Equity – Sarah Worthington PDF

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Equity – Sarah Worthington spring term CHAPTER 1—Dual Legal Systems: Common Law and Equity Rules and their natural evolution Every group activity adopts rules but it is universally recognized that any general rule can operate unfairly in certain circumstances. There is a constant tension between the desire for universal, generalized rules and the need for individual, context-specific, fact-sensitive justice. Rule evolution is based on repeated practical experience. The first decisions are based on individual circumstances. Fairness demands that similar situations are treated alike. The pattern in these individual decisions will create generalized, universal rules. This is called “slow-build” evolutionary strategy. It is difficult to articulate practical, comprehensive, and sophisticated rules at the outset and attempting it is risky (e.g.: costly). ”fast-build” strategy (=rules articulated at the outset) will only work if it is based on extensive past-experience and if flexibility is deliberately built into the system so that unexpected circumstances can be accommodated. Usually achieved by formulating the rules in very general terms so that they can bear different interpretations in different circumstances. (This is a system based on a legal code).

Civil law and common law systems Most societies start out with some sort of primitive general statement of the basic rules necessary to achieve order in a civilized society. They develop these rules, borrowing from other practices, learning from the successes and failings of others. Goal= to keep evolving an increasingly sophisticated legal regime designed to best fit the society’s ever-evolving needs. Such societies may start out with some sort of precedent-based regime, but may eventually adopt a legal code. (Civil law system). Legal codes are codified and provides a clear and comprehensive statements of the entire body of State law (early Roman law traditions). England’s legal regime is precedent-based and dualist. It reflects the normal practices of individuals in developing their own internal moral principles and views on life. Common law is not a monolithic enterprise.

The origins of common law dualism Medieval period in England: the universal law of the realm was administered by the King’s Judges. The law administered by these judges evolved in response to various political, social, economic pressures for change. If the changed were not rapid enough, or id the circumstances suggested that the Judge’s decision was ‘unfair’, litigations could appeal directly to the King. The king was seen as the fount of justice, responsible for ensuring that subjects were treated fairly and justly. This function was later delegated to his Chancellor (=chief administration of the realm). The law of the realm was administered bot by judges and chancellors, but there was a clear-cut institutional separation between the practices of the two. Each operated in separate courts. The King’s Judges in the court of King’s Bench, the Court of Common Pleas

and the court of Exchequer, administering the rules and principles of ‘Common law’. The Chancellors operated from the Court of Chancery, administering the rules and principles of ‘Equity’.  The modern common law is built on this model and now statutory rules are enacted by legislation passed by Parliament. ’Equity’ is now the body of rules, principles and remedies that derive from those initially developed and administered in the English High Court of Chancery. In the past the King’s Judges seemed unwilling to develop new legal rules to address complaints (3 significant factors: politics, the writ [written order] and the jury system). Writ= royal prerogative granted by the King permitting a litigation to pursue a claim. These writs provided the only procedural routes to bring a case to court, and indicated the relief to which and aggravated party might be entitled in different circumstances. If no permitted form of writ, then there was no Common Law remedy. The role of the King’s Judge was simply to determine whether the writ was a form which gave the court jurisdiction; the facts and outcome of the case was determined by the jury. The problem with this: substantive law lay in writs. Judges have significant discretion to deal with different writ forms allowed common law to evolve. If judges interpreted writs rigidly, common law could easily be stultified. 14th century: the rigid approach prevailed. Writs had to conform to a limited range of available forms and the forms were interpreted restrictively (for political reasons). There was intense power struggles between the King, Parliament and judges. The formalization of the writ system was intended to curb the power of the Chancellor and the King. BUT the real result was to limit the types of claim available at common law. The jury system reduced the scope for ready evolution of formal legal rules into more discriminating forms. Judges tried to explain the law in its simplest form to the jury so they would understand and so that the public understanding of the law wouldn’t change significantly. The problem was political. The interpretations of precedents were rigid. The Chancellor’s jurisdiction itself began to develop its own distinctive system of legal rules. The early Chancellors were often Catholic clerics of nobles, trained in Latin and French language as well as Roman civil and canon law, and therefore borrowed from what was familiar to them. They investigated complaints in a civilian, roman manner (no use of jury, just written pleadings) and made decisions based on morality and civilian mode. They also gave rational justifications. In the late 17th century, reasoned decisions by Chancellors made it easier to systematize Equity, and a body of Equitable principles developed. The struggles between the Chancellors and the King’s Judges put Equity under pressure to become more law-like; its decisions can only be politically acceptable if they are characterized as rational, predictable and objective. The democratic revolutionary forces threatened to destroy Equity if it maintained its close associations with the monarch and royal prerogative justice. Equity reacted positively to such pressures and became law and created a sort of rule that regulated the relationship between the common law and equity. Initially the rule was simple: the Chancellors would only intervene when it was absolutely necessary to avoid injustice. This did not last. The pressure was on Equity to expand. In the 17th century there was a political struggle between the Chancellor and the Lord Chief Justice. The Chancellor won. The new rule was that if there was a conflict, the

Chancellors’ rules would prevail (rules of Equity would prevail the rules of Common Law). In the 19th century the pressure was the largest and the response to it was, to relax the constrains on common law. Writs that had prescribed the permitted forms of action were abolished in favor of fact pleading, this meant that matters once treated as issues of fact to be decided by juries became the concern of judge-controlled law, and judges had to state the principles underlying their decisions. Led to development of Common Law: principles were refined and new rules appeared as judges honed legal rules by distinguishing the circumstances before them from those which had been material to an earlier application of principle. Despite the above convergence of Equitable practices and Common Law, dualism persisted. There was a practical difficulty Such difficulty was resolved in the 19th century, with the passage of Judicature Act 1873 and 75: fusing the administration of the King’s Bench and Chancery Courts. So judges could either use Common Law or Equitable rules. Despite the changes judges effectively continued to operate on either separately, depending on circumstances.

Dualism in action—The early distinguishing characteristics of Common Law (green) and Equity (red) Equity was originally only called upon to intervene when the Common Law rules were seen inadequate. Sometimes Equity would deny rights where the Common Law accorded them (e.g. Equity might declare a contract not binding even if it was binding a Common Law). Or vice versa (e.g. Equity may declare that a party owed Equitable obligations of confidentiality or secrecy, which is not recognized by the Common Law). Differences between the two might be problematic. Common Law reacts in one way to 3rd party recipients of legal property; Equity reacts differently for Equitable property. A legal system with rules that regulate the same behavior in different ways has lost coherence. Each adopt different remedial strategies. (a) Common Law usually gives money remedies, which reflect the 3 substantive subdivisions of the common law of: 1) obligations into contract (breach of contract aims to put claimant into a good financial situation as if the contract had been properly performed); 2) civil wrongs (torts) (e.g. negligence/ nuisance, aim to put claimant in a good position, as if the wrong had not been committed); 3) unjust enrichment (aim to remove from the D any enrichment that it would be unjust for him to retain. (b) Equity usually orders the Defendant to do something (e.g. hand over an item of property, perform a contract, cease creating nuisance, correct a document etc.); even if orders do concern money, it is usually to pay over a defined amount of fund. Different remedial strategies can be problematic. For example, both deals with negligence, and each deals with it differently, so like situations are not treated alike. There is incoherence. Another problem is that there is no mechanism for ensuring that the infringement of highly prized rights attract highly valued remedies, and lesser infringements lesser remedies (e.g. remedies for interference with common law property rights are different from those of equitable property rights).

They have different enforcement techniques for insisting upon compliance with its remedies: (a) Common Law: money remedy is a debt owed to the claimant, which can be stripped of the defendant’s assets. (b) Equity: defendants are considered to be contempt of court if they refuse to comply with the relevant court orders. Originally Ds could be thrown into prison for contempt. Equity acted ‘on the person’ (personam)—physical enforcement. They have different procedures for deciding cases: (a) Common Law courts required all actions to be commenced by writ. Parties had to present formal pleadings; witnesses presented their evidence orally; the judge decided questions of law; the jury questions of fact. (b) Equity was asked to rectify injustices related to these procedures. It allowed more informal actions; co-opted further evidence to determine the issues, and did this by inventing new processes of discovery (requiring parties to provide a list of all the relevant documents in their possession) and interrogatories (allowing parties to submit written questions to each other before trial, and requiring written answers to be provided); and it avoided juries, rather allowed judges to decide issues of both law and fact. Common law court procedure is now determined by statute, but many old practices of Chancery have been adopted.

Exploring Equity and addressing its demanding questions—the function of this book There is no ‘general theory of Equity’. It lacks a distinctive theoretical ‘peg’. There is a sheer breadth of Equity’s subject matter. It imposes obligations of loyalty or confidence, and creates new interests in property. Equity has a profound influence on the Common Law of property, contract, tort and unjust enrichment. The two jurisdictions, Common Law and Equity, are supposed to be so unique that they cannot be integrated. Two core concerns: (a) Equity’s rationale for intervention is said to be conceptually different from the Common Law’s: equity is said to be conscience-based and moral in a way that the common law is not. (b) Equity’s intervention is said to be irredeemably discretionary in a way that the Common Law is not.

CHAPTER 2: Legal Systems and Legal Rights pp 42-60 Legal systems provide a set of rules, determines who has the authority to make new rules and resolve disputes, and how this is to be done. In common law systems judicial roles are very significant. Judiciary resolves disputes according to settled rules, and has the capacity to invent new rules (e.g. Common Law’s recognition of a general tort of negligence). There is also a hierarchy and legal rights can be

restructured, judicially, according to different degrees of protection to different rights.

Linking Legal Rights and Legal Remedies 

Pp 51-58 and 63-77 (14 pages)

pp 51-58: Creating Property: -Equity’s greatest contribution to law is its manipulation of concepts of property. -Equity regards certain assets as property even when Common Law didn’t (e.g. debts). These assets became tradable and usable as wealth in the eye of equity. Equity allowed debts to be transferred to 3rd parties, creditors could trade in debts and obtain immediate cash returns this dramatically increased the fow of capital into the market. -Sometimes Equity says A owns a car whilst Common Law says B does. Simple ideas about property: -tangible property: money, car, etc.. -intangible property: company share, copy right, etc.. -Jeremy Bentham: property is not a ‘thing’ but ‘relationship’. E.g. an owner has a right to control over a horse. -difference between personal right and proprietary right is the right to exclude others. Personal rights (e.g. jobs) only entitle the right-holder to make demands of the right giver (employer). -if owners of property can exclude others, they can equally permit others to have access – they can give, share or sell their property to 3rd parties. Transferability gives property its commercial value: property can be traded. Person’s relationship with things are proprietary because of twin benefits of transferability and excludability. Importance of property: -starting point to justifying the need for property is usually economic. A society that safeguards property is wealthier than one that doesn’t. Resources only increase in value if people work to develop them, which is only possible if they have ownership and gain rewards for their efforts. -ownership includes right to allocation and access.

-things are property only if the law accords them the special forms of protection (e.g. right to exclude) associated with property and permits special powers of control (e.g. right to permit access). Protection of creditors when debtor becomes insolvent: – a creditor’s property rights are protected on the debtor’s insolvency in a way his personal rights are not. E.g. supplier sold computer to traders for £2K, but hasn’t yet received a payment. Supplier sees the computer being swept into a pool f assets and sold off to fund the debts owing to all creditors. If the pool of assets are worth £10K, but owes his creditors £100K, supplier will only receive £200 (1/10th). When goods are sold, the buyer becomes the owner when goods are delivered (even if before paying for them). So buyer will have proprietary rights over goods and supplier will only have a personal right to receive money. – if supplier had only leased computer to the trader, supplier retains ownership and trader’s right of possession are conditional on paying the leasing charges. On insolvency, the computer would not be swept into the pool of assets and sold off to fund the creditors. The supplier will be entitled to retake possession. Creditors with proprietary rights are far better protected than creditors with personal rights when debtors become insolvent. - creditors with personal rights are unsecured creditors; creditors with proprietary rights are secured creditors. In cases of insolvency, a secured creditors are often in a position to claim for all the debtor’s assets leaving unsecured creditors to take a whole loss, depending on secured creditor’s nature of proprietary rights. -proprietary interest can also arise through judicial intervention. -criticism: equitable further erode the position of unsecured creditors. Limitations on transferability and excludability – testing the boundaries of proprietary rights: -property ownership is rarely associated with absolute rights to full enjoyment of all that the property has to offer, the right to transfer property at will, right to exclude anyone who seems about to interfere (e.g. car owner cannot enjoy max speed; right to transfer shares in a company often restricted to be sold to existing shareholders only). -reduced transferability affects the commercial value of the property - it cannot be freely traded.

Property as a ‘bundle of rights’: -Honore’s principles of ownership: right to possess, right to use, right to manage, right to income from it, right to the capital, right to transfer. These rights don’t need to be absolute (home owner doesn’t cease to be an owner just because she leases or mortgages the house). -Ownership is a bundle of rights, and just because an owner transfers some of the rights from the bundle, she doesn’t cease to be an owner. -3rd parties who hold steaks from these bundle of rights are not owners but their rights can be described as proprietary (e.g. a tenant has the right to possess the property (on specific terms); the bank has the right to repossess and sell it (on specific terms); the neighbour can have a right to use part of property (on specific terms).

pp63-77: Equity’s recognition of new categories of interests in property: -Equity took a ‘bundle of rights’ that Common Law already regarded as proprietary and divided the bundle between 2+ people so that the interests of each will be significant enough to be proprietary. -Equity (Chancellor) in the 13th century enforced obligations undertaken by trusted friend of dead friend (trustee), who became legal owner but insisted that he was bound to manage it according to the benefit of the family of dead friend (beneficiaries). -In 19th century, equity allowed beneficiary proprietary rights to be possible to be transferred to 3rd parties. Beneficiaries were protected on the trustee’s insolvency: the beneficiaries could remove ‘their’ estate – their trust property – from the pool of trustee’s assets which was to be sold and distributed to the trustee’s general creditors. (= They could exclude the trustee and the trustee’s general creditors from interfering with their rights. Beneficiaries became to be described as the Equitable owners of the trust property. -beneficiaries were also protected in non-insolvency situations: just like legal owners, they can also exclude interference by third parties. -under Common Law, trustees can sell property and run, leaving beneficiaries with nothing. Equity adopted 2 strategies:

1) gave beneficiaries the right of excludability – 3rd parties who knew or ought to have known (e.g. had constructive notice) of the beneficiaries’ rights had to recognise them. So the new owner would have to recognise the existing Equitable ownership: the beneficiaries’ interest in the property. 2) if the trust property was sold wrongfully to a 3rd party, beneficiary can only claim for recognition of their interest if that 3rd party had constructive notice that these interests existed AT THE TIME OF PURCHASE. Only innocent, honest 3rd party purchasers without the necessary notice of the beneficiaries’ rights would be unaffected by the beneficiaries’ Equitable property rights. These bona fide 3rd party purchasers are also known as “Equity’s darlings”). -Equity also developed ‘fiduciary’ obligations, which were originally devised to regulate trustees engaged in the management of trust property. Now these are much broader. -Equitable ownerships are regarded as proprietary and not personal, because they now include rights to transfer to 3rd parties and rights to exclude others. Creating trusts – express, constructive and resulting trusts: -Trusts can be created by consensual arrangements between the settlor and the trustee; now they are used in wide range of circumstances (e.g. pension trusts – created expressly for small family se...