainty and distrust of the equitable jurisdiction. As Professor Newman points out: The relationship between law and equity in modern times has never been clearly established, and the nature of equity remains shrouded in mystery.2 In this part, the amorphous nature of the equitable jurisdiction and its somewhat nebulous relationship with the common law is examined. It is not until Part II that the character and application of juridical equitable principles that have evolved in this jurisdiction are considered. 1 The Nicomathean Ethics, Book Vx, 5-xi, Rackham, H (trans), 1926. 2 Newman, RA (ed), Equity in the World’s Legal Systems, 1973, Introduction, p 15. CHAPTER 1 5 THE NATURE OF EQUITY 1.1 Equity and justice The concept of equity has different social and legal interpretations. Its primitive meaning, if traced back to its Latin source aequum, is physical equality or evenness. In this purely neutral sense equity refers to a balance or an equilibrium; just as the origin of rightness is straightness, the origin of equity is equality. This primary understanding of equity is also used in an ethical context. What is equitable has come to represent behavioural neutrality; this in turn is equated with fair and just conduct. A person who has acted equitably will be presumed to have acted justly because ‘just conduct’ is associated with balanced, proportionate conduct. Conduct which is not balanced and neutral is likely to be considered inequitable; such conduct is, in turn, likely to be described as being either immoral or unethical.3 This ethical understanding of equity is of great relevance to our legal system. Whilst in a social context equity represents morally balanced behaviour, in a legal context equity represents what is legally just. Legal morality is encapsulated within the notion of justice. Conduct found to be equitable will generally be found to be just, although legal justice is not the exclusive province of equity. This is well explained by Aristotle. 1.1.1 Aristotle In Book V Chapter 3(A), Aristotle claims that the ‘just’ is a species of the proportionate and the unjust violates proportionality. In Book V Chapter 10, Aristotle concludes that equity and justice are effectively the same thing because they are both concerned with balance and proportionality and with what is right and good. According to Aristotle, however, different forms of legal justice exist: that which is distributive and that which is corrective.4 In broad terms, distributive justice refers to principles enunciating collective proportionality. The articulation and application of common law principles may be broadly termed ‘distributive justice’. On the other hand, collective justice considers the proportionality of conduct in private, individual transactions. Collective justice refers to individual equality and fairness. It is reflected, not in the 3 See Parker, JL (ed), Salmond on Jurisprudence, 9th edn, 1937, pp 672–73. 4 See op cit, Aristotle, fn 1, book Vii, 10-iii. Principles of Equity and Trusts 6 creation of generalised principles of proportionality, but in the equalisation of particular instances of injustice. As noted by Aristotle (Book V Chapter 4), collective justice represents ‘Justice in Rectification’. Aristotle felt that the form of justice which ‘equity’ most represents is collective justice because it rectifies the unfairness flaw from distributive justice. According to Aristotle, equitable justice is superior because it individualises a legal justice. Whilst law is universal, it is not possible to make a universal statement which shall be correct about all things; equity ensures that the law as generally stated is not applied unjustly to individual situations. As Aristotle notes (Book V Chapter 10): When the law speaks universally, and a case arises on it which is not covered by the universal statement, then it is right to ... correct the omission ... Hence the equitable is just, and better than one kind of justice – not better than absolute justice, but better than the error that arises from the absoluteness of the statement. And this is the nature of the equitable: a correction of law where it is defective owing to its universality. Equitable justice is superior because it is not absolute in nature. Unlike the common law, equity is determined individually rather than collectively; it is therefore able to correct the law by considering particular applications. The need for this type of ethical dimension to the law is also found in Roman jurisprudence where Domat lays it down as a general principle of the civil law that, if any case should happen which is not regulated by some express or written law, it should have for a law the natural principles of equity, which are the universal law extending to everything.5 1.2 Equity as a body of law The application of equitable justice has gradually resulted in the evolution of tangible, equitable principles which embellish the common law by alleviating the deficiencies of the absolute law. The most common legal understanding of ‘equity’ today is not as an intangible sense of justice, but rather as a discernible body of law, developed by the early Courts of Chancery and administered by modern Courts of Justice. Equity has become a source of legal principles in much the same way as the common law. The primary difference between common law and equity today lies in the method of implementation. Equitable principles are administered according to processes which have evolved in the courts of equity: equitable discretions, maxims and remedies will only be relevant to the administration and application of equitable principles. The evolution of equity into a body of law has not, however, destroyed the functioning of equitable justice. Whilst current legal references to equity are usually to the legal principles administered by courts of equity rather than the 5 Randall, AE (ed), Story on Equity, 3rd edn, 1920, pp 3–4. The Nature of Equity 7 form of corrective justice that equity represents, this is not to suggest that equity is no longer synonymous with corrective justice. The equitable principles which have developed embody this justice and retain the inherent discretionary capacity to adapt to new forms of individual unfairness. 1.3 Equity corrects the law In its discretionary capacity, equity operates to correct the law, not to overwhelm it. The jurisdictional foundation of equity is, as Aristotle notes, corrective rather than distributive; it prescribes relief against the proscriptive operation of the common law. It is imperative that every rational system of jurisprudence has a place for equity. In every legal system, defects will arise which cannot be cured by a universal principle. This requirement is summarised in the famous words by St Germain: In some cases it is necessary to leave the words of the law, and to follow that which reason and justice requireth, and to that intent equity is ordained, that is to say, to temper and mitigate the rigour of the law.6 In the evolution of equitable principles and in the application of existing rules, equity operates to correct all defects arising from the generalised operation of the law. Justice cannot ever be properly achieved without the ability to move from the general to the particular; equity endows the law with this capacity so that what is legally equitable is synonymous with what is singularly just. 1.4 Form and substance Whilst equitable principles were intended to alleviate the deficiencies of the common law, they still gave effect to the spirit and intent of the law. Equity is not obliged to follow the letter of the law, where the universality of this ‘letter’ produces injustice; equitable principles follow the ‘reason and spirit’, so that deficiencies arising from a strictly literal interpretation can be corrected. Mr Justice Blackstone, in his famous Commentaries, alludes to this: Equity, in its true and genuine meaning, is the soul and spirit of all law; positive law is construed, and rational law is made by it. In this, equity is synonymous with justice in that, to the true and sound interpretation of the rule.7 1.5 Standards of conduct Equity does not apply defined rules, it evaluates specific conduct; this requires flexibility and discretion. Most equitable principles are based upon 6 ‘St Germain’s doctor‘, adapted from Plucknett, TFT and Barton, JL (eds), St Germain’s Doctor and Student,1974, 97, Dialogue 1, Chapter 16. 7 Blackstone’s Commentaries, Book III, 2001, London: Cavendish Publishing. Principles of Equity and Trusts 8 discretionary standards of conduct rather than definitive rules; these standards usually stem from the basic precepts of good faith, honesty and generosity, and in this sense are relational in nature. Equitable standards emanate from fundamental precepts of good faith and fair dealing; courts are required to balance the nature of the alleged unfairness with the circumstances in which it occurred and compare it with existing social, domestic and commercial norms. Inevitably, standards of conduct vary from time to time in accordance with changing societal expectations. Increasing commercial pressures and expectations and changing family dynamics have meant that equitable standards are constantly being reassessed. For example, in assessing the relational fairness between individuals and large institutions, courts are increasingly taking into account the inequity flowing from lack of information. This is particularly prevalent with large institutions which have the expertise and financial ability to obtain a greater degree of information, and are thereby placed in a superior position to individuals dealing with them. Where large institutions proceed to take advantage of this by failing to fully inform or advise the individual to seek independent advice, equity must consider whether an injustice has occurred and relief should be granted. The question for a court of equity in such a situation is not so much whether there is an information imbalance, but whether the parties have acted fairly in light of the disproportionate circumstances. Equity will apply a behavioural standard based upon what it considers would constitute fair conduct for an institution in such a situation. Relief will only be granted after a full assessment of the circumstances. 1.5.1 Unconscionability In modern times, ‘unconscionability’ has become a fundamental cornerstone for the assessment of equitable standards. As one commentator has noted, avoiding unconscionability ‘may be the central informing idea of equity’. 8 Modern courts prefer to talk in the language of conscience as it provides a clearer reminder of the ethical origins of equity. Today, ‘unconscionability’ has become the founding standard for equitable intervention; its categories are expansive and include: • abusing a position or relationship of trust or confidence; • exploiting a recognised vulnerability or weakness; • unfair insistence upon strict legal rights in circumstances where this would be harsh or oppressive; and • unfair refusal to perform legal obligations. None of the above categories are mutually exclusive; there is always the possibility for new areas to open up. Each category must be carefully assessed; 8 Hackney, J, Understanding Equity and Trusts, 1987, p 17. The Nature of Equity 9 unconscionability will only be proven where a clear injustice can be established. While a level of doctrinal uncertainty is inevitable in the application of open-ended concepts, courts are very wary of the dangers of using unconscionability as a ‘panacea’ for any idiosyncratic perception of unfairness.9 1.6 Distrust of equity