Module 1 – What is equity?

Learning resources

Prescribed reading
M W Bryan et al, chapter 1

Further reading
M W Bryan et al, Sourcebook chapter 1

Essential cases
Chan v Cresdon Pty Ltd (1989) 168 CLR 242

Corin v Patton (1990) 169 CLR 540

Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298

Walsh v Lonsdale (1882) 2 Ch D 9

What is equity?
Equity is a body of legal principles as well as a manner of describing a jurisdiction. Equitable principles were
initially developed by the English Court of Chancery prior to 1873 and have subsequently been modified by
courts administering equitable jurisdiction.

As will be outlined below, equity’s earliest role was to supplement the deficiencies of the common law
system. Equity intervened to offer justice and remedies which might otherwise have been unavailable. In this
sense equity is often described as a gloss on the common law. The extent to which equity interferes with the
common law varies greatly, but it is overwhelmingly contract and real property law which have been most
affected. Indeed, it is likely that in your studies of these areas you have already become familiar with
equitable concepts such as estoppel, injunction and specific performance.

Today equity in Australia is still driven by the notion underpinning the early historical beginnings of
equitable doctrines and principles: the avoidance of unconscionability. This is illustrated in a series of cases,
including:

Australian Competition & Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51
Baumgartner v Baumgartner (1987) 164 CLR 137

Commonwealth v Verwayen (1990) 170 CLR 394.

A good understanding of the equitable principles which operate today should be underpinned by a firm grasp
of the origins of equitable principles and how they operate in concert with the common law. This topic is an
important one to understand.
The development of equitable principles: the Middle Ages to the modern
era

Distinguishing the origins of equity and common law

In order to begin to understand the role that equitable principles play in our legal system, it is important to
distinguish the origins of common law and equity. Common law is presumed to have existed since time
immemorial. The Statute of Westminster of 1275 fixed the commencement of time immemorial as the date
of King Richard I’s accession to the throne: 3 September 1189. Equity, however, is composed of principles
created much later by the Court of Chancery and subsequently modified by courts exercising equitable
jurisdiction. This concept of equity as ‘invented’ principle is well explained in the case of In re Hallett’s
Estate; Knatchbull v Hallett (1880) 13 Ch D 696 at 710 per Sir George Jessel MR:

[I]t must not be forgotten that 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.

Middle Ages: 5th to 15th Centuries

The King’s Council and the common law Henry II: 1133 - 1189

In England in the Middle Ages, King Henry II determined that the King’s Council would be the central
governing authority responsible for legislative, executive and judicial functions. Over the next 200 years,
recognised forms of action, rules, principles and remedies were established and refined. In this period of
time, three common law courts developed from the King’s Council: Common Pleas, King’s Bench and
Exchequer. Writs became the focal point of the common law system. Writs laid down the accepted causes of
action. They determined which complaints could amount to a recognised claim which could be brought
before a court of common law. The writ determined acceptable procedure and available relief.

An important focus of the refinement of the common law system during this time was precision,
predictability and conformity with precedent and procedure. Those unable to bring their claims before the
court and those dissatisfied with their outcomes were able to circumvent the common law system and
petition the King for justice.

The Chancellor and petitions for justice

Towards the end of the 14th century, as the common law courts became more rigid and inflexible in their
approach to the law, petitions to the King for justice became more frequent. These petitions would have been
received on behalf of the King by the Chancellor as head of the King’s Council. The petitions increased to
such an extent that they were delegated to the Chancellor who would hear and decide the petition. Eventually
petitions for justice were made directly to the Chancellor. Later, the number of petitions required the
establishment of a separate court designed to deal with the petitions: the Court of Chancery.

The Chancellor already occupied the role of head of the King’s Council. The Chancellor was the head of
Chancery, which issued the King’s writs, and keeper of the King’s Great Seal, which was applied to the
King’s official documents. Until the establishment of the Court of Chancery, the Chancellor had heard the
petitions for justice as a delegated exercise of executive, not judicial power.

The Chancellors during this period were typically high-ranking clergy, often with legal experience in both
civil and canon law. While this experience certainly qualified them for dealing with petitions for justice, their
decision-making during this period has been described as being largely ‘according to conscience’ and having
scant regard to precedent. The Court of Chancery emerged in the 15th century, but it was not until 1557 that
the first published reports of decisions of this court emerged. It was the Chancellors of this court who were
responsible for the early development of equitable principles.

Equitable jurisdiction was not exclusively the province of Chancery. The Court of Requests exercised
equitable jurisdiction for a short time during the Tudor period commencing in the 15th century. The Court of
Exchequer also exercised a limited equitable jurisdiction until as recently as 1842.

Jurisdiction of the Court of Chancery

The Court of Chancery’s jurisdiction grew from the hearing of petitions for justice. Its jurisdiction was in
part auxiliary, as it enhanced the common law. For example, Chancery was able to provide remedies
unknown to the common law, such as injunctions and specific performance. Chancery was also able to offer
relief where the common law did not recognise a cause of action, for example the unconscionable insistence
upon strict legal rights in circumstances of fraud or duress.

Chancery also developed exclusive jurisdiction over uses and trusts. These devices played a key role in the
growth of Chancery’s jurisdiction and importance. Neither uses nor trusts were devices recognised by the
common law.

A use enabled a person, the feoffee to uses, to hold the title to land for the benefit or use of another, the
cestui que use. The common law recognised the feoffee to uses as the absolute owner of the land and refused
to recognise the rights of the cestui que use. However, Chancery not only recognised the rights of the cestui
que use, it was able to enforce them. Chancery did acknowledge the feoffee to uses’ legal title but also
considered the feoffee to uses as bound by conscience to use that right to legal title for the benefit of the
cestui que use.

Uses made it possible to avoid the payment of feudal dues payable to the King on land holdings. Uses proved
so effective in this regard that King Henry VIII passed the Statute of Uses 1535 to abolish uses. In response,
a new device of similar effect was developed. This new device was called a use upon a use, but such devices
remained unenforceable until the abolition of feudal dues in the 17th century. With feudal dues abolished,
any bars to the recognition and enforceability of the use upon a use were removed. The use upon a use
became known as the trust, which became a cornerstone of equitable jurisdiction.

One of the earliest uses of the trust was the marriage settlement. At common law a woman’s property was
transferred to her husband upon their marriage. However, prior to the marriage, it was possible for the parties
to enter into a marriage settlement where the woman’s property would be transferred to a trustee. This trust
arrangement circumvented the operation of the common law and enabled the woman to retain the benefit of
her own property even after her marriage. These early trusts were effectively used to circumvent the common
law rule until its abolition in 1882.

The Tudor and Stuart periods: defining equitable principles

The first common lawyer was appointed as Chancellor during the Tudor period commencing in 1485. This
appointment heralded a significant move away from the traditional appointments of high-ranking clergy to
the office in favour of prominent common lawyers with a greater focus on the development of a clearly
articulated body of equitable principles and precedent. This move toward the appointment of common
lawyers was so pronounced that ecclesiastical Chancellors were no longer appointed after the Stuart period
which ended in 1714.

The two most prominent Chancellors during the Tudor and Stuart periods were Thomas Egerton, Lord
Ellesmere (1596–1617), and Lord Nottingham (1672–1683), who is often referred to as the father of modern
equity.
Seventeenth century conflict with common law
Given that many petitions involved injustice afforded by the strict insistence upon common law rights, the
most significant discretionary remedy awarded by the Chancellor in the 16th and 17th centuries was the
common injunction. The common injunction was used to order a common law plaintiff to cease common law
proceedings or to prevent such a plaintiff from enforcing a verdict already obtained through the common law
system. This injunction was discretionary and was only available if the common law proceedings or
enforcement of the common law verdict would amount to an unconscionable insistence upon the plaintiff’s
strict legal rights. In focusing upon the conscience of the plaintiff, the Chancellor acted in personam while
still recognising the validity and existence of the plaintiff’s common law rights and entitlements. A common
law plaintiff who disobeyed or acted in contempt of the terms of the common injunction was imprisoned, a
further illustration of the remedy acting in personam.

The dispute with the common law arose when the common law courts claimed to prevent any party to
common law proceedings from seeking relief in other jurisdictions and used writs of habeas corpus to
release people imprisoned for contempt or disobedience of common injunctions. Both were attempts by the
common law courts to assert their supremacy over Chancery.

The conflict came to a head in The Earl of Oxford’s Case (1615) 1 Ch Rep 1, in which Lord Ellesmere
upheld at 6-10 the common injunction and the right of Chancery to set aside bad common law judgments on
the basis of conscience:

The office of the Chancellor is to correct men’s consciences for frauds, breach of trusts, wrongs and
oppressions, of what nature soever they be, and to soften and mollify the extremity of the law, […] when
a judgment is obtained by oppression, wrong and a hard conscience, the Chancellor will frustrate and
set it aside, not for any error or defect in the judgment, but for the hard conscience of the party […].

King James I, by royal decree, finally settled the long-running dispute between common law and equity
when he decreed that Chancery could set common law verdicts aside where they were against conscience. In
this sense, at least, equitable principles would prevail when they were in conflict with rules of law.

Almost immediately this position was harshly criticised. The only limit to equity’s jurisdiction appeared to
be what Chancery might decide to be unconscionable: a measure as arbitrary and uncertain as the length of
the Chancellor’s foot, a comparison which was made by John Selden, a Member of Parliament in the 1620s.

Equity faced further challenges later in the 17th century during the rule of Oliver Cromwell, who introduced
a bill to Parliament seeking to abolish both equity and the Court of Chancery. The bill was not passed.

During this period Chancery underwent significant changes. Under the leadership of the early common
lawyer Chancellors, increasingly more Chancery reports were published. Lord Nottingham (1672–1683) was
the first of a long line of Chancellors to lay down the rules and principles which today underpin equitable
jurisdiction. Lord Eldon (1801–1806 and 1807–1827) was the longest-serving Chancellor and the most
prolific writer of reports: 32 volumes of his reported judgments were published. As a direct consequence of
the proliferation of rules, principles and reported judgments, the Court of Chancery eventually became as
bound by precedent as the common law, with an equally well-defined jurisdiction.

By the early 19th century, the Court of Chancery began to experience problems similar to those in the
common law courts. Large numbers of cases and shortages of staff and judges all contributed to lengthy
delays. Matters became worse when the equitable jurisdiction of the Court of Exchequer was transferred to
the Court of Chancery. In 1851 it became possible to appeal decisions of the Court of Chancery with the
establishment of the Court of Appeal in Chancery.

While Chancery recognised the common law, it did not have power to decide common law legal rights and
interests. Chancery could award some forms of monetary compensation or restitution, but was not able to
award damages as relief. Common law courts did not recognise equitable rights and interests, could not
award equitable remedies and did not allow the pleading of equitable defences. Once proceedings were
 instituted it was not possible to transfer from the common law system to Chancery. Forum choice was a
difficult one for many prospective plaintiffs.

Piecemeal attempts to remedy these issues were made in a series of legislative efforts:

● s 61 of the Court of Chancery Procedure Act 1852 (Imp) gave Chancery the power to determine
incidental questions of law arising in equitable matters;
● Lord Cairns’ Act 1858 (Imp) gave Chancery power to award damages in lieu of or in addition to
remedies of specific performance and injunction;
● ss 48-51 of the Common Law Procedure Act 1854 (Imp) gave common law courts power to grant
injunctions and order discovery and interrogatories.

A new judicature system

A comprehensive review of the legal system addressed all these problems. The result was the English
Judicature Act 1873. This statute abolished the existing dual court systems of common law and Chancery,
replacing them with one court system: the High Court of Justice. The new High Court had five divisions,
including Chancery which heard cases involving equitable principles. A Court of Appeal heard appeals from
all five divisions. All of the divisions recognised equitable rights and interests and were able to provide
equitable remedies and entertain equitable defences. The common injunction was abolished.

The earlier decision of The Earl of Oxford’s Case (1615) 1 Ch Rep 1 was enshrined in s 25(11) of the
Judicature Act 1873, which provided that in the event of any conflict or variance between the rules of equity
and common law the rules of equity should prevail.

The impact of the reforms effected by the Judicature Act 1873 could be interpreted in two ways: the
orthodox interpretation or the ‘fusion fallacy’. Under the orthodox interpretation, separate bodies of legal and
equitable rules continued to exist despite the legislation. Support for this view lies in the s 25(11) stipulation
for a rule to apply in the event of a conflict between equity and common law. Under this view, the Act
brought about a fusion of administration: the one court system could administer both legal and equitable
principles. On the other hand, the ‘fusion fallacy’ supposed that the impact of the Act was to fuse the
principles of common law and equity into one coherent body of law, modifying the rules of each by
incorporating rules of the other. The result of this ‘fusion fallacy’ has been that some decisions have been
made that were simply not possible under the pre-Judicature Act system. These decisions fall into two
categories:

● where the award of a remedy not available in the pre-Judicature Act system at common law or in equity
was made;
● where the principles of one branch of the law were modified by the infusion of principles of the other
branch of the law.

The fusion fallacy

Walsh v Lonsdale (1882) 21 Ch D 9 is considered the most famous case exemplifying the fusion fallacy. In
that case, Sir George Jessel MR was considering the enforceability of a lease for a mill. His Honour appeared
to reason that the prevalence given to equity by the Judicature Act 1873 had removed all distinctions
between the common law and equity, saying at 14:

There is an agreement for lease under which possession has been given. Now since the
Judicature Act the possession is held under the agreement. There are not two estates as there
were formerly, one estate at common law by reason of the payment of the rent from year to year,
and an estate in equity under the agreement. There is only one Court and equity rules prevail in
it.
Other examples of decisions seen as evidence of the fusion fallacy at work include:

● Seager v Copydex Ltd [1967] 1 WLR 923, in which common law damages were awarded in an action for
breach of an entirely equitable obligation;
● Redgrave v Hurd (1881) 20 Ch D 1, in which damages were awarded for innocent misrepresentation. In
equity, innocent misrepresentation had previously only given rise to a right to rescind but no entitlement
to damages.

After considering argument based on the fusion fallacy, the New South Wales Court of Appeal in Harris v
Digital Pulse Pty Ltd (2003) 56 NSWLR 298 held by majority that exemplary damages were not an available
remedy in an action for breach of fiduciary obligation. In that case, exemplary damages had been sought for
a breach of fiduciary duty. The majority, Spigelman CJ and Heydon JA, rejected this argument on the basis
that it was a fallacy to suggest that the common law and equitable rules had become so inextricably linked or
fused that common law remedies should be available for breach of an entirely equitable obligation. Although
Mason P dissented, his Honour’s reasons at 335-9 offer a valuable analysis of the fusion fallacy concept,
describing it as ‘fallacious and historically unsound’.

Equity in Australia
The Supreme Court of New South Wales was established in 1823 by the Charter of Justice, letters patent
issued pursuant to the statutory authority of Imperial Act of 1823 4 Geo IV c 96. This law specifically
invested the Supreme Court with the equitable jurisdiction exercised by the Chancellor in Great Britain. This
power was continued by the Australian Courts Act 1828, 9 Geo IV c 83. Matters of equity and common law
were administered by the one court until the Administration of Justice Act 1840 (NSW) 4 Vict No 22
sanctioned the appointment of a judge to administer equitable matters separately from other court business.

Equity in Queensland
The equitable jurisdiction of the Supreme Court of Queensland was conferred by an Imperial Act passed in
1861 which established the court and was almost immediately reinforced by the Equity Act 1867 (Qld) and
the Supreme Court Act 1867 (Qld). The new judicature system in England was introduced in 1873 and
eventually all Australian colonies adopted the new system. Queensland adopted the system first, pursuant to
the Judicature Act 1876 (Qld). New South Wales eventually adopted the system pursuant to the Supreme
Court Act 1970 (NSW). Today, the basis of equitable jurisdiction in Queensland’s superior courts is found in
the Civil Proceedings Act 2011 (Qld).

Inferior courts also have an equitable jurisdiction: ss 68-70 of the District Court of Queensland Act 1967
(Qld); Barbagallo v J & F Catelan Pty Ltd [1986] 1 Qd R 245. Amendments to the District Court of
Queensland Act 1967 introduced in 1989 significantly enhanced that court’s equitable jurisdiction.

Maxims of equity

Significance of the maxims of equity

Equitable maxims express broad equitable concepts. They reflect the basic principles of equity and have
influenced its development. Akin to rules of thumb, they are of assistance to the court in determining
disputes but are not binding rules or principles of law.

The significance of the maxims was well put by Mason CJ and McHugh J in Corin v Patton (1990) 169 CLR
540 at 557 when considering the importance of one of the maxims:
 Like other maxims of equity, it is not a specific rule or principle of law. It is a summary statement of a
broad theme which underlies equitable concepts and principles. Its precise scope is necessarily ill-
defined and somewhat uncertain.

Important equitable maxims

(1) Equity acts in personam

This is one of equity’s oldest recorded maxims, dating back to The Earl of Oxford’s Case (1615) 1 Ch Rep 1.
Historically, equity’s orders and remedies were directed to the conscience of the parties rather than affecting
any particular property. Although the maxim remains relevant in a range of contexts, today many equitable
rights and interests are proprietary in nature. X v Twitter Inc [2017] NSWSC 1300.

(2) Equity will not suffer a wrong without a remedy

As illustrated above, historically equity was able to step in and provide an action or remedy where the
common law could not. Giumelli v Guimelli [1999] HCA 10.

(3) Equity follows the law

This maxim is true to the extent that equity has always recognised common law rights and interests. Motor
Terms Co Pty Ltd v Liberty Insurance Ltd (in liq) (1967) 116 CLR 177. Yet equity does not follow the law in
all things, with many equitable remedies designed to correct defects in the common law.

(4) When equities are equal, the first in time prevails

This maxim underpins the equitable principles of priorities, which will be studied later in this course through
relevant cases.

(5) One who seeks equity must do equity

A plaintiff seeking equitable relief must have satisfied his or her own legal and equitable obligations. This
maxim was applied in Maguire v Makaronis (1997) 188 CLR 449; Stern v McArthur (1988) 165 CLR 489.

(6) One who comes to equity must come with clean hands

Equity will examine the conduct of the plaintiff seeking equitable relief and may refuse relief if the plaintiff
is guilty of any pertinent legal impropriety. This maxim was relevant in Black Uhlans Inc v New South Wales
Crime Commission [2002] NSWSC 1060.

(7) Equity assists the diligent and not the tardy / Delay defeats equity

Undue delay can prejudice an equitable claim, although simple delay alone will not necessarily act as a bar to
relief. The best examples of this maxim at work are the equitable concepts of laches and acquiescence. Latec
Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265.

(8) Equity is equality

This maxim refers to equity’s tendency to distribute profits and losses in proportion to the parties’ claims and
liabilities. This maxim is well illustrated in the execution of trust powers and in partnerships. Chan v
Zacharia (1984) 154 CLR 178.

(9) Equity looks to the substance / intent and not the form

This maxim underpins the equitable doctrine of rectification. Essentially it refers to equity’s practice of
looking at the intent or substance of a contract or transaction rather than at its strict wording or at any failure
to comply with legal technicalities or formalities. Stern v McArthur (1988) 165 CLR 489.
(10) Equity regards as done that which ought to be done / Equity imputes an intention to fulfil an
obligation

Equity will occasionally regard an obligation as being fulfilled where a person is legally obliged to carry out
that obligation. This maxim is the basis of the doctrine in Walsh v Lonsdale (1882) 21 Ch D 9, the doctrine
of equitable conversion, equitable estoppel, and part performance.

(11) Equity will not assist a volunteer

Equity will not assist a party to a transaction who has provided no consideration. The most significant
exception to this rule arises in relation to the assistance provided by equity to beneficiaries of trusts, who are
usually volunteers. This maxim was discussed in the majority judgment in Corin v Patton (1990) 169 CLR
540 and is also relevant to equitable assignments.

Discussion Questions
1. Explain the role of the Chancellor in the 14th and 15th centuries.
2. What difficulties with the common law led to the establishment of the Court of Chancery?
3. What was the ‘use upon a use’ and what role did it play in the early development of equity?
4. Outline the circumstances leading to The Earl of Oxford’s Case in 1615. What was the eventual outcome
of the difficulties leading to this dispute?
5. What is the fusion fallacy? Your answer should refer to some modern examples of the fusion fallacy.
6. What role do the maxims of equity play in equitable doctrine? Identify some of the maxims which
remain relevant today.