Note: Cases linked in the text on the right are either to BAILII reports (where available) or the Wikipedia reference.

Author

Dr John Birchall

 

Contents

1. Introduction

2. Types of Trust

 

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CHAPTER 1: THE HISTORY AND SCOPE OF EQUITY


The study of Equity and Trusts

Equity is often regarded as a difficult subject by students, and among practitioners as a technical subject best left to lawyers who specialise in it. From the point of view of the student who is preparing for an exam, learning a list of cases well is no guarantee of success. Equity lawyers have a particular style of thinking which must be learned before the student's memorised list of cases can be used effectively. It is best learned by reading cases. Alongside the reading of cases, it is useful to read the historical and conceptual analyses found in textbooks and academic literature. Each writer will have his or her own take on the subject.

A student might ask, why should trusts and Equity be taught on the same course? Why are they part of the same subject in the first place? And, supposing they belong together historically, why should a student who will one day be a commercial equity practitioner spend so much time on family trusts, when other aspects of Equity will be more important in the 'real world'? This last question becomes more pointed when one takes into account that the bits of Equity which relate to contract law have long been taught in courses on contract law and (on the whole) left out of courses on Equity.

First, the historical question. A trust is structure where one person or group of persons is treated as the technical owner of property (the trustees), but a different person (or group of persons) is entitled to enjoy the benefit of that property (the beneficiaries). For example if a house is registered in the name of two trustees, they are technical owners, and can buy and sell that house, but since they hold it on trust, someone else is entitled to the benefit of the house, (for example, the benefit of the right to collect rent, or to live in the house, or to lend the house to a friend). The person who sets up the trust is called the settlor, and the settlor might give the house (for example) in trust to the trustees and make certain stipulations about how they should manage it, and which benefits should be allowed to pass to the beneficiaries, and when. Since the legal owner is not allowed to use the trust property for his own enjoyment, although he is in control of it, a trust can only function reliably where there is a legal system which supervises trustees to ensure they do not abuse their position, for example to ensure the trustees do not abuse the fact that a house is technically in their name, when they should be looking after it for someone else's benefit. There is no absolute reason why the Common Law could not have adapted itself to regulate trusts and trustees. However, the courts of Law had a tradition of regulating property rights according to strict rules, and courts of Equity had a tradition of preventing people who controlled property from abusing their legal rights, or from doing things which, though technically legal, were plainly unfair. Therefore it is not surprising that the jurisprudence of the Chancery Court was, in the event, adaptable enough to regulate trusts and prevent unjust behaviour by trustees, and the rules of the Common Law were not.

Turning now to the second question: why not teach students who want to know enough Equity for commercial work, the parts of the subject they will need, without spending so much time on express trusts, which had (and still have) more to do with planning family wealth? Four points can be made in reply. First, it makes practical sense for students to get an overview of the work of Chancery courts. Equitable principles in contract law usually arise these days in Common Law courts, since those courts are already dealing with the other aspects of contract cases, but the matter covered in courses on Equity are all usually dealt with in Chancery courts. Second, because trusts have historically been a large part of Chancery work, much of the thinking, and general principles of Equity can be found in cases dealing with trusts. Third, trusts are important in modern investment law. Whilst an investment trust may be significantly different than a family trust, the historical principles found in trust cases are even more relevant to investment trusts, than they are to general commercial Chancery practice. Fourth, the thinking behind the question is, in the present writer's view, to some extent justified: whilst there are good reasons why Equity and Trusts courses need to cover key cases dealing with family wealth planning and tax panning, there is a strong case for changing the balance of courses to give more emphasis to problems encountered in modern commercial Chancery practice. Subsets of Equity courses tend cover disputes over ownership of, and rights in a family home, which is important in practice; and charitable trusts, a niche area which arguably gets more coverage than it needs on modern general courses on Equity and Trusts.

 

Note on terms

The terms Equity, and Chancery law (that is, the law first developed and applied in the English Court of Chancery, when it existed as a separate court) are used interchangeably. Traditionally lawyers speak about the analysis of a case 'at Law' and 'in Equity. The supervision of trusts is one element of the equitable jurisdiction. In the present work Equity is given a capital letter to distinguish the use of the word as the name for a recognized branch of law, as distinct from its use in general English to mean something like 'fairness.' 'Law' is also given a capital letter to distinguish the set of rules technically known as 'Common Law' or 'Law' (in contrast to Equity) from 'law' used more loosely and more generally. The present author does not regard this use of capitals as a strict rule, and many judges and distinguished writers will use lower case letters where the present writer has chosen capitals.

The downside of the division between Law and Equity

The concept of the trust has proved useful in modern finance, and in tax planning. Various kinds of injunction, which have been developed from the Chancery court's jurisdiction to make orders in personam , ordering, or more usually, forbidding a person or persons from doing some specified act, are also hugely important in modern commercial law. This is one of the reasons why Common Law (as distinct from the legal systems of continental Europe) is often regarded as the best system for regulating business. However, Equity arose as a competitor to Common Law (in its narrow definition), so that the law courts and the court of Chancery were for centuries 'rival' courts, applying different legal rules, and coming to different conclusions in the same case. For example, a claimant might obtain a valid judgment at Common Law, and be forbidden from enforcing that judgement by a court of Equity.

This led to the situation depicted by Dickens in Bleak House where a case has become very long and expensive partly because of the competing jurisdictions of Law and Equity. In Chapter 8, Dickens writes:

Equity sends questions to law, law sends questions back to equity; law finds it can't do this, equity finds it can't do that; neither can so much as say it can't do anything, without this solicitor instructing and this counsel appearing for A, and that solicitor instructing and that counsel appearing for B; and so on through the whole alphabet, like the history of the apple pie.

In some editions (1) there is a preface in which Dickens asserts that in real life the Chancery Court created just such problems. The solution to this problem was the fusion of the jurisdictions of the Common Law and Chancery courts, discussed briefly below.

The division, of course, raises of the problem of how to resolve the conflict when the Common Law courts and the courts of Equity come to conflicting conclusions in the same case. Every Equity textbook refers to the Earl of Oxford's case (2) as the turning point at which it was decided that where Equity and Law conflict, Equity wins. The decisive document is not the case itself, but the order issued by the king, on the advice of Francis Bacon and others, which orders in effect that where there is a dispute, Equity wins. (3 - A phrase used by Lord Denning in White & Ors v Vandervell Trustees Ltd. (No. 2) [1974] EWCA Civ 7 (03 July 1974) , and adopted by other judges. ) Legal historians tend to treat the resolution of the dispute between Equity and Law as being politically motivated, but, as one would expect with the involvement of Bacon, the decision does set out good legal reasons for the principle.

A note on the historical background of Equity

This document, just mentioned, in which James I orders that Equity should prevail over Common Law where they come to conflicting conclusions in a case, is an important building block in setting up the traditional narrative that Common Law deals with property according to fixed rules, and that 'Equity steps in to mitigate the rigour of the law'(4) in cases where the law to a result which feels unjust. The narrative is developed in historical introductory sections to some of the leading textbooks, in more detail than is necessary here. (5) Roughly speaking, this narrative says that the Chancellor, on behalf of the monarch, could overrule Common Law courts, on the basis that their judgment had led to a palpable injustice; and that the rules of Equity according to which the Chancellor's court decided cases were gradually fixed by the establishment of a set of principles and by precedents, in particular by the eighteenth century judge, politician, and Chancellor, Lord Hardwicke. This narrative is important not only as a bit of history, but because it informs the way judges and lawyers think about Equity.

Equity follows the Law

One consequence of what I call the 'narrative' about the role of Equity is the point is that when dealing with a question which raises an issue to which both Common Law and Equity are relevant, the court should know, or decide, what legal rights are involved before applying the rules of Equity. Not only was this well understood at the time of James I's decision that Eqity prevails over Law, but it is noted in that document that judges in Common Law courts would sometimes tell litigants that their hands were tied by the Law, and specifically recommend turning to Equity.

In fact, Chancery lawyers go a step further than the proposition that legal rights be decided first, with the maxim, Equity follows the Law. Maxims of Equity will be treated later, but this particular maxim says that the rules of Equity do not claim to override the law, but to create additional rights, and / or additional remedies not available at law. Of course the practical outcome might be to override the law. From the student's point of view, where a question or scenario raises a legal question, this should be dealt with before the rules of Equity are applied, bearing in mind that technically speaking, Equity does not take away any legal rights.

The fundamental principle of Equity is 'conscience'

The narrative about the development of Equity also reinforces the principle that Equity affects the conscience of the holder of a legal right, or more generally that a court of Equity is a Court of Conscience. The idea that a court of Equity is a court of conscience is very ancient, and it has been suggested that it did not at first mean what it means today. (6) The idea that Equity grew up to mitigate the rigour of the law incorporates the idea sometimes an outcome to a case which is legally correct is plainly wrong. The term 'conscience' in Equity is used as shorthand to describe the principle that a court of Equity should provide an outcome to a case which is equitable, and which Equity regards as the right outcome. Put like that, the argument is somewhat circular, but the concept is significant because when a court has to go back to the most fundamental principle of Equity in order to determine the correct outcome of a particular case, it can still ask, 'was the behaviour of the defendant consistent with a good conscience.'

This raises the question of what 'conscience' means. One approach, since lawyers tend to use the word as if it is readily understood, is to examine just what 'conscience' is normally understood in ordinary English. This task is undertaken by Professor Alastair Hudson in an essay on his website. (7)

Courts in the sixteenth and seventeenth centuries, in resolving the question of what was and what was not consistent with good conscience, would sometimes offer a legal analysis of just what conscience involves. Such analyses would of course be found in cases where the very foundation and scope of Equity became an issue. The law of God was often appealed to (though in the Earl of Oxford's Case, God's law, and the demands of 'good conscience and equity' are parallel grounds rather than part of the same argument).

Many writers deny that there is any unifying principle in modern Equity, and there have been judicial comments denying that the Chancery Division of the High Court is a court of conscience. This is an inevitable concommitant of the application of a doctrine of binding precedent in Equity. When following precedent leads to a result which feels unjust, a court of Equity may produce an unjust result, one which is contrary to conscience. A second problem with the view that conscience is still a unifying principle in Equity is that Equity tends to remedy infringements of property rights, and ingore other kinds of wrong, a point brought out strongly in Emperor of Austria v DayEmperor of Austria v Day, (11) discussed later in this chapter. Nevertheless, not only does conscience inform the development of the rules of Equity, but the concept of 'conscience' can still be resorted to in a case where the court must analyse the scope of Equity from first principles. This is what Lord Brown-Wilkinson did in Westdeutsche Landesbank Girozentrale v Islington LBC. (8)In that case, the defendant's awareness that a transaction may be illegitimate is an ingredient in deciding whether his conscience is affected (or in plain in English, should be affected). The test for a situation where Equity steps in, seems to be that property rights must be in issue (though the modern injunction seems to extend beyond property rights), and that a reasonable and impartial observer would say either 'that action is not fair, and the law ought to remedy it, even if the common law does not' or 'if that is the outcome the law decides, the law is unjust.' That is the present author's attempt to describe what 'conscience,' as the fundamental principle of Equity, is. Exactly what 'feels' fair to a reasonable person is of course not fixed, and there will be cases which fall into a grey area. For example, what level or degree of knowledge does someone have to have that his action might unjustifiably hurt another person's property interests, before Equity will treat him as dishonest, and deserving to be forced make good any loss which his action has caused? This question has caused the English courts some difficulty in recent years, though it is beyond the scope of the present chapter to deal with it in detail.

Looking through the cases where the fundamental nature of Equity is considered, one finds that some cases emphasise the unconscionableness of the action for which a remedy is sought. Others, where the facts of the case call for it, emphasise the unconscionabless of the outcome to a problem which the Common Law does (or arguably may) provide. This is reflected in the phrase 'Equity mitigates the rigour of the law.' Whilst this precise wording seems to go back to Lord Denning, earlier judges had expressed the point in very similar terms. One often quoted passage from Lord Dudley v Lady Dudley, on the nature of Equity, emphasises this aspect of Equity. In it, the Chancellor (not named in the report), speaking in 1705, clearly adheres to the view that Equity is guided by a unifying principle:

Now equity is no part of the law, but a moral virtue, which qualifies, moderates, and reforms the rigour, hardness, and edge of the law, and is an universal truth; it does also assist the law where it is defective and weak in the constitution (which is the life of the law) and defends the law from crafty evasions, delusions, and new subtleties, invented and contrive to evade and delude the common law, whereby such as have undoubted right are made remediless; and this is the office of equity, to support and protect the common law from shifts and crafty contrivances against the justice of the law. Equity therefore does not destroy the law, nor create it, but assist it. (9- Lord Dudley and Ward, an infant, by the Honourable Thomas Newport, versus the Lady Dowager Dudley, [1705] EngR 25; (1705) Prec Ch 241; 24 E.R. 118 (1 January 1705) )

The 'decay' of Equity

However, during the eighteenth century rules of Equity grew up, and cases were increasingly decided according to rules rather than according to the court's assessment of what good conscience required. One reads everywhere that Lord Seldon objected to the idea that the Court of Chancery should make decisions according to the length of the Chancellor's foot (in other words, he objected to the idea that Chancery judges should take arbitrary decisions rather than following predictable principles). It is worth reading the passage where this well-known saying is found:

[I]it is my duty to submit my judgment to the authority of those who had gone before me. The doctrines of this Court ought to be as well settled and made as uniform almost as those of the common law, laying down fixed principles, but taking care that they are to be applied according to the circumstances of each case. I cannot agree that the doctrines of this Court are to be changed with every succeeding Judge. Nothing would in inflict on me greater pain in quitting this place, than the recollection that I had done anything to justify the reproach that the equity of this Court varies like the Chancellor's foot. (10)

On the face of this quotation it is not entirely clear whether it amounts to an assertion that Equity is governed by binding precedent, or only by strongly persuasive precedent. In the same case Lord Seldon said that he had no jurisdiction to make an injunction to prevent the commission of a crime, only to prevent an infringement of a property right, and Lord Seldon seems to regard some authorities as binding as to principle, but flexible as to interpretation. This is still true in the sense that in spite of some dicta to the contrary, there is no doubt that Chancery courts are subject to the doctrine of binding precedent, but equitable remedies remain discretionary. However, the discretion of the court in deciding whether to award an Equitable remedy is itself circumscribed by precedent.

The in personam jurisdiction of Equity

If Equity reaches decisions on the basis that a defendant, or a holder of a legal title, should not act in a way which does or ought to give him a bad conscience, it makes sense that the remedies provided by Equity should be remedies directing the actions of a person, rather than remedies in rem , that is, remedies which makes decisions about property. For example, is is obvious that an English court cannot make a decision about the ownership of a house in Spain, because that kind of questions is normally in the exclusive jurisdiction of a Spanish court. However, an English court of Equity can make an injunction ; against a defendant within its jurisdiction, ordering him to transfer the ownership of a house in Spain to another person, or to refrain from action. Courts are of course reluctant to do anything which looks like interference with the competence of a foreign jurisdiction to regulate property in the area it is responsible for, but it is not unusual for an English court to make an injunction, (originally, at least, an equitable remedy), ordering a litigation not to start or pursue proceedings in a foreign court.

Therefore the distinction between a right in rem , and right in personam is sometimes significant. For this reason, with few exceptions, an Equitable remedy orders a person to do something or not to do something. Thus, in ordinary English almost every equitable remedy can be called an injunction, though technically the term 'injunction' is normally used for an order designed to prevent a wrong before it happens

Both the scope of the jurisdiction to grant an injunction, and the way in which an injunction can extend to matters of which English courts have no legal (ie Common Law) jurisdiction, is illustrated in Emperor of Austria v Day. (11) A Hungarian revolutionary (Kossuth), who was living in England, had hired an English printing firm (Day) to print Hungarian banknotes, which he planned to put into circulation after the revolution in which he hoped Hungary would break away from the authority of the Austrian Emperor. The notes were intended for use only in Hungary, and the Austrian Emperor as plaintiff was domiciled abroad. He asked the court for an injunction stopping the printing of notes, and asking for already printed notes to be handed over to him. The Lord Chancellor and Turner LJ, upholding the Vice Chancellor on appeal, decided that they had no jurisdiction to grant an injunction to prevent a revolution; they also held that the infringement of the sovereign's right to print money was a matter to be resolved between states, and not in a private suit in Equity. However, an injunction was awarded on the basis that the Chancery Court did have jurisdiction to protect the Austrian Emperor's property interests, which would be threatened if a rival currency were introdued.

The fusion of Law and Equity

Since legal rights must be determined before equitable rights or remedies can be considered, the problem discussed above in the section on 'The downside of the division between Law and Equity' can arise in any case where there is room for dispute about a legal right as well as about some question which comes within the scope of Equity. The case would have to go before a court of Law to determine the legal position, and then go before a Chancery court to decide the equitable question. The obvious solution is to allow a single court to have jurisdiction to deal with both equitable as well as legal questions, and to award equitable as well as legal remedies. The theoretical difficulty with this is that the older courts, such as the Kings Bench, and the Court of Chancery, grew up with a jurisdiction derived, in effect, from tradition and from the fiat of the monarchy. The scope of that jurisdiction is a matter of history and precedent. The English High Court still has such an 'inherent' jurisdiction, which is not defined by statute (unlike the modern Court of Appeal, which derives its jurisdiction from statutory authority). There was perhaps a reluctance to allow a statute to interfere with something as important as the jurisdiction of the king's courts. When a new court was to be set up by statute, the problem did not arise. Therefore when small claims courts were established in English towns, they had mixed legal and equitable jurisdiction. (12) See e.g. Silk versus Rennett, Un c [1764] EngR 80; (1764) 3 Burr 1583; 97 ER 993 (A) Such courts were at first called 'Courts of Conscience' (or 'Courts of Request'), which is confusing because the term 'Court of Conscience' is also used for the Chancery Court (and for the concept of conscience as deciding moral issues in theology). The first was established in London in the reign of Henry VIII.

 

However, a more substantial problem with combining the juriscitons was that Equity and Common Law had different procedural systems. The most obvious difference was that in Equity cases are heard without a jury, whereas Common Law cases were (and in the USA generally still can be) decided by a jury. Therefore, when the so-called Supreme Court was created in England and Wales by the Judicature Acts, initially in 1873 and 1875, with both equitable and legal jurisdiction in the same court, and with the Queens Bench and Chancery divisions both empowered to award both equitable and legal remedies, it was necessary to devise a new system of pleading and new procedural rules which would work for both kinds of jurisdiction.

Similar fusion has taken place in other jurisdictions at various dates. In the United States, the federal courts and most state courts have concurrent equitable and legal jurisdiction, although the state of Delaware retains a specialised Chancery Court. The Delaware Chancery Court derives much of its work from the fact that Delaware is the favourite state in the USA for the registration of companies. The Judicature Acts were also adopted in Australia, (apart from New South Wales, where jurisdiction was fused in 1972), and in other Commonwealth countries.

One consequence of the fusion of courts of Equity and courts of Law has been a tendency for the rules of Equity and the rules of Law to be combined into a single integrated system. There are contradictory comments by judges and lawyers on the extent to which the two systems are fused. The question sometimes has practical importance, in particular when the question arises, whether it is possible to award Common Law damages in a case of a wrong which is recognized as a wrong by Equity rather than by Law; or conversely, whether it is possible to award an equitable remedy, for example a 'remedial' constructive trust, to remedy a Common Law wrong.

One factor tending to preserve the distinctness of Equity is that in some jurisdictions, particularly in London, lawyers and judges conducting Chancery work tend to be specialists in Chancery work, and so to maintain some of the traditions of the Chancery court and its jurisprudence. Chancery work has also retained its vitality because of the way it has been flexible enough to adapt to some of the needs of modern commercial affairs. It is clearly important for Common Law and Equity to function in a co-ordinated manner. However, it is also important that lawyers preserve a sense of the historical roots of Equity, a sense which helps to promote a deep understanding of this style of juridical thought, and maintain the quality of decisions which are made on the basis of equitable principles. For a more detailed discussion of fusion, with particular reference to Australia, the present writer respectfully commends K. Mason, 'Fusion: Fallacy, Future, or Finished' (2004), on the website of the Supreme Court of New South Wales. (13)


 

(1) The Preface is included in the e-text at http://www.gutenberg.org/etext/1023


(2) [1615] EngR 2; (1615) 1 Rep Ch 1; 21 E.R. 485 (1 January 1615), http://www.commonlii.org/int/cases/EngR/1615/ Research note: The English Reports are a nineteenth century edited reprint of the published English law reports before law reporting was systematised. Few libraries hold the dozens of publications which appeared over the centuries, so it is useful to have them all brought together in one set of books, which most law libraries should have. The English reports give the reference to the original publication, and page numbers in square brackets in the text allow readers to identify the page in the original publication where the text appeared. The reference to the English Reports give the volume number and page number in English Reports itself. English Reports are now available electronically. The most important cases are now also available free on the internet on the www.commonlii.org website, and links to this are given here. The search facility on that website is useful, but sometimes gives incorrect dates. No good student ever cites a case without checking it, but with this database, the chances of an unchecked reference being wrong are very high.

(3) The King's Order and Decree in Chancery [1616] EngR 1; (1616) Cary 115; 21 E.R. 61 (1 January 1616) http://www.commonlii.org/int/cases/EngR/1616/1.pdf

(3) A phrase used by Lord Denning in White & Ors v Vandervell Trustees Ltd. (No. 2) [1974] EWCA Civ 7 (03 July 1974) http://www.bailii.org/ew/cases/EWCA/Civ/1974/7.html , and adopted by other judges.

(5) For example, G. Watt Equity and Trusts (3rd ed. 2008). At time of writing, the first chapter is available fir free download on OUP's website for the book: http://www.oup.com/uk/orc/bin/9780199230266/

(6) M R Macnair, 'Equity and Conscience' (2007) Oxford Journal of Legal Studies (e-pub).

(7) http://www.alastairhudson.com/equity/equityindex.htm

(8) [1996] UKHL 12 (22 May 1996) http://www.bailii.org/uk/cases/UKHL/1996/12.html

(9) Lord Dudley and Ward, an infant, by the Honourable Thomas Newport, versus the Lady Dowager Dudley, &c & econt' [1705] EngR 25; (1705) Prec Ch 241; 24 E.R. 118 (1 January 1705); http://www.commonlii.org/int/cases/EngR/1705/25.pdf

(10) Gee v Pritchard, (1818) 2 Swanst. 414

(11)The Emperor of Austria v Day and Kossuth [1861] EngR 688; (1861) 3 De G F J 217; 45 ER 861 http://www.commonlii.org/int/cases/EngR/1861/688.pdf

(12) See e.g. Silk versus Rennett, Un c [1764] EngR 80; (1764) 3 Burr 1583; 97 ER 993 (A) http://www.commonlii.org/int/cases/EngR/1764/80.pdf

(13) http://www.lawlink.nsw.gov.au/lawlink/Supreme_Court/ll_sc.nsf/pages/SCO_mason161204

 

 

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Equity & Trusts Text

Alastair Hudson
ISBN13: 9780415497718 ISBN: 041549771X Published: July 2009 Publisher: Routledge-Cavendish Country of Publication: UK Binding: Paperback Price: £32.99

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