2 Law and Equity

When considering ownership in English law, it is necessary to apply two separate sets of rules: Law, then Equity.

(1)CARICATURE OF THE COMMON LAW

At the time of the Norman Conquest in 1066, the basic social unit was the manor. Each manor was a community of agricultural labourers of servile status, governed and protected by the lord of the manor. The lord could not, however, rule in an arbitrary manner. Each manor had its own local law, the law and custom of the manor. The Norman invaders adopted and imposed their authority on this manorial system. As between the lord and his serfs, the local law and custom of the manor continued to apply. As between themselves, the Norman overlords were subject to the king’s law. The king’s law was, however, of general, as opposed to local, application and so became known as the common law. Gradually, the importance of the common law waxed, and that of the local or manorial law waned; but, at least in relation to the ownership of land, manorial law retained some importance right down to the 20th century.

The common law is thus older than Parliament. In origin, the king was the lawgiver, although common prudence dictated that he should generally govern with the advice of his council. And, of practical necessity, the dispensation of justice was soon delegated to the king’s justices. In theory, the judges merely declared the law; in practice, they made it. Thus, the common law eventually became what it is today: a judge made law, unwritten and therefore capable of being developed and adapted to meet changing circumstances as the judges see fit.

Meanwhile, the king’s council had become a larger parliament, and the issue was raised whether the king was bound to act on the advice of the parliament or whether he was free to do as he pleased. The Civil War resolved the issue against the king and in favour of the parliament. Thus, the common law may now be abrogated or amended by Act of Parliament.

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UNDERSTANDING LAND LAW

It will be apparent that the expression ‘common law’ is a chameleon, taking its meaning from its context. Common law may mean, in the first place, the general law as opposed to the local or manorial law. Common law may mean, in the second place, judge made law as opposed to statute. In the context of property law, however, there is a third meaning of ‘common law’ which is of greatest importance: the contrast between the common law (or simply Law) and Equity – and in that context, ‘the Law’ means the common, judge made law as amended by statute from time to time.

(2)CARICATURE OF EQUITY

By the end of the 13th century, the common law had become unduly ritualistic. A litigant’s prospects of success might depend as much upon following the correct procedure as upon the substantial merits of his case. If he used the wrong incantation, he might fail altogether, without any investigation of the justice of his cause. Thus, it might happen that in dispensing law, the judges might also dispense injustice. What could an aggrieved litigant do in those circumstances? Well, since the law was in theory the king’s law, he could go to its source and petition the king himself to remedy the injustice apparently perpetrated by his law. A typical opening was: ‘Sire, for the Love of God and in the Way of Mercy, please …’ Note two features: this is a request, not a demand; and the appeal is based on grounds of moral justice and good conscience.

Initially, the king might deal personally with such petitions, but then he began to refer them to the Lord Chancellor, who in those days was a cleric and the ‘keeper of the king’s conscience’, and soon it became the practice for a petitioner to send his petition directly to the Lord Chancellor.

Now the Lord Chancellor had no power or authority to alter the law. He was bound to accept that the law was what the common law judges said it was. But if he felt that the defendant had behaved unconscionably, then the Lord Chancellor might alter the effect of the law by directing the defendant, on pain of imprisonment, to behave in accordance with the dictates of good conscience, his strict legal rights notwithstanding. Note three more points: first, the Lord Chancellor does not actually alter the law, but assumes the continued existence and effectiveness of the law; second, he fixes his attention on the conscience of the defendant; and, third, his injunction is directed at the defendant personally.

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LAW AND EQUITY

This novel jurisdiction of the Lord Chancellor had a profound effect upon the administration of justice. Most significantly, it meant that a ‘use’ became enforceable. It sometimes happened – perhaps in Saxon times, but certainly in Norman times – that a landowner conveyed his land to another ‘to the use of’ some third party. A knight, riding off to the Crusades, might, for example, convey his land to his brother ‘to the use of’ the knight’s family. In other words, the brother became the owner of the property, but he was supposed to hold it for the use and benefit of others. The common law, however, treated the added use as a moral obligation, but no more. The brother could hold the land for the benefit of the family if he wished, but the common law would not compel him to do so. The Lord Chancellor, however, would. He would say that it was contrary to good conscience for the brother to keep the property for himself. The brother was, and remained, the true owner of the land at common law, but the Lord Chancellor could direct him to use it for the benefit of the absent knight’s family, with the threat of imprisonment in default.

From such beginnings, an entirely separate jurisdiction evolved, with its own entirely separate courts. The Lord Chancellor’s court eventually became known as Chancellery or Chancery; the jurisdiction it dispensed, being based on true justice, was called Equity. In the early days, justice was dispensed according to the subjective impressions of each succeeding Chancellor, and the complaint was that Equity varied with the length of the Chancellor’s foot. But Lord Chancellor Nottingham (1673–82, ‘the Father of Equity’) moulded its principles into a coherent scheme, and later Equity threatened to become as rigid and formal as the old common law.

Law and Equity continued as two separate jurisdictions with separate courts until the 19th century. The common law courts dispensed Law, the Court of Chancery dispensed Equity, and, if necessary, the litigant had to flit from one to the other and back again. The two systems continue as separate systems today. It is still necessary to consider first what is the position at Law, and then to consider whether Equity demands any modification. But the administration of the two systems was fused in 1875, so that today any court can dispense Law and any court can dispense Equity.

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UNDERSTANDING LAND LAW

(3)DOUBLE VISION

Property law can therefore be represented diagrammatically in this way:

P R O P E R T Y

Some areas of property law are governed exclusively by the Law. For example, the Law will enforce a covenant (a promise in a deed) even where no consideration has been given in return for the covenant (a ‘voluntary covenant’); Equity will not enforce a covenant unless valuable consideration has been given. Other areas of property law are governed exclusively by Equity. For example, the rights of a beneficiary against his trustee are exclusively Equity’s concern; the Law ‘sees’ only the legal ownership of the trustee; it cannot even ‘see’ the beneficiary, let alone enforce his claims. But in most cases there is an overlap, and it is necessary to consider two questions: what is the position at Law? And then: does Equity take a different view?

The following points may be emphasised about the nature of Equity.

First, equity (in the non-technical sense) means fairness or justice; Equity (in the technical sense) is based on ideas of fairness or justice, but Equity does not and cannot right every wrong. Equity acts according to settled principles. Equity’s principles are more flexible and more adaptable

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than the rules of the Law, but some order is necessary so that people can know how they stand.

Second, Equity is only a partial system. The Law claims to be comprehensive; it has an answer for everything. Equity intervenes in selected areas only; it has, for example, very little to do with the criminal law.

Third, Equity is a parasitic system, or, as it is usually put, ‘Equity is a gloss on the Law’ – gloss meaning a marginal note or comment on a text. Take away Equity, and the Law could continue to function; take away the Law, and Equity would collapse; it would have nothing upon which to bite.

Fourth, ‘Equity acts in personam’. In theory at least, Equity does not alter the Law. Equity does not and cannot deny a person’s legal rights. It merely fastens on the conscience of the legal claimant, and directs him how he should behave. Equity may thus alter the effect of the Law, but it does not alter the rules of the Law.

Finally, a court of Equity is a court of conscience, and, in particular, it will not assist a claimant if it would be unjust to do so: equitable remedies are discretionary.

(4)THE CONTRIBUTIONS OF EQUITY

The contribution made by Equity to our jurisprudence was threefold.

First, Equity brought new procedures. In particular, because a court of Equity was a court of conscience, it could examine a defendant’s conscience by putting him on oath to tell the truth – something unheard of in the early common law.

Second, Equity brought new remedies. The principal remedy at Law was, and is, damages: the claimant recovers money compensation for loss suffered by reason of the defendant’s misconduct. But money does not always provide adequate compensation, and Equity can issue an injunction compelling the defendant, on pain of imprisonment, to desist from his misconduct, or to refrain from threatened misconduct, or to take corrective measures. It may also grant an order for specific performance, requiring the defendant actually to do that which he promised to do.

There are, however, continuing differences in the availability of legal and equitable remedies respectively, which may be traced back to medieval origins. In general, if the claimant proves infringement of a legal right, then he is entitled to a legal remedy. He can demand damages. If his claim is

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as the relationship which exists when the apparent or legal owner of

normally charitable, purposes). The person who creates the trust is called

LEGAL TITLE

N

B

S is the settlor; T, the trustee; and B, the beneficiary

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LAW AND EQUITY

It will be seen that the modern trust is, in principle, identical to the ancient use, described above. The history of how the one became the other does not matter for present purposes. What, however, is important is the idea that it is possible to have two ‘owners’ of the same property at the same time – one being the titular owner according to the rules of the Law; the other being the person entitled to be treated as the owner according to the principles of Equity.

The trust is an immensely flexible institution. It may be used to vest powers of management in one person or group of persons, and the benefit in another or others who cannot effectively manage for themselves (children, mental patients, clubs and associations). It can be used to provide for persons unborn and therefore as yet incapable of holding property. It can be used to dispose of property in such a way as to minimise taxation. It can be used to solve various technical problems in conveyancing. It can sometimes be used in a quasi-remedial fashion to prevent a fraudster benefiting from his unconscionable conduct. And the trust has many more functions besides.

(5)EQUITABLE OWNERSHIP

It is necessary to say a little more about the nature of equitable ownership. The beneficiary under a trust is commonly called the equitable owner, and he is treated in Equity as though he were the owner of the property. He can sell, give away or otherwise dispose of his equitable property. If he does so, the trustee thenceforth holds on trust for the transferee instead of on trust for the original beneficiary. Equitable ownership is, however, less secure than full legal ownership.

(a)Nature of equitable rights

Legal ownership is a right in rem. It is a right which, in principle, is good against the whole world. Equitable ownership falls short of that. Equitable rights are, in principle, good against the whole world except a bona fide purchaser of the legal estate for value and without notice – commonly known as ‘the BFP’ – but it is a principle which needs both explanation and modification.

Originally, the beneficiary’s right in Equity was merely a right against the ‘trustee’ personally. The settlor had reposed a confidence in him. It was

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UNDERSTANDING LAND LAW

his conscience which was affected. It was he who was bound in Equity to treat the property as belonging to the beneficiary. If the trustee transferred the property to some third party, then, originally, that third party was not bound by the trust. However, from about the middle of the 15th century, Equity began to extend its notion of conscience, and began to enforce the beneficiary’s rights not only against the original trustee, but also against various classes of successors in title. First, it held that the trust could be enforced against a purchaser with notice of the trust – one who took the property knowing of the beneficiary’s claim. Then it began to enforce the trust against the trustee’s heir, if the trustee himself died. Then it began to enforce the trust against any donee from the trustee – even one who took with a clear conscience and without notice of the beneficiary’s claim. Then Equity asserted that the rights of the beneficiary should take priority even over the claims of the trustee’s creditors in the event that he failed to pay his debts. The beneficiary’s right, which had begun as a right in personam, had become, so to speak, a right in personas – enforceable against many people. In effect, although it was not finally confirmed until the start of the 20th century, the beneficiary’s right had become almost a right in rem. It was a right which was good against the whole world except the BFP.

(b)The BFP

If he is to claim the privileged status of BFP, the purchaser must satisfy five requirements. First, he must be bona fide, that is, honest. Second, he must be a purchaser in the technical sense. A ‘purchaser’ here means a person who takes by act of party, rather than by operation of law. A buyer is a ‘purchaser’: he acquires his title by the deliberate act of the vendor. But so is a mere donee of the property, or one who takes a lease or a mortgage on the property. They all take their title because someone transfers it to them. On the other hand, if a person is declared bankrupt, title to his assets vests by operation of law in an official called his trustee in bankruptcy. Or if a person dies intestate (without making a will), title to his assets vests by operation of law in an administrator appointed by the court to wind up his estate. These last two are therefore not ‘purchasers’ in the technical sense.

Third, the BFP must be a purchaser of a legal estate or legal ownership of the property. The BFP can say that he too has an equity (or moral claim) in his favour to counteract the equitable claims of the beneficiary. He acted in all innocence, his conscience is clear, and moreover he gave good value for the property. The moral arguments for the purchaser and for the beneficiary are equally balanced. The case for not interfering with the

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Law’s solution is as strong as the case for interfering with it. Equity therefore declines to interfere and allows the Law to take its course: ‘Where the equities are equal, the Law prevails.’ On the other hand, if the purchaser buys only an equitable interest in the property, then Equity must adjudicate between the purchaser and the beneficiary. Neither has the Law on his side to tip the balance. Equity then says, ‘Where the equities are equal, the first in time prevails’, and the beneficiary prevails over the purchaser.

Fourth, the BFP must be a purchaser for value. So a donee is a purchaser, but he is not a purchaser for value. ‘Value’ here means money, money’s worth or marriage. Where the purchaser pays money, he need not pay the full market price, but a purely nominal payment is not value. Money’s worth includes payment in kind – barter or exchange. Marriage may need explanation. Where a parent or some other person promises to settle property on the happy couple upon the occasion of their marriage, then the act of getting married constitutes consideration for that promise. The ‘marriage consideration’, as it is termed, is deemed given by both parties to the marriage and (a quaint rule!) by the children or remoter issue of that marriage (‘because the parents have the seeds of future generations within them’).

Finally, the BFP must be a purchaser without notice of the beneficiary’s rights. A purchaser who actually knows of an equitable right or interest is said to have actual notice of it. But a purchaser who does not actually know of an equitable right or interest may nevertheless still have notice of it. Notice is wider than knowledge. Every purchaser is expected to behave in a sensible and reasonable manner. If he does not, then he is deemed to have notice of those rights which he would have discovered if he had behaved as a sensible and reasonable purchaser would have behaved. He is said to have constructive notice of those rights. Now a purchaser of land is expected to carry out a thorough investigation of his vendor’s title. So, if a purchaser of land does not investigate title, he is nevertheless fixed with (constructive) notice of those rights which he would have discovered had he properly investigated. And if a purchaser of land investigates the title carelessly, he is nevertheless fixed with (constructive) notice of those rights which he would have discovered had he conducted his investigation in a reasonably careful manner. A purchaser of goods, on the other hand, does not normally ask for proof of title – the fact of possession and the absence of suspicious circumstances is usually accepted as sufficient proof of the seller’s right to

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sell. The doctrine of constructive notice is therefore of limited application in the case of pure personalty. Lastly, in addition to actual notice and constructive notice, there is a third kind of notice: imputed notice. Where a purchaser employs a solicitor or other agent to conduct the purchase for him, then anything which was discovered or which ought to have been discovered by that agent is imputed to his principal, the purchaser.

(c)Effect of a bona fide purchase

The BFP as described above takes free of the beneficiary’s rights. The defence of bona fide purchase acts as a brick wall, over which the beneficiary can never scramble. He can no longer claim that the property belongs to him in Equity. His equitable ownership is destroyed. His only claim is a claim for compensation for breach of trust against his trustee. It follows that anyone claiming through a BFP takes free of the trust, even if he himself had notice of the erstwhile equitable interest, because, ex hypothesi, the equitable interest ceased to exist when the BFP acquired the title.

B

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(d)Modern modifications of the doctrine

Although one continues to say that equitable rights are good against the whole world except the BFP, in practice the doctrine is much modified by statute. In the first place, some equitable rights are declared registrable. For that class of rights, registration generally supplants notice. If the item is duly registered, the purchaser is bound whether he checked the register or not; if the item is not registered, then a purchaser for value (or in some cases a purchaser for money or money’s worth) will take free of the right even if he actually knew of its existence. In relation to such rights, one still refers to a ‘BFP without notice’, but one makes the mental translation that notice means registration.

In the second place, a purchaser with notice may nevertheless take free of certain other rights by the doctrine of overreaching. In order to overreach, the purchaser must comply with certain prescribed requirements. In the typical case, he must pay over his purchase money to at least two trustees. (He may pay his money to a sole trustee if that sole trustee is a trust corporation; a trust corporation is the Public Trustee or a company – say, a bank or an insurance company – which is authorised to act as a trustee.) If the purchaser does that, then the rights of the equitable owners are, so to speak, detached by statutory magic from the property itself and are attached instead to the money paid by the purchaser. The purchaser can then, so to speak, reach over the heads of the beneficiaries and take the property freed from their equitable interests. Overreaching is thus a device which attempts to reconcile commercial expediency and moral justice: the purchaser gets the clean title he wants, free of the beneficiaries’ rights; their rights are not destroyed, they are merely transferred from one investment to another. The requirement that, for overreaching to work, there must normally be two trustees or a trust corporation, is some safeguard against collusion or fraud.

Registration and overreaching are considered in more detail later.

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