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Lecture 1 Introduction to Equity and Trusts

Introduction to the Nature of Equity


[Equity is] the saving supplement and complement of the Common Law
prevailing over the Common Law in cases of conflict but ensuring, by its persistence
and by the very fact of its prevailing, the survival of the Common Law.
~ Sir Frank Kitto

The Development of the Systems of Equity and Common Law


The Court of Chancery existed until 1873. The courts of equity have significant discretion:
they consider whether litigants acted in good conscience and in good faith the principle of
clean hands is important. Equity should not be seen as just a set of rules, but a
jurisdiction. It is less constrained than the common law.
Re Halletts Estate; Knatchbull v Hallet (1880)
Sir George Jessel MR: The rules of Courts of Equity are not, like the rules of the
Common Law, supposed to have been established from time immemorial. It is
perfectly well-known that they have been established from time to time altered,
improved and refined from time to time. In many cases we know the names of the
Chancellors who invented them. No doubt they were invented for the purpose of
securing the better administration of justice, but still they were invented.

The Supreme Court of New South Wales was established in 1823 with equity jurisdiction.
With the enactment of the Judicature Act 1873 (UK), the administration of the two systems
was fused, but not the principles themselves. It also ensured:
1. All branches of the court have the power to administer equitable remedies.
2. Equitable defences can be pleaded in all branches of the court and appropriate relief
given.
3. All branches of the court must recognise equitable rights, titles and interests.
4. All branches of the court have a general power to determine legal rights and titles.
5. The common law injunction was abolished

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The Lord Chancellor in effect, the Kings Secretary and in Charge of the Great Seal
In medieval times, when people were dissatisfied with the common law, they would petition
the King to provide justice. In the 14th century, the King began to delegate the matters ot
the Chancellor.
Chancellors were often archbishops with previous legal training; they were considered well
placed to consider claims on moral and legal grounds. The Chancellor (Court of Conscience)
performed an executive, rather than a judicial, function. The Chancellor provided remedies
like injunctions or specific performance. Courts of Chancery had exclusive jurisdiction over
trusts and uses, and concurrent jurisdiction over estoppel, fraud and misrepresentation.
Trusts are a prime example of a fiduciary relationship.
The Earl of Oxfords Case (1615)
Coke asserted the supremacy of the Common Law over Equity. He released people
imprisoned for contempt of Chancery by using habeus corpus. The suit was settled in favour
of Equity: the Chancery could set aside judgments at common law where they were against
conscience to do that. Equity prevails when it conflicts with the Common Law.
The Court of Chancery is a Court of Conscience?
In Cook v Fountain (1676), Lord Nottingham refuted the idea that the conscience which
guided equity was some arbitrary measure. In the 1800s, equity took a rigid form and was
bound by precedent like the common law.
Westdeutsche Landesbank v Islington LBC [1996] AC 669
In this case, Lord Browne-Wilkinson nicely sets out the following (emphasis added):
The Relevant Principles of Trust Law
i.

Equity operates on the conscience of the owner of the legal interest. In the case of a
trust, the conscience of the legal owner requires him to carry out the purposes for
which the property was vested in him (express or implied trust) or which the law
imposes on him by reason of his unconscionable conduct (constructive trust).

ii.

Since the equitable jurisdiction to enforce trusts depends upon the conscience of the
holder of the legal interest being affected, he cannot be a trustee of the property if

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and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until
he is aware that he is intended to hold the property for the benefit of others in the
case of an express or implied trust, or, in the case of a constructive trust, of the
factors which are alleged to affect his conscience.
iii.

In order to establish a trust there must be identifiable trust property. The only
apparent exception to this rule is a constructive trust imposed on a person who
dishonestly assists in a breach of trust who may come under fiduciary duties even
if he does not receive identifiable trust property.

iv.

Once a trust is established, as from the date of its establishment the beneficiary has,
in equity, a proprietary interest in the trust property, which proprietary interest will
be enforceable in equity against any subsequent holder of the property (whether
the original property or substituted property into which it can be traced) other than
a purchaser for value of the legal interest without notice.

Modern equity in Australian law:

Regarded by the High Court as an unidentified portion


of the Constitutionally unified common law component
of the single system of jurisprudence of Australia
Administered throughout Australia in all courts with
practically no distinguishing rules of procedure
Regulated by precedent, like all branches of law

The Distinction between Equitable and Common Law Claims


Equity, despite being separate, presupposes the existence of the Common Law. In
Castlereagh Motels v Davies-Roe (1967), a company broght an action against a director for
breach of the duty to act in the companys interests.
Asprey and Jacobs JJ: We do not think all those principles which must govern
the conduct of directors as fiduciaries which have been developed in equity have
become in some manner transposed into the common law.

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Matters in equity jurisdiction:


o Property trusts, married womens property, mortgages, vendors lien, etc.
o Contracts fraud, undue influence, misrepresentation, mistake, accident, etc.
o Deceased Estates satisfaction, ademption, performance, hotchpot, marshalling.
o Procedure set-off and account, discovery and interrogatories, etc.
o Guardianship and Lunacy care and management of people lacking legal capacity
o Commercial matters fiduciary duties, subrogation, etc.
o Bankruptcy
Matters in the exclusive jurisdiction of equity are concerned with the enforcement of
equitable claims which are cognisable only in equity, such as the rights and liabilities of a
trustee or the duties of a receiver.
The auxiliary jurisdiction is concerned with the intervention by the court of equity via an
injunction or other remedy to assist in the enforcement of common law rights, such as an
injunction to restrain the breach of an implied negative stipulation per Lucas Stuart v
Hemmes Hermitage (2010) or Lucas Drilling v Armour Energy (2013).
... if the party in whose favour the bond has been given has made a contract
promising not to call upon the bond, breach of that contractual promise may be
enjoined on normal principles relating to the enforcement by injunction of
negative stipulations in contracts.

Mason P: In its auxiliary jurisdiction, equity has embraced the role of


supplementing the inadequacies of "common law" remedies. It has always claimed
a right of intervention if appropriate to achieve a just result. Discretion and
flexibility ensure that equity will not be forced to act where proprietary remedies
such as a constructive trust or lien would be inappropriate or disproportionate.
~ Harris v Digital Pulse (2003)

The concurrent jurisdiction involves the availability of a claim both at law and in equity: for
example, an equitable claim for specific performance of a contract, or a common law claim
for damages for breach of contract.

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In Aquaculture Corp v New Zealand Green Mussel (1990), a New Zealand case, it was held
that the court may award exemplary damages (a common law remedy) in respect of a
breach of confidence (an equitable action). The decision is regarded as a fusion fallacy. The
question of punitive damages was examined in Harris v Digital Pulse (2003):
Spigelman CJ: Damages are a remedy at common law. The issue before the Court
is whether a punitive monetary award can be made in equity The fact that
compensatory damages at common law and equitable compensation have a similar
justification does not necessarily indicate that a different kind of monetary award at
common law, which has come to be referred to as a form of damages, can or
should be reflected in equity.

Equitable and Common Law Remedies


The Court of Chancery could award monetary compensation, but not damages. The
remedies are always discretionary and not a right.
Damages
In Australia, there is no basis for awarding exemplary damages in equity, compare
Aquaculture Corp v New Zealand Green Mussel (1990). Equitable remedies are not punitive
in nature nor intent. In Harris v Digital Pulse (2003), it was held that exemplary damages
could not be administrated since it is a common law remedy, and the case involved a purely
equitable claim.
Specific Performance
A decree of specific performance is an order to a contracting party to perform their
obligations under a contract, per Hewett v Court (1983).
King v Poggioli (1923) where the court has jurisdiction to entertain an application
for the specific performance of a contract, it should be lawful, if thought fit, to award
damages to the party injured in addition to, or in substitution for, specific performance.
Injunctions
An injunction is an order to restrain a person from performing a specified act, or requiring
them to perform a certain act, per ABC v Lenah Game Meats (2001). Its grant is
discretionary, and may occur when the court sees it is just or convenient to do so.

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Declarations of Right
A declaration from the court is a statement of the law or the rights of the parties. It is a way
of resolving disputes where other remedies or relief would not be effective, such as in
disputes over title or possession, or the extent of contractual obligations, see Johnco
Nominees v Albury-Wodonga (1977). The procedure is also more simple than bring an action
for other remedies.

The Nature of Equitable Remedies


Equity acts in personam, which means that orders should not affect the property of litigants,
but are order against the conscience of the parties involved. A person in contemp of a
remedy may be imprisoned until they are purged of the contempt.
The availability of remedies is frequently tied to whether the conduct is unconscientious.
Consider the contract law doctrine of unconscionability.
Garcia v National Australia Bank (1998)
Mrs Garcia signed three guarantees for the bank regarded mortgage debts, the money from
which her husband used for his business. Mrs Garcia had no involvement in the business
and eventually separated from the husband.
The court upheld Yerkey v Jones (1939), the principle from which is based on trust and
confidence between married partners. She did not bring a free will to the execution, nor did
she understand the effect of the transaction.
Schultz v Bank of Queensland (2014)
Concerned the wifes equity; setting aside a contract in equity for misrepresentation.

Consider Re Brocklehursts Estate (1977)


The question was one of undue influence in the gift of a shooting licence. In the case,
although the relationship gave rise to a presumption of undue influence, the deceased had
been independently advised about the lease and the gift was the spontaneous and
independent act of the deceased.

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Equity vs Common Law


The day will come when lawyers will cease to inquire whether a given
rule be a rule of equity or a rule of common law: suffice it that it is a wellestablished rule administrated by the High Court of Justice
~ Maitland

Equity has no power to decide disputed legal rights and titles.


Pelechowski v Registrar, Court of Appeal (1998)
McHugh J: That is true but, just answering what Justice Kirby just said, in 1970 and
thereabout, 1973, these questions of exclusive jurisdiction, auxiliary jurisdiction, and
divided jurisdiction between common law and equity, were the daily diet of the
legal practitioners in New South Wales.

RTA v Dederer (2007)


Gummow J: What is demonstrated here is a by-product of the common law technique
which looks to precedent and operates analogically as a means of accommodating
certianty and flexibility in the law. Equity, by contrast, involves the application of
doctrines themselves sufficiently comprehensive to meet novel cases. The question of
a plaintiff what is your equity? this has to common law counterpart.

Courts of Common Law have often recognised trusts, especially where leases have been
held on trust.

Law vs Equity before the Judicature Acts

Equity had no power to award damages

No common law recognition of equitable rights, titles and interests

Equity had not power to decide disputed legal rights and titles

Common law courts lacked power to give interlocutory relief

No common law power to decree specific performance or grant injunctions

The common law courts lacked the power to make declarations

No power existed to transfer cases from one jurisdiction to another

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Fusion of Law and Equity


This has been encouraged for the sake of consistency and coherence, particularly in the 20th
century. Since the Chancellor took ages to make decisions, the jurisdictions were fused to
speed up administration, but the principles were not fused. Fusion of the jurisdictions has
also been accelerated by the Judicature Acts.
Judicature Act 1876 (Qld) s 4:

The Judicature Acts, by providing for the administration of both common law and equity in
the same courts, naturally encouraged the convergence of the two bodies of law, per Cooke
P in the New Zealand case Day v Mead (1987).
Fusion Fallacies
These are the erroneous assumption that the Judicature Acts had united the Common Law
and Equity into one bundle of principles. For example, Sir George Jessel MR in Redgrave v
Hurd (1881) suggested the distinction had disappeared.

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The most famous case decided upon a fusion fallacy was Walsh v Lonsdale (1882). Yet the
existence of trusts shows that fusion did not occur.
Unconscionability is a concept unknown to the common law.
Declaration of Trust
The act by which an individual acknoweldge that property, the title to which he holds in his
own name, in fact belongs to another, for whose use he holds it.

Maxims of Equity

Equity will not suffer a wrong without a remedy.

Equity follows the law.

When the equities are equal, the first in time will prevail.

Equity assists the diligent and not the tardy.

Equity is equality.

He who seeks equity must do equity.

Equity looks to the intent rather than the form.

Equity imputes an intention to fulfil an obligation.

Equity regards as done that which ought to be done.

He who comes to equity must do so with clean hands

Equity will not assist a volunteer

Equity acts in personam

Set-Offs
A set-off is the right to balance mutual debts of a creditor and a debtor: reconciliation. They
are only recognised in equity, and only apply to debts of a definite character parties
cannot set-off their debts against damages claimed, nor equitable claims or demands.
The principle is the prevention of injustice in permitting one person to enforce a claim, while
leaving unenforceable an equally meritorious claim.

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