• Ms. Ankita Shetye

Understanding 'Equity' as a source of law.

This article provides notes on EQUITY. It covers the summary of explanation of equity and its existence, history difference between equity and common law; also how equity works and equitable remedies.


When we see word equity, what instantly pops up in our mind is equity shares because we hear this term frequently in business or in the company. Even I thought the same before entering in this field, but here in legal sense equity is a system which includes part of natural justice. Equity literally means being fair and impartial.

But what exactly is equity and how did it come to existence?

Lets us begin from its origin; the principles of equity are the rules which have been developed by the courts of chancery over the centuries. The purpose of equity in this sense is to prevent injustice being caused by the automatic application of legal rules. Philosophically, equity is a concept that is also found in the works of the ancient Greek philosopher Aristotle and one which suggests that a judge may ignore a legal rule if its literal application would cause an injustice which the legislator could not have intended.


But English courts have not expressly adopted the ideas of Aristotle nor of any other philosopher as part of equity but it is suggested that the core of principles of English equity are in sympathy with this philosophical tradition in that the courts consider the conscience of the individual defendant in any particular case.


Consequently, it is necessary to understand from the outset one feature of English legal procedure. As the Courts of Chancery developed their own principles, there were clearly two completely separate streams of jurisprudence emerging in English law; the common law on one side and equity on the other. In practice, it was necessary for the litigant to decide which if these systems of rules would be necessary to decide his case. The common law court and courts of equity were completely separate courts. Only courts of common law would hear cases to do with the common law and provide common law remedies. Similarly, only the courts of equity would hear cases to do with equitable principles or the award of equitable remedies.


History of equity:

After the Norman conquest of England in the 11th century, royal justice came to be administered in three central courts: the Court of king's bench, the Court of Common Pleas, and the Exchequer. The common law developed in these royal courts. To commence litigation in these royal courts, it was necessary to fit one's claim within a form of action. The plaintiff would purchase a writ in the chancery, the head of which was the Lord Chancellor. If the law provided no remedy, litigants could sometimes appeal directly to the King. Eventually, the King would delegate resolution of these petitions to the King's Council. These petitions were eventually delegated to the Lord Chancellor himself. In the early history of the United States, common law was viewed as a birthright. Both the individual states and the federal government supported common law after the American Revolution. U.S. courts draw on decisions of English courts, individual state courts, and federal courts in formulating common law.


By the 14th century, it appears that Chancery was operating as a court, affording remedies for which the strict procedures of the common law worked injustice or provided no remedy to a deserving plaintiff. Chancellors often had theological and clerical training and were well versed in Roman law and canon law.


By the 15th century, the judicial power of Chancery was clearly recognised. Equity, as a body of rules, varied from Chancellor to Chancellor, until the end of the 16th century. After the end of the 17th century, only lawyers were appointed to the office of Chancellor. Over time, Equity developed a system of precedent much like its common-law cousin. One area in which the Court of Chancery assumed a vital role was the enforcement of uses, a role that the rigid framework of land law could not accommodate. This role gave rise to the basic distinction between legal and equitable interests.

The court of king's bench:

The Court of King's Bench, formally known as The Court of the King Before the King Himself, was a court of common law in the English legal system. Created in the late 12th to early 13th century from the curia Regis, the King's Bench initially followed the monarch on his travels. The King's Bench finally joined the Court of Common Pleas and Exchequer of Pleas in Westminster Hall in 1318, making its last travels in 1421. The King's Bench was merged into the High Court of Justice by the Supreme Court of Judicature Act 1873, after which point the King's Bench was a division within the High Court. The King's Bench was staffed by one Chief Justice (now the Lord Chief Justice of England and Wales) and usually three Puisne Justices.


In the 15th and 16th centuries, the King's Bench's jurisdiction and caseload was significantly challenged by the rise of the Court of Chancery and equitable doctrines as one of the two principal common law courts along with the Common Pleas. To recover, the King's Bench undertook a scheme of revolutionary reform, creating less expensive, faster and more versatile types of pleading in the form of bills as opposed to the more traditional writs. Although not immediately stemming the tide, it helped the King's Bench to recover and increase its workload in the long term. While there was a steep decline in business from 1460 to 1540, as the new reforms began to take effect the King's Bench's business was significantly boosted; between 1560 and 1640, it rose tenfold. The Common Pleas became suspicious of the new developments, as legal fictions such as the Bill of Middlesex damaged its own business. Fighting against the King's Bench in a reactionary and increasingly conservative way, an equilibrium was eventually reached in the 17th century until the merger in 1873.


The King's Bench's jurisdiction initially covered a wide range of criminal matters, any business not claimed by the other courts, and any cases concerning the monarch. Until 1830, the King's Bench acted as a court of appeal for the Exchequer of Pleas and Common Pleas and required Parliament to sign off on its decisions. From 1585, the Court of Exchequer Chamber served for appeals of King's Bench decisions.


Court of Common pleas:

The Court of Common Pleas, or Common Bench, was a common-law court in the English legal system that covered "common pleas"; actions between subject and subject, which did not concern the king. Created in the late 12th to early 13th century after splitting from the Exchequer of Pleas, the Common Pleas served as one of the central English courts for around 600 years. Authorised by Magna Carta to sit in a fixed location, the Common Pleas sat in Westminster Hall for its entire existence, joined by the Exchequer of Pleas and Court of King's Bench.

The court's jurisdiction was gradually undercut by the King's Bench and Exchequer of Pleas with legal fictions, the Bill of Middlesex and Writ of Quominus respectively. The Common Pleas maintained its exclusive jurisdiction over matters of real property until its dissolution, and due to its wide remit was considered by Sir Edward Coke to be the "lock and key of the common law".It was staffed by one Chief Justice and a varying number of puisne justices, who were required to be Serjeants-at-Law, and until the mid 19th century only Serjeants were allowed to plead there.


As one of the two principal common law courts with the King's Bench, the Common Pleas fought to maintain its jurisdiction and caseload, in a way that during the 16th and 17th centuries was categorised as conservative and reactionary. Reaching an acceptable medium with the King's Bench and Exchequer of Pleas proved to be the downfall of all three courts; with several courts of near-identical jurisdiction, there was little need for separate bodies, and the superior courts of Westminster were merged by the Supreme Court of Judicature Act 1873 into a single High Court of Justice. With an Order in Council issued on 16 December 1880, the Common Pleas Division of the High Court ceased to exist, marking the end of the Court of Common Pleas.

Exchequer:

The Exchequer of Pleas or Court of Exchequer was a court that dealt with matters of equity, a set of legal principles based on natural law and common law in England and Wales. Originally part of the Curia Regis, or King's Council, the Exchequer of Pleas split from the curia during the 1190s, to sit as an independent, central court. The Court of Chancery's reputation for tardiness and expense resulted in much of its business transferring to the Exchequer. The Exchequer and Chancery, with similar jurisdictions, drew closer together over the years, until an argument was made during the 19th century that has two seemingly identical courts was unnecessary. As a result, the Exchequer lost its equity jurisdiction. With the Judicature Acts, the Exchequer was formally dissolved as a judicial body by an Order in Council of 16 December 1880.


The Exchequer's jurisdiction, at various times, was common law, equity, or both. Initially a court of both common law and equity, it lost much of its common law jurisdiction after the formation of the Court of Common Pleas, and from then on concerned itself with equitable matters and those common-law matters it had discretion to try, such as actions brought against Exchequer officials and actions brought by the monarch against non-paying debtors. With the Writ of Quominus, which allowed the Exchequer to look at "common" causes between subject and subject, this discretionary area was significantly expanded, and it soon regained its standing in common law matters. Cases were formally taken by the Chancellor of the Exchequer, but in practice were heard by the Barons of the Exchequer, judicial officials led by the Chief Baron. Other court officials included the King's Remembrancer, who appointed all other officials and kept the Exchequer's records, and the sworn and side clerks, who acted as attorneys to parties to a case.


What's the difference between equity and common law?

Equity has developed a range of very particular claims and remedies as part of its mission to dispense justice through the courts. One of the skills of the English lawyer is to understand which claims and remedies arise under equity and which arise under the common law. Therefore, it is necessary to make a distinction between common law and equity. Below is the example of distinction:

So here the availability of equitable remedies are more dependent on the discretion of the court than common law remedies, although even equitable remedies are becoming more rigid over time.


In general terms, it is only in equity that it is possible to receive discretionary remedies or declarations that are awarded in relation to specific factual circumstances - whether preventing unjust behaviour by means of injunction, forcing obedience of contractual provisions by specific performance etc.





How does equity works?

Equity acts in personam the most important equitable principle is that the jurisdiction of the court is to act in personal: that is the court is concerned with the conscience of the individual defendant as much as with any strict rule. That equity acts in personam do not mean that it awards purely personal rights, such as damages at common law as opposed to proprietary rights because equity also awards proprietary rights in the form of rights under trust and so forth. This particular usage of the expression 'in personam' refers back to Lord Ellesmere's description of equity in the Earl of Oxford's Case in 1615 as being concerned with the conscience of the defendant who appears before the court.


A court of equity is therefore making and order,based on the facts of an individual case,to prevent that particular person from continuing to act unconsciously. This may relate to the manner in which a trustee is dealing with a beneficiary's property, or to a claimant's fear that the defendant will move his or her property out of the jurisdiction before judgement in a trial, or to a defendant's refusal to perform his or her obligations under a contract.

One of the themes that we will observe in the modern application of equity is that the great flexibility which is identifiable in a court of equity's inherent jurisdiction to act in personam has been superseded in many circumstances by the introduction of more rigid rules to decide when these principles will and will not be deployed.



What are equitable remedies?

Equitable remedies are distinguished from "legal" remedies by the discretion of the court to grant them. In common law jurisdictions, there are a variety of equitable remedies, but the principal remedies are:

  • Injunction:

An injunction is an equitable remedy. It is at the discretion of the court to make an order to either party to the litigation, or by way of a final judgment, to take some action or to refrain from some action. The broadest discretion of the court is required at this point. Injunctions can be used in a broad range of factual situations from family law disputes to commercial litigation. Sometimes the injunction forms a part of the relief sought by one or other of the parties in parallel to claims for damages and other remedies, whereas at other times the injunction is the sole remedy required by the claimant.


Types of injunctions:

Injunctions divide between those that require some action from the respondent (mandatory injunctions), those that require the respondent to refrain from some action (prohibitory injunctions) and those that seek to prevent some action that it is feared may be performed in the future (injunctions quia timet). Another division between types of injunction is between interim injunctions, which are made during litigation to preserve the parties’ respective positions until the litigation is resolved, and final or permanent injunctions, which are made at the end of litigation as part of the court’s resolution of the dispute between the parties.


Interim injunctions in general

Interim injunctions (formerly known as interlocutory injunctions) are awarded on an interim basis during litigation. Their award is based on a balance of convenience between the potential harm suffered by the applicant if no injunction were awarded, and the potential inconvenience caused to the respondent if the injunction were to be awarded.The applicant must therefore demonstrate a strong prima facie case.


The test for the availability of an interim injunction was contained in American Cyanamid v Ethicon Ltd (1975). In the words of Lord Diplock, ‘The court must weigh one need against another and determine where “the balance of convenience” lies’. The court is thus required to consider, in all the circumstances, whether it would be more convenient on balance to award or deny the award of an interim injunction. There are four elements to the test: (i) that the balance of convenience indicates the grant of an award; (ii) seemingly, that the applicant can demonstrate a good prima facie case; (iii) that there is a serious question to be resolved at trial; and (iv) that there is an undertaking for damages in the event that the applicant does not succeed at trial.


Significantly, the applicant must also demonstrate that, even though the application for the injunction is made before litigation has begun in earnest or before the litigation has been completed, he has the makings of a good case once the matter does come on for trial. Clearly, the court would not wish to award an injunction to someone who had no reasonable prospect of success at trial or else the respondent could suffer harm or injury as a result of the injunction, which might not be capable of compensation in the future.


Freezing injunctions

Another form of interim injunction is the freezing injunction (colloquially known as ‘Mareva injunctions’). A freezing injunction will be awarded to prevent the respondent from removing assets from the English jurisdiction before the completion of litigation to avoid settlement of a final judgment.


The applicant is required to demonstrate three things: a good arguable case; that there are assets within the jurisdiction; and that there is a real risk of the dissipation of those assets which would otherwise make final judgment nugatory. Another formulation has provided that freezing injunctions will be awarded when the court is convinced that the applicant will recover judgment against the defendant, that there is good reason to believe that the defendant has assets within the jurisdiction to meet that liability, and that the respondent may well take steps to put those assets beyond the applicant’s reach


  • Search orders

A search order (colloquially known as an ‘Anton Piller’ order) permits the applicant to seize property belonging to the defendant to protect evidence for any future trial. Typically, the order will be obtained ex parte (without the defendant being aware of the hearing) to enable the applicant to exercise it before the defendant realises the risk of having property seized (Universal Thermosensors Ltd v Hibben (1992)). In many cases, a freezing injunction and a search order are obtained at once in respective of the same defendant and over the same property: a case of ‘freeze’ and ‘seize’, if you will.


  • Specific performance:

The remedy of specific performance is concerned to hold parties to a contract to the proper performance of their obligations. Specific performance achieves this goal by imposing a personal obligation on the defendant to perform specific contractual obligations. It is not necessary that there has been a pre-existing breach of contract for the award of an order for specific performance. As with all equitable remedies, its award depends on common law remedies, such as an award of damages, being insufficient remedies in the circumstances (Wilson v Northampton and Banbury Junction Railway Co(1874)), thus emphasising equity’s role in supplementing shortcomings in the common law. Specific performance has been explained by Lord Hoffmann in Co-operative Assurance v Argyll (1997) as being part of the discretionary jurisdiction of the Court of Chancery to do justice in cases in which the remedies available at common law were inadequate.


  • Account:

More generally, the remedy of account has been developed by equity to compel one person to render an account to another person of amounts owed to that other as the result of the breach of some equitable obligation. Its roots are therefore in a procedural obligation to value either the amount of the loss that has been caused to the claimant and for which he or she will require compensation, or to calculate the amount of the profit that has been earned by the defendant at the claimant’s expense and which must be given up to the claimant by way of the obligations of a constructive trustee (as in Boardman v Phipps (1967)) or otherwise. There is no particular intellectual basis to the remedy of account which can be identified here; rather, the remedy of account is generally confined to a process of adding the amounts that are owed between the parties at the end of litigation once substantive liabilities.


  • Rescission:

Another form of equitable remedy concerned with contracts is rescission, the purpose of which is to unpack a contract so as to achieve a restitutio in integrum: that is, to restore the parties to the position that they had occupied originally. The grounds on which an order for rescission might be made are many. Rescission is available only in relation to contracts that are voidable; if a contract is found to have been void ab initio then rescission will not be available because such a contract is deemed never to have existed (Westdeutsche Landesbank v Islington (1994), per Leggatt LJ).


  • Mistake:

A material mistake made by both parties to a contract will enable that contract to be rescinded (Cooper v Phibbs (1867)). Unilateral mistake may only lead to rescission where there has been some unconscionability in the formation of the contract. Mistakes of law and of fact may both give good grounds for rescission (Kleinwort Benson v Lincoln CC (1998)).


  • Rectification:

The remedy of rectification is available to amend the terms of a contract so as to reflect the true intentions of the contracting parties (M’Cormack v M’Cormack (1877)). It is restricted to situations in which there is a written document which fails to reflect the true intention of the parties (Racal Group Services v Ashmore (1995)). The effect of the order is to effect an alteration in the written document itself (Craddock Bros Ltd v Hunt (1923)). However, what rectification does not do is alter the parties’ contractual intention, on the basis that equity will not intervene in the contractual freedom of the parties to a contract. Instead, rectification merely effects an alteration better to reflect its true contractual intention (Mackenzie v Coulson (1869)). Rectification will not be ordered where there is some sufficient, alternative remedy available, such as common law damages (Walker Property Investments (Brighton) Ltd v Walker (1947)), or where the issue forming the subject matter of the application could be dealt with by a simple correction of, for example, a clerical error (Wilson v Wilson (1854)).


  • Subrogation:

Subrogation is an equitable remedy concerned with the replacement of one claimant with another (Banque Financière de la Cité v Parc (Battersea) Ltd (1999)). In short, subrogation permits a person to be substituted for a claimant in suing a defendant, the best example being the situation in which an insurance company sues a defendant in respect of a car accident in relation to which the insurance company has paid out to its customer and thus bought the right to sue the defendant on the customer’s behalf.


The second type of subrogation claim enables the claimant to revive rights binding on the defendant, which have seemingly been extinguished. One example of this remedy in action is the case of Wenlock v River Dee Co (1887), in which the plaintiff’s money had been used by the defendant to pay off the defendant’s creditors. The plaintiff was able to demonstrate that he had a right in equity to have the debts owed to those creditors treated as being owed to the plaintiff instead, even though the debts had in fact been discharged with the plaintiff’s money.



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