In this episode we look at the body of judge-made law called Equity, which emerged in England as a separate body of case law from “the common law”. Whereas common law focuses on clear rules and rights, equity focuses on conscience and doing what is fair. These two conceptual systems were developed in separate courts but are now applied concurrently in the same courts. If the facts of the case support applying an equitable doctrine or concept, then it prevails over whatever the common law result would be.
We illustrate the two different approaches with a recent case, Stubbings v Jams (No 2) Pty Ltd. Poor old Mr Stubbings had no income. He had assets but plenty of debts. He refinanced his affairs with Jams Pty Ltd, after receiving independent legal and financial advice. However, according to the initial judge, Mr Stubbings was “completely lost, totally unsophisticated, incompetent and vulnerable”. His financial situation was “bleak”.
In the trial court, he succeeded in having his loan agreement set aside. However, the Court of Appeal overturned that decision, focusing on the fact that he had had independent advice. The High Court – the final possible court – reinstated the trial judge’s decision, and Mr Stubbings therefore ultimately won, although after 7 years of cost and stress.
The contrast between the Court of Appeal and the High Court is a contrast between common law reasoning and equitable principle.
In this episode we ask the listener what they think about this and other examples.
We need rules. But we also know that they can be used unfairly or don’t match every situation. So we need some kind of corrective. But have we got it right?
TRANSCRIPT
Stephen Parker
In the last episode we looked at three different meanings of “the common law”. One of those meanings was to distinguish between cases concerning common law rules and cases concerning equitable remedies.
Stephen Bottomley
In this counterpart episode, we explain what Equity is, and in doing so we look at competing approaches about how we should treat other people in our everyday lives.
Stephen Parker
So, dear listener, how do you feel about rules? Most people think they are a good idea in society, provided they are reasonable in the first place.
Stephen Bottomley
Suppose, however, you have a reasonable rule which is being used unfairly.
Stephen Parker
Suppose someone led you to believe that they would not enforce a rule against you but then changed their mind after you had relied on their assurance.
Stephen Bottomley
Suppose you agreed to buy some land because of its special features, but the seller than defaulted. The rules say you can get compensation in money for your loss, but you actually want that land.
Stephen Parker
Suppose someone is defaming you. You want them to stop now. You don’t want to have to sue them and receive damages later.
Stephen Bottomley
Suppose you agreed to something in a contract but the other party had much greater knowledge, you were vulnerable, and you think they took unfair advantage of you.
Stephen Parker
Welcome to Equity. An area of law which has grown up when someone is behaving unconscionably in enforcing their rights or when the rules are not in themselves enough to do fairness.
In the first example, of someone leading you to believe they would not enforce their rights and then changing their mind, there might be an equitable remedy called “estoppel”.
Stephen Bottomley
In the second, where the seller of land defaults, you could seek an equitable remedy of “specific performance”, to enforce the transfer of that actual land.
Stephen Parker
In the third, where someone is defaming you, the remedy of an “injunction” may be available. An order requiring them to stop.
Stephen Bottomley
In the fourth, where someone took unfair advantage of your vulnerability, you might have a remedy which these days is called “unconscionable conduct”.
Stephen Parker
This, if you like, is the ethical context of Equity; that sometimes rules and rights are not enough or are used unfairly.
Stephen Bottomley
To bring it all to life, let’s look at a recent case in the High Court of Australia. It involves a Mr Stubbings. In the words of the initial judge in the case, Mr Stubbings was: “completely lost, totally unsophisticated, incompetent and vulnerable”.
He could not calculate 10% of a simple number. He had no income, but plenty of debts. His financial situation was, in the words of the judge, “bleak”.
Stephen Parker
Simplifying the facts a little, Mr Stubbings found his way to a lender; aptly called Jams Pty Ltd. They engaged in asset-based lending, which is lending only on the strength of the security offered, and without consideration of whether the borrower had the means to repay the loan. Their interest rates were well above normal bank lending rates, and in fact Mr Stubbings had been refused a mortgage by a major bank.
Stephen Bottomley
When all the loan documents had been prepared, Mr Stubbings was required to go to a lawyer and to an accountant, separately. The lawyer had to certify that the documents had been fully explained to him. The accountant had to certify that Mr Stubbings knew about the financial risk he was taking and that to the best of the accountant’s knowledge, Mr Stubbings understood it.
Stephen Parker
Of course, it all went wrong. Within a short time he couldn’t pay the instalments and Jams Pty Ltd took proceedings against him.
Stephen Bottomley
Mr Stubbings won in the trial court, where the judge held that Jams Ltd, through their own lawyer and broker, had behaved unconscionably. He lost in the Victorian Court of Appeal, which placed emphasis on the supposedly independent advice he had received. But Mr Stubbings won in the High Court of Australia in 2022.
Crucial findings were that Mr Stubbings was at a special disadvantage, ie over and above a common imbalance of bargaining power. Jams Pty Ltd must have known it could only end in one way, with them enforcing the security for the loan, and they were presumed to have known that Mr Stubbings had not understood this.
Stephen Parker
Now let’s think about the case. The common law frame of mind would put weight on the fact that he signed a document, and if people aren’t held to things they sign for, no transaction is safe. Furthermore, Mr Stubbings had legal and financial advice, which was apparently independent, although I have my doubts. He took a risk and it didn’t pay off.
The High Court quoted an historic English judge who said that a court of common law works its way to “short issues, and confines its views to them”. In our case, these “short issues” might be the signature and the advice.
“A court of equity”, said that English judge, “takes a more comprehensive view, and looks to every connected circumstance that ought to influence its determination upon the real justice of the case”.
Stephen Bottomley
Mr Stubbings, after a seven year battle, benefited from the development of thinking that goes back about eight centuries to the Court of Chancery in England, initially presided over by the Lord Chancellor. Over the following centuries, Lord Chancellors often were religious clerics or had theological training. They infused their secular court work with these influences of conscience and morality.
In particular the Court of Chancery could be appealed to when the courts of common law would allow something that was not in good conscience, and at times there was outright competition between the two kinds of courts.
Eventually, in 1873, the common law and equitable doctrines were fused in England, in the sense that all courts could apply both. But conceptually – as ideas – they continue to develop separately, and every so often a case involving an equitable principle provides quite a shock to the common law.
Stephen Parker
This is the case throughout the common law world now, although equity as a separate strand is more vigorous in some countries than others, and in India it has been codified into statute.
It is tempting to see common law and equity as reflecting different political philosophies and ethics. Some place emphasis on individual autonomy, on looking after yourself, and on a society where the weak sometimes go to the wall in order to create an economy that is overall to everyone’s benefit.
Others argue that no amount of rules can do justice in every circumstance and that we need a separate voice that can intervene to protect the vulnerable and state publicly a few core moral principles.
Stephen Bottomley
In some common law systems, such as Australia, England and Canada equity has been in the ascendancy in recent decades. At the same time, the tort of negligence has expanded, which is broadly about taking reasonable care not to cause harm to those you can anticipate will be affected directly by your actions. We have also seen expansion of offences of dishonesty in the criminal law.
Some listeners may approve of these trends, others may not. But if we end up with a legal system that revolves around just three principles, of fairness, reasonableness and honesty, we might find that the law is not a good guide to conduct; that it is hard to predict in particular situations. Maybe we need some clarity in life, some tramlines as well as guidelines.
Stephen Parker
This is the debate that the law, in its context, grapples with every day. It’s not a new debate. In the 17th century an English jurist John Seldon complained that one Lord Chancellor might have a different conscience from another Lord Chancellor. To quote him, one has a long foot, another a short foot, a third an indifferent foot. ‘Tis the same thing in a Chancellor’s conscience.
At some point in a law degree, students will hear a strange reference to the length of the Chancellor’s foot.
Stephen Bottomley
Personally, I think it’s time to give that one the boot.